Accounting Principles, International Student Version, 10th Edition By
Weygandt, Kimmel, Kieso
CHAPTER 1 ACCOUNTING IN ACTION SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 2 2 2 2 2
K K C K K C K C
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 3 4
K K K K K K K K
41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. a 55. a 56. a 57. a 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.
1 1 1 1 1 1 1 1 2 2 2 2 2 2 9 9 9 9 2 2 2 3 3 4 4 4 4 4
K K K C K K K K C C C C C C K K K C K K C K C K K C K K
69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.
4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6
Item
SO
BT
Item
SO
BT
Item
SO
BT
6 6 7 7 7 7 8 8
K K K C C C K K
sg
33. 34. sg 35. sg 36. sg 37. sg 38. sg 39. sg 40.
1 2 3 4 5 6 7 8
K K K C K K K K
8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 1
K K AP AP AP K C K K AP AP AP AP AP AP AP AP AP AP AP AP AP AN AN AN AN AN K
st
1 1 2 2 4 5 5 6 7 7 8
K K K K K K K K C C K
True-False Statements 17. 18. 19. 20. 21. 22. 23. 24.
4 4 4 5 5 5 5 6
K K K C K K K K
25. 26. 27. 28. 29. 30. 31. 32.
sg
Multiple Choice Questions
sg st a
C K K C K K K K K K C C K K C K K K K K K K C K K C K K
97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124.
6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 8 8 8
K K K C K C AP AP AP AP AP C AP C C C C C C K C C C AN C C C K
125. 126. 127. 129. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. sg 15 2.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
153. 154. sg 155. st 156. sg 157. st 158. sg 159. sg 160. sg 161. sg 162. sg 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. st
1-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Brief Exercises 178. 179. 180.
2 6 6
C K K
181. 182. 182.
6 6 6
AP AP C
184. 7 C 185. 8 AP 418 8 C 6. Exercises
187. 188.
8 8
AP AP
189. 190. 191. 192. 193. 194. 195. 196.
2,4 6 6 6 6 6 6 6
K C C AP C AP AN AN
197. 198. 199. 200. 201. 202. 203. 204.
6 6,7 6,7 6,7 7 7 7 7
C C C AP AP AP C AN
205. 206. 207. 208. 209. 210. 211. 212.
213. 214. 215. 216. 217. 218. 219. 220.
8 8 8 8 8 8 8 8
AP AP AP AN AP AP C AP
221. 222. 223. 224. 225.
8 8 8 8 8
AN C AP AP AP
5 6
K K
234. 235.
6 8
K K
Item
Type
7 7 7 7 7 7 7 7
C C AP C C C C C
Completion Statements 226. 227.
1 2
K K
228. 229.
2 2
K K
230. 231.
4 4
K K
232. 233.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
Type
1. 2. 3.
TF TF TF
33. 41. 42.
TF MC MC
43. 44. 45.
4. 5. 6. 7.
TF TF TF TF
8. 9. 10. 11.
TF TF TF TF
12. 13. 14. 34.
15.
TF
35.
TF
62.
16. 17. 18.
TF TF TF
19. 36. 64.
TF TF MC
65. 66. 67.
20. 21. 22. 23.
TF TF TF TF
37. 74. 75. 76.
TF MC MC MC
77. 78. 79. 80.
Item
Type
Item
Study Objective 1 MC 46. MC 152. MC 47. MC 153. MC 48. MC 154. Study Objective 2 TF 49. MC 53. TF 50. MC 54. TF 51. MC 59. TF 52. MC 60. Study Objective 3 MC 63. MC Study Objective 4 MC 68. MC 71. MC 69. MC 72. MC 70. MC 73. Study Objective 5 MC 81. MC 85. MC 82. MC 86. MC 83. MC 87. MC 84. MC 158.
Type
Item
Type
MC MC MC
226.
C
MC MC MC MC
61. 155. 156. 178.
MC MC MC BE
175. 227. 228. 229.
Ex C C C
MC MC MC
157. 189. 230.
MC Ex C
231.
C
MC MC MC MC
159. 232.
MC C
FOR INSTRUCTOR USE ONLY
Accounting in Action
1-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 24. 25. 26. 38. 88. 89. 90.
TF TF TF TF MC MC MC
91. 92. 93. 94. 95. 96. 97.
MC MC MC MC MC MC MC
98. 99. 100. 101. 102. 103. 104.
27. 28. 29. 30. 39. 108.
TF TF TF TF TF MC
109. 110. 111. 112. 113. 114.
MC MC MC MC MC MC
115. 116. 117. 118. 119. 120.
31. 32. 40. 122. 123. 124. 125. 126. 127. 128.
TF TF TF MC MC MC MC MC MC MC
129. 130. 131. 132. 133. 134. 135. 136. 137. 138.
MC MC MC MC MC MC MC MC MC MC
139. 140. 141. 142. 143. 144. 145. 146. 147. 148.
a
MC
a
MC
a
55.
56.
Note: TF = True-False MC = Multiple Choice
57.
Study Objective 6 MC 105. MC 182. MC 106. MC 183. MC 107. MC 190. MC 160. MC 191. MC 179. BE 192. MC 180. BE 193. MC 181. BE 194. Study Objective 7 MC 121. MC 186. MC 161. MC 201. MC 162. MC 202. MC 184. BE 203. MC 184. Ex 204. MC 185. Ex 205. Study Objective 8 MC 149. MC 170. MC 150. MC 171. MC 151. MC 172. MC 163. MC 173. MC 164. MC 174. MC 165. MC 175. MC 166. MC 176. MC 167. MC 177. MC 168. MC 185. MC 169. MC 186. Study Objective 9 a MC 58. MC
BE BE Ex Ex Ex Ex Ex
195. 196. 197. 198. 199. 200. 233.
Ex Ex Ex Ex Ex Ex C
234.
C
Ex Ex Ex Ex Ex Ex
206. 207. 208. 209. 196. 197.
Ex Ex Ex Ex Ex Ex
198. 213. 214. 215. 216. 217.
Ex Ex Ex Ex Ex Ex
MC MC MC MC MC MC MC MC BE BE
187. 188. 199. 200. 201. 202. 217. 218. 219. 220.
BE BE Ex Ex Ex Ex Ex Ex Ex Ex
221. 222. 223. 224. 225. 235.
Ex Ex Ex Ex Ex C
BE = Brief Exercise Ex = Exercise
C = Completion
This chapter also contains one set of ten Matching questions and Short-Answer Essay questions. A summary table of all learning outcomes, including AACSB, AICPA, and IMA professional standards, is available on the Weygandt Accounting Principles 9e instructor web site.
FOR INSTRUCTOR USE ONLY
1-4
Test Bank for Accounting Principles, Tenth Edition
CHAPTER STUDY OBJECTIVES 1. Explain what accounting is. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. 2. Identify the users and uses of accounting. The major users and uses of accounting are: (a) Management uses accounting information in planning, controlling, and evaluating business operations. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners. 3. Understand why ethics is a fundamental business concept. Ethics are the standards of conduct by which actions are judged as right or wrong. If you cannot depend on the honesty of the individuals you deal with, effective communication and economic activity would be impossible, and information would have no credibility. 4. Explain generally accepted accounting principles and the cost principle. Generally accepted accounting principles are a common set of standards used by accountants. The cost principle states that companies should record assets at their cost. 5. Explain the monetary unit assumption and the economic entity assumption. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owner and other economic entities. 6. State the accounting equation, and define assets, liabilities, and owner's equity. The basic accounting equation is: Assets = Liabilities + Owner's Equity Assets are resources owned by a business. Liabilities are creditorship claims on total assets. Owner's equity is the ownership claim on total assets. 7. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in owner's equity. 8. Understand the four financial statements and how they are prepared. An income statement presents the revenues and expenses of a company for a specified period of time. An owner's equity statement summarizes the changes in owner's equity that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and owner's equity of a business at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. a
9. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, government, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.
FOR INSTRUCTOR USE ONLY
Accounting in Action
1-5
TRUE-FALSE STATEMENTS 1.
Owners of business firms are the only people who need accounting information. Ans: F SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2.
Transactions that can be measured in dollars and cents are recorded in the financial information system. Ans: T SO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3.
The hiring of a new company president is an economic event recorded by the financial information system. Ans: F SO1 BT: C Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4.
Management of a business enterprise is the major external user of information. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reportin g
5.
Accounting communicates financial information about a business enterprise to both internal and external users. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
6.
Accounting information is used only by external users with a financial interest in a business enterprise. Ans: F SO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
7.
Financial statements are the major means of communicating accounting information to interested parties. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
8.
Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process. Ans: F SO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
9.
The origins of accounting are attributed to Luca Pacioli, a famous mathematician. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
10.
The study of accounting will be useful only if a student is interested in working for a profitoriented business firm. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
11.
Private accountants are accountants who are not employees of business enterprises. Ans: F SO2 BT:K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
12.
The study of accounting is not useful for a business career unless your career objective is to become an accountant. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
13.
A working knowledge of accounting is not relevant to a lawyer or an architect. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
14.
Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CPAs. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1-6 15.
Test Bank for Accounting Principles, Tenth Edition Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information. Ans: T SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
16.
The primary accounting standard-setting body in the United States is the International Accounting Standards Board. Ans: F SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
17.
The Financial Accounting Standards Board is a part of the Securities and Exchange Commission. Ans: F SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
18.
The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies. Ans: T SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
19.
The cost and fair market value of an asset are the same at the time of acquisition and in all subsequent periods. Ans: F SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
20.
Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners. Ans: T SO5 BT: C Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
21.
A partnership must have more than one owner. Ans: T SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
22.
The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities. Ans: T SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
23.
The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. Ans: T SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
24.
In order to possess future service potential, an asset must have physical substance. Ans: F SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
25.
Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses. Ans: F SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
26.
The basic accounting equation states that Assets = Liabilities. Ans: F SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
27.
Accountants record both internal and external transactions. Ans: T SO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
28.
Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company. Ans: F SO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 29.
1-7
The purchase of store equipment for cash reduces the owner's equity by an equal amount. Ans: F SO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
30.
The purchase of office equipment on credit increases total assets and total liabilities. Ans: T SO7 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
31.
The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period. Ans: T SO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
32.
Net income for the period is determined by subtracting total expenses and drawings from total revenues. Ans: F SO8
33.
BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Identifying is the process of keeping a chronological diary of events measured in dollars and cents. Ans: F SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
34.
Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation. Ans: F SO2 BT: K Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
35.
Accountants do not have to worry about issues of ethics. Ans: F SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
36.
At the time an asset is acquired, cost and fair value should be the same. Ans: T SO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
37.
The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar. Ans: F SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
38.
The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets. Ans: T SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
39.
External transactions involve economic events between the company and some other enterprise or party. Ans: T SO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
40.
In the owner's equity statement, revenues are listed first, followed by expenses, and net income (or net loss). Ans: F SO8 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1-8
Test Bank for Accounting Principles, Tenth Edition
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T F F T F
7. 8. 9. 10. 11. 12.
T F T F F F
13. 14. 15. 16. 17. 18.
F T T F F T
19. 20. 21. 22. 23. 24.
F T T T T F
25. 26. 27. 28. 29. 30.
F F T F F T
31. 32. 33. 34. 35. 36.
T F F F F T
37. 38. 39. 40.
F T T F
MULTIPLE CHOICE QUESTIONS 41.
Accountants refer to an economic event as a a. purchase. b. sale. c. transaction. d. change in ownership. Ans: c SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reportin g
42.
The process of recording transactions has become more efficient because a. fewer events can be quantified in financial terms. b. computers are used in processing business events. c. more people have been hired to record business transactions. d. business events are recorded only at the end of the year. Ans: b SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
43.
Communication of economic events is the part of the accounting process that involves a. identifying economic events. b. quantifying transactions into dollars and cents. c. preparing accounting reports. d. recording and classifying information. Ans: c SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
44.
Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction? a. The appointment of a new CPA firm to perform an audit. b. The purchase of a new computer. c. The sale of store equipment. d. Payment of income taxes. Ans: a SO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
45.
The use of computers in recording business events a. has made the recording process more efficient. b. does not use the same principles as manual accounting systems. c. has greatly impacted the identification stage of the accounting process. d. is economical only for large businesses. Ans: a SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 46.
1-9
The accounting process involves all of the following except a. identifying economic transactions that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording nonquantifiable economic events. d. analyzing and interpreting financial reports. Ans: c SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
47.
The accounting process is correctly sequenced as a. identification, communication, recording. b. recording, communication, identification. c. identification, recording, communication. d. communication, recording, identification. Ans: c SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
48.
Which of the following techniques are not used by accountants to interpret and report financial information? a. Graphs. b. Special memos for each class of external users. c. Charts. d. Ratios. Ans: b SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
49.
Which of the following would not be considered an internal user of accounting data for the GHI Company? a. President of the company. b. Production manager. c. Merchandise inventory clerk. d. President of the employees' labor union. Ans: d SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
50.
Which of the following would not be considered an external user of accounting data for the GHI Company? a. Internal Revenue Service Agent. b. Management. c. Creditors. d. Customers. Ans: b SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
51.
Which of the following would not be considered internal users of accounting data for a company? a. The president of a company. b. The controller of a company. c. Creditors of a company. d. Salesmen of the company. Ans: c SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 10
52.
Test Bank for Accounting Principles, Tenth Edition
Which of the following is an external user of accounting information? a. Labor unions. b. Finance directors. c. Company officers. d. Managers. Ans: a SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
53.
Which one of the following is not an external user of accounting information? a. Regulatory agencies. b. Customers. c. Investors. d. All of these are external users. Ans: d SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
54.
Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the accounting process? a. Identification. b. Communication. c. Recording. d. Analysis. Ans: c SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
55.
All of the following are services offered by public accountants except a. budgeting. b. auditing. c. tax planning. d. consulting. Ans: a SO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
56.
Which list below best describes the major services performed by public accountants? a. Bookkeeping, mergers, budgets. b. Employee training, auditing, bookkeeping. c. Auditing, taxation, management consulting. d. Cost accounting, production scheduling, recruiting. Ans: c SO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
57.
Preparing tax returns and engaging in tax planning is performed by a. public accountants only. b. private accountants only. c. both public and private accountants. d. IRS accountants only. Ans: c SO9 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action a
58.
1 - 11
A private accountant can perform many activities in a business organization but would not work in a. budgeting. b. accounting information systems. c. external auditing. d. tax accounting. Ans: c SO9 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
59.
The origins of accounting are generally attributed to the work of a. Christopher Columbus. b. Abner Doubleday. c. Luca Pacioli. d. Leonardo da Vinci. Ans: c SO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
60.
Financial accounting provides economic and financial information for all of the following except a. creditors. b. investors. c. managers. d. other external users. Ans: c SO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
61.
The final step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. recognize an ethical situation. c. identify the alternatives and weigh the impact of each alternative on stakeholders. d. recognize the ethical issues involved. Ans: c SO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
62.
The first step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. identify the alternatives. c. recognize an ethical situation and the ethical issues involved. d. weigh the impact of each alternative on various stakeholders. Ans: c SO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
63.
Ethics are the standards of conduct by which one's actions are judged as a. right or wrong. b. honest or dishonest. c. fair or unfair. d. all of these. Ans: d SO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
64.
Generally accepted accounting principles are a. income tax regulations of the Internal Revenue Service. b. standards that indicate how to report economic events. c. theories that are based on physical laws of the universe. d. principles that have been proven correct by academic researchers. Ans: b SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 12 65.
Test Bank for Accounting Principles, Tenth Edition The cost principle requires that when assets are acquired, they be recorded at a. appraisal value. b. cost. c. market price. d. book value. Ans: b SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
66.
The cost of an asset and its fair value are a. never the same. b. the same when the asset is sold. c. irrelevant when the asset is used by the business in its operations. d. the same on the date of acquisition. Ans: d SO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
67.
The body of theory underlying accounting is not based on a. physical laws of nature. b. concepts. c. principles. d. definitions. Ans: a SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
68.
The private sector organization involved in developing accounting principles is the a. Feasible Accounting Standards Body. b. Financial Accounting Studies Board. c. Financial Accounting Standards Board. d. Financial Auditors' Standards Body. Ans: c SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
69.
The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that a. they are both governmental agencies. b. the SEC is a private organization of accountants. c. the SEC often mandates guidelines when no accounting principles exist. d. the SEC and FASB rarely cooperate in developing accounting standards. Ans: c SO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
70.
GAAP stands for a. Generally Accepted Auditing Procedures. b. Generally Accepted Accounting Principles. c. Generally Accepted Auditing Principles. d. Generally Accepted Accounting Procedures. Ans: b SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 71.
1 - 13
Financial information that is capable of making a difference in a decision is a. faithfully representative. b. relevant. c. convergent. d. generally accepted. Ans: b SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
72.
The Duce Company has five plants nationwide that cost a total of $100 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at a. $100 million. b. $600 million. c. $400 million. d. $500 million. Ans: a SO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
73.
The fair value principle is applied for a. all assets. b. current assets. c. buildings. d. investment securities. Ans: d SO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
74.
The proprietorship form of business organization a. must have at least three owners in most states. b. represents the largest number of businesses in the United States. c. combines the records of the business with the personal records of the owner. d. is characterized by a legal distinction between the business as an economic unit and the owner. Ans: b SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
75.
The economic entity assumption requires that the activities a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of an entity be kept separate from the activities of its owner. Ans: d SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
76.
A business organized as a corporation a. is not a separate legal entity in most states. b. requires that stockholders be personally liable for the debts of the business. c. is owned by its stockholders. d. terminates when one of its original stockholders dies. Ans: c SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 14
77.
Test Bank for Accounting Principles, Tenth Edition
The partnership form of business organization a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability. Ans: b SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
78.
Which of the following is not an advantage of the corporate form of business organization? a. Limited liability of stockholders b. Transferability of ownership c. Unlimited personal liability for stockholders d. Unlimited life Ans: c SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
79.
A small neighborhood barber shop that is operated by its owner would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: d SO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
80.
John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: b SO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
81.
Which of the following is true regarding the corporate form of business organization? a. Corporations are the most prevalent form of business organization. b. Corporate businesses are generally smaller in size than partnerships and proprietorships. c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships. d. Corporations are separate legal entities organized exclusively under federal law. Ans: c SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 82.
1 - 15
A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the a. stand alone concept. b. monetary unit assumption. c. corporate form of ownership. d. economic entity assumption. Ans: d SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
83.
Ted Leo is the proprietor (owner) of Ted's, a retailer of golf apparel. When recording the financial transactions of Ted's, Ted does not record an entry for a car he purchased for personal use. Ted took out a personal loan to pay for the car. What accounting concept guides Ted's behavior in this situation? a. Pay back concept b. Economic entity assumption c. Cash basis concept d. Monetary unit assumption Ans: b SO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
84.
A basic assumption of accounting assumes that the dollar is a. unrelated to business transactions. b. a poor measure of economic activities. c. the common unit of measure for all business transactions. d. useless in measuring an economic event. Ans: c SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
85.
The assumption that the unit of measure remains sufficiently constant over time is part of the a. economic entity assumption. b. cost principle. c. historical cost principle. d. monetary unit assumption. Ans: d SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
86.
A business that enjoys limited liability is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Ans: c SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
87.
A problem with the monetary unit assumption is that a. the dollar has not been stable over time. b. the dollar has been stable over time. c. the dollar is a common medium of exchange. d. it is impossible to account for international transactions. Ans: a SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 16
88.
Test Bank for Accounting Principles, Tenth Edition
The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit. Ans: d SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
89.
Owner's equity is best depicted by the following: a. Assets = Liabilities. b. Liabilities + Assets. c. Residual equity + Assets. d. Assets – Liabilities. Ans: d SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
90.
The basic accounting equation may be expressed as a. Assets = Equities. b. Assets – Liabilities = Owner's Equity. c. Assets = Liabilities + Owner's Equity. d. all of these. Ans: d SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
91.
Liabilities a. are future economic benefits. b. are existing debts and obligations. c. possess service potential. d. are things of value used by the business in its operation. Ans: b SO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
92.
Liabilities of a company would not include a. notes payable. b. accounts payable. c. wages payable. d. cash. Ans: d SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
93.
Liabilities of a company are owed to a. debtors. b. benefactors. c. creditors. d. underwriters. Ans: c SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
94.
Owner's equity can be described as a. creditorship claim on total assets. b. ownership claim on total assets. c. benefactor's claim on total assets. d. debtor claim on total assets. Ans: b SO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
95.
1 - 17
Owner's equity is often referred to as a. residual equity. b. leftovers. c. spoils. d. second equity. Ans: a SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
96.
When an owner withdraws cash or other assets from a business for personal use, these withdrawals are termed a. depletions. b. consumptions. c. drawings. d. a credit line. Ans: c SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
97.
Capital is a. an owner's permanent investment in the business. b. equal to liabilities minus owner's equity. c. equal to assets minus owner's equity. d. equal to liabilities plus drawings. Ans: a SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
98.
Revenues would not result from a. sale of merchandise. b. initial investment of cash by owner. c. performance of services. d. rental of property. Ans: b SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
99.
Sources of increases to owner's equity are a. additional investments by owners. b. purchases of merchandise. c. withdrawals by the owner. d. expenses. Ans: a SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
100.
The basic accounting equation cannot be restated as a. Assets – Liabilities = Owner's Equity. b. Assets – Owner's Equity = Liabilities. c. Owner's Equity + Liabilities = Assets. d. Assets + Liabilities = Owner's Equity. Ans: d SO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 18
Test Bank for Accounting Principles, Tenth Edition
101.
Owner's equity is decreased by all of the following except a. owner's investments. b. owner's withdrawals. c. expenses. d. owner's drawings. Ans: a SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
102.
A net loss will result during a time period when a. liabilities exceed assets. b. drawings exceed investments. c. expenses exceed revenues. d. revenues exceed expenses. Ans: c SO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
103.
If total liabilities increased by $15,000 and owner’s equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $25,000 decrease b. $5,000 decrease c. $5,000 increase d. $25,000 increase Ans: d SO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
104.
If total liabilities decreased by $15,000 and owner’s equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $25,000 decrease b. $5,000 decrease c. $5,000 increase d. $25,000 increase Ans: b SO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
105.
If total liabilities decreased by $25,000 and owner’s equity increased by $15,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $40,000 decrease b. $10,000 decrease c. $10,000 increase d. $40,000 increase Ans: b SO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
106.
If total liabilities decreased by $15,000 and owner’s equity decreased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $25,000 decrease b. $5,000 decrease c. $5,000 increase d. $25,000 increase Ans: a SO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
107.
1 - 19
If total liabilities increased by $17,000 during a period of time and owner’s equity decreased by $6,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n) a. $23,000 decrease. b. $11,000 decrease. c. $11,000 increase. d. $23,000 increase. Ans: c SO6 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
108.
The accounting equation for Quattro Enterprises is as follows: Assets Liabilities Owner’s Equity $120,000 = $60,000 + $60,000 If Quattro purchases office equipment on account for $15,000, the accounting equation will change to Assets Liabilties Owner’s Equity a. $120,000 = $60,000 + $60,000 b. $135,000 = $60,000 + $75,000 c. $135,000 = $67,500 + $67,500 d. $135,000 = $75,000 + $60,000 Ans: d SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
109.
As of June 30, 2011, Actual Tigers Company has assets of $100,000 and owner’s equity of $30,000. What are the liabilities for Actual Tigers Company as of June 30, 2011? a. $30,000 b. $70,000 c. $100,000 d. $130,000 Ans: b SO7 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
110.
Owner's equity is increased by a. drawings. b. revenues. c. expenses. d. liabilities. Ans: b SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
111.
Owner's equity is decreased by a. assets. b. revenues. c. expenses. d. liabilities. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 20 112.
Test Bank for Accounting Principles, Tenth Edition If total liabilities increased by $8,000, then a. assets must have decreased by $8,000. b. owner's equity must have increased by $8,000. c. assets must have increased by $8,000, or owner's equity must have decreased by $8,000. d. assets and owner's equity each increased by $4,000. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
113.
Collection of a $1,000 Accounts Receivable a. increases an asset $1,000; decreases an asset $1,000. b. increases an asset $1,000; decreases a liability $1,000. c. decreases a liability $1,000; increases owner's equity $1,000. d. decreases an asset $1,000; decreases a liability $1,000. Ans: a SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
114.
Revenues are a. the cost of assets consumed during the period. b. gross increases in owner's equity resulting from business activities. c. the cost of services used during the period. d. actual or expected cash outflows. Ans: b SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
115.
If an individual asset is increased, then a. there must be an equal decrease in a specific liability. b. there must be an equal decrease in owner's equity. c. there must be an equal decrease in another asset. d. any of these is possible. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
116.
If services are rendered for credit, then a. assets will decrease. b. liabilities will increase. c. owner's equity will increase. d. liabilities will decrease. Ans: c SO7 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
117.
If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. owner's equity will increase. d. assets will decrease. Ans: d SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
118.
If an owner makes a withdrawal of cash from a proprietorship, then a. there has been a violation of accounting principles. b. owner's equity will increase. c. owner's equity will decrease. d. there will be a new liability showing the owner owes money to the business. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 119.
1 - 21
If supplies that have been purchased are used in the course of business, then a. a liability will increase. b. an asset will increase. c. owner's equity will decrease. d. owner's equity will increase. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
120.
As of December 31, 2011, Calexico Company has assets of $37,000 and owner's equity of $20,000. What are the liabilities for Calexico Company as of December 31, 2011? a. $17,000. b. $20,000. c. $37,000. d. $57,000. Ans: a SO7 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
121.
Which of the following events is not a business transaction? a. Investment of cash by the owner. b. Hired employees. c. Incurred utility expenses for the month. d. Earned revenue for services provided. Ans: b SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
122.
Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses. Ans: c SO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
123.
Owner's capital at the end of the period is equal to a. owner's capital at the beginning of the period plus net income minus liabilities. b. owner's capital at the beginning of the period plus net income minus drawings. c. net income. d. assets plus liabilities. Ans: b SO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
124.
A balance sheet shows a. revenues, liabilities, and owner's equity. b. expenses, drawings, and owner's equity. c. revenues, expenses, and drawings. d. assets, liabilities, and owner's equity. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
125.
An income statement a. summarizes the changes in owner's equity for a specific period of time. b. reports the changes in assets, liabilities, and owner's equity over a period of time. c. reports the assets, liabilities, and owner's equity at a specific date. d. presents the revenues and expenses for a specific period of time. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 22 126.
Test Bank for Accounting Principles, Tenth Edition If the owner's equity account increases from the beginning of the year to the end of the year, then a. net income is less than owner drawings. b. a net loss is less than owner drawings. c. additional owner investments are less than net losses. d. net income is greater than owner drawings. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
127.
Mofro’s Computer Repair Shop started the year with total assets of $270,000 and total liabilities of $180,000. During the year, the business recorded $450,000 in computer repair revenues, $270,000 in expenses, and Mofro withdrew $45,000. Mofro's Owner’s Capital balance at the end of the year was a. $180,000. b. $210,000. c. $225,000. d. $270,000. Ans: c SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
128.
Mofro’s Computer Repair Shop started the year with total assets of $270,000 and total liabilities of $180,000. During the year, the business recorded $450,000 in computer repair revenues, $270,000 in expenses, and Mofro withdrew $45,000. The net income reported by Mofro's Computer Repair Shop for the year was a. $90,000. b. $135,000. c. $180,000. d. $225,000. Ans: c SO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
129.
Mofro’s Computer Repair Shop started the year with total assets of $270,000 and total liabilities of $180,000. During the year, the business recorded $450,000 in computer repair revenues, $270,000 in expenses, and Mofro withdrew $45,000. Mofro's Owner’s Capital balance changed by what amount from the beginning of the year to the end of the year? a. $90,000. b. $135,000. c. $180,000. d. $225,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
130.
The balance sheet is frequently referred to as a. an operating statement. b. the statement of financial position. c. the statement of cash flows. d. the statement of owner's equity. Ans: b SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
131.
The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash. Ans: c SO8 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 132.
1 - 23
All of the financial statements are for a period of time except the a. income statement. b. owner's equity statement. c. balance sheet. d. statement of cash flows. Ans: c SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
133.
The ending owner's equity amount is shown on a. the balance sheet only. b. the owner's equity statement only. c. both the income statement and the owner's equity statement. d. both the balance sheet and the owner's equity statement. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
134.
Black Keys Company began the year with owner’s equity of $185,000. During the year, the company recorded revenues of $250,000, expenses of $190,000, and had owner drawings of $20,000. What was Black Keys’ owner’s equity at the end of the year? a. $185,000. b. $225,000. c. $245,000. d. $265,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
135.
Sufjan Stevens Ito began the Sufjan Company by investing $25,000 of cash in the business. The company recorded revenues of $185,000, expenses of $140,000, and had owner drawings of $10,000. What was Sufjan’s net income for the year? a. $35,000. b. $45,000. c. $55,000. d. $60,000. Ans: b SO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
136.
Centro-matic Company began the year with owner’s equity of $15,000. During the year, Centro-matic received additional owner investments of $21,000, recorded expenses of $60,000, and had owner drawings of $4,000. If Centro-matic’s ending owner’s equity was $56,000, what was the company’s revenue for the year? a. $80,000. b. $84,000. c. $101,000. d. $105,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
137.
Barsuk Company began the year with owner’s equity of $217,000. During the year, Barsuk received additional owner investments of $294,000, recorded expenses of $840,000, and had owner drawings of $56,000. If Barsuk’s ending owner’s equity was $581,000, what was the company’s revenue for the year? a. $910,000. b. $966,000. c. $1,204,000. d. $1,260,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 24
Test Bank for Accounting Principles, Tenth Edition
Use the following information for questions 138–139. Fat Possum’s Service Shop started the year with total assets of $110,000 and total liabilities of $80,000. During the year, the business recorded $210,000 in revenues, $140,000 in expenses, and owner drawings of $20,000. 138.
Owner’s equity at the end of the year was a. $30,000. b. $80,000. c. $100,000. d. $120,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
139.
The net income reported by Fat Possum’s Service Shop for the year was a. $50,000. b. $70,000. c. $80,000. d. $90,000. Ans: b SO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
140.
Misra Company compiled the following financial information as of December 31, 2011: Revenues $170,000 Owner’s Capital (1/1/11) 70,000 Equipment 40,000 Expenses 125,000 Cash 45,000 Owner’s Drawings 10,000 Supplies 5,000 Accounts payable 20,000 Accounts receivable 35,000 Misra’s assets on December 31, 2011 are a. $90,000. b. $125,000. c. $180,000. d $245,000. Ans: b SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
141.
Misra Company compiled the following financial information as of December 31, 2011: Revenues Owner’s Capital (1/1/11) Equipment Expenses Cash Owner’s Drawings Supplies Accounts payable Accounts receivable
$170,000 70,000 40,000 125,000 45,000 10,000 5,000 20,000 35,000
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 25
Misra’s owner’s equity on December 31, 2011 is a. $45,000. b. $70,000. c. $105,000. d. $125,000. Ans: c SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
142.
Teamboo Company’s owner’s equity at the beginning of August 2011 was $300,000. During the month, the company earned net income of $70,000 and owner’s drawings were $30,000. At the end of August 2011, what is the balance in owner’s equity? a. $270,000 b. $300,000 c. $330,000 d. $340,000 Ans: d SO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
143.
On January 1, 2011, Cat Power Company reported owner’s equity of $470,000. During the year, the owner withdrew cash of $20,000. At December 31, 2011, the balance in owner’s equity was $550,000. What amount of net income or net loss would the company report for 2011? a. Net loss of $20,000 b. Net income of $60,000 c. Net income of $80,000 d. Net income of $100,000 Ans: d SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
144.
Stahl Consulting started the year with total assets of $20,000 and total liabilities of $5,000. During the year, the business recorded $16,000 in catering revenues and $10,000 in expenses. Stahl made an additional investment of $3,000 and withdrew cash of $5,000 during the year. The owner’s equity at the end of the year was a. $11,000. b. $18,000. c. $19,000. d. $21,000. Ans: c SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
145.
Stahl Consulting started the year with total assets of $20,000 and total liabilities of $5,000. During the year, the business recorded $16,000 in catering revenues and $10,000 in expenses. Stahl made an additional investment of $3,000 and withdrew cash of $5,000 during the year. The net income reported by Stahl Consulting for the year was: a. $1,000. b. $4,000. c. $6,000. d. $9,000. Ans: c SO8 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 26 146.
Test Bank for Accounting Principles, Tenth Edition Stahl Consulting started the year with total assets of $20,000 and total liabilities of $5,000. During the year, the business recorded $16,000 in catering revenues and $10,000 in expenses. Stahl made an additional investment of $3,000 and withdrew cash of $5,000 during the year. Owner’s equity changed by what amount from the beginning of the year to the end of the year? a. $1,000. b. $3,000. c. $4,000. d. $15,000. Ans: c SO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
147.
During the year 2011, Dilego Company earned revenues of $45,000, had expenses of $28,000, purchased assets with a cost of $5,000 and had owner drawings of $3,000. Net income for the year is a. $9,000. b. $12,000. c. $14,000. d. $17,000. Ans: d SO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
148.
At October 1, Arcade Fire Enterprises reported owner’s equity of $35,000. During October, no additional investments were made and the company earned net income of $9,000. If owner’s equity at October 31 totals $39,000, what amount of owner drawings were made during the month? a. $0 b. $4,000 c. $5,000 d. $13,000 Ans: c SO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
149.
At October 1, Arcade Fire Enterprises reported owner’s equity of $36,000. During October, no additional investments were made and the company posted a net loss of $4,000. If owner’s equity at October 31 totals $32,000, what amount of owner drawings were made during the month? a. $0 b. $2,000 c. $4,000 d. $8,000 Ans: a SO8 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
150.
At October 1, Arcade Fire Enterprises reported owner’s equity of $35,000. During October, the owner made additional investments of $2,000 and the company earned net income of $7,000. If owner’s equity at October 31 totals $40,000, what amount of owner drawings were made during the month? a. $0 b. $2,000 c. $4,000 d. $5,000 Ans: c SO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 151.
1 - 27
At October 1, Arcade Fire Enterprises reported owner’s equity of $35,000. During October, the owner made additional investments of $5,000 and the company posted a net loss of $2,000. If owner’s equity at October 31 totals $35,000, what amount of owner drawings were made during the month? a. $0 b. $2,000 c. $3,000 d. $5,000 Ans: c SO8 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
152.
Which of the following is not part of the accounting process? a. Recording b. Identifying c. Financial decision making d. Communicating Ans: c SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
153.
The first part of the accounting process is a. communicating. b. identifying. c. processing. d. recording. Ans: b SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
154.
Keeping a systematic, chronological diary of events that are measured in dollars and cents is called a. communicating. b. identifying. c. processing. d. recording. Ans: d SO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
155.
Auditing is a. the examination of financial statements by a CPA in order to express an opinion on their fairness. b. a part of accounting that involves only recording of economic events. c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems. d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presented fairly. Ans: a SO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
156.
Internal users of accounting information include all of the following except a. company officers. b. investors. c. marketing managers. d. production supervisors. Ans: b SO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 28 157.
Test Bank for Accounting Principles, Tenth Edition The organization(s) primarily responsible for establishing generally accepted accounting principles is(are) the a. b. c. d.
FASB no yes no yes
SEC no no yes yes
Ans: d S04 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
158.
The primary accounting standard-setting body in the United States is the a. Financial Accounting Standards Board. b. International Accounting Standards Board. c. Internal Revenue Service. d. Securities and Exchange Commission. Ans: a SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
159.
A proprietorship is a business a. owned by one person. b. owned by two or more persons. c. organized as a separate legal entity under state corporation law. d. owned by a governmental agency. Ans: a SO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
160.
A net loss will result during a time period when a. assets exceed liabilities. b. assets exceed owner's equity. c. expenses exceed revenues. d. revenues exceed expenses. Ans: c SO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
161.
Bright Eyes Downtown Diner received a bill of $600 from the Jronand Wine Advertising Agency. The owner, A. A. Bondy, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Owner’s Capital. c. an increase in Accounts Payable and a decrease in Owner’s Capital. d. a decrease in Accounts Payable and an increase in Owner’s Capital. Ans: c SO7 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
162.
Matador Company purchases $1,300 of equipment from Danger Mouse Inc. for cash. The effect on the components of the basic accounting equation of Matador Company is a. an increase in assets and liabilities. b. a decrease in assets and liabilities. c. no change in total assets. d. an increase in assets and a decrease in liabilities. Ans: c SO7 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 163.
1 - 29
Druganaut Company buys a $21,000 van on credit. The transaction will affect the a. income statement only. b. balance sheet only. c. income statement and owner's equity statement only. d. income statement, owner's equity statement, and balance sheet. Ans: b SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
164.
Which of the following (a, b, or c) is not a reason one set of international accounting standards are needed? a. multinational corporations. b. mergers and acquisitions. c. information technology. d. all of the above (a, b, or c) are reasons one set of international accounting standards are needed. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
165.
Which of the following (a, b, or c) is not a reason one set of international accounting standards are needed? a. multinational corporations. b. financial markets. c. information technology. d. all of the above (a, b, or c) are reasons one set of international accounting standards are needed. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
166.
International standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB. Ans: a SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
167.
U.S. standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB. Ans: b SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
168.
International standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB. Ans: c SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
169.
U.S. standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 30 170.
Test Bank for Accounting Principles, Tenth Edition The United States and the international standard-setting environment are primarily driven by meeting the needs of a. investors and creditors. b. tax authorities. c. central government planners. d. academic researchers. Ans: a SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
171.
The internal control standards applicable to Sarbanes-Oxley apply to a. all U.S. and international companies. b. U.S. and international companies listed on U.S. exchanges. c. International companies listed on U.S. exchanges. d. U.S. companies listed on U.S. exchanges. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
172.
The concern about international companies adopting SOX-type standards centers on a. cost-benefit analysis. b. ethics issues. c. the governing authorities. d. comparability. Ans: a SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
173.
Financial accounting ethics violations are a. not a problem in the U.S. or internationally. b. much more common in the U.S. than internationally. c. much more common internationally than in the U.S. d. a major problem both in the U.S. and internationally. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
174.
IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements. Ans: c SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
175.
GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosure requirements. Ans: b SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
176.
Proprietorships, partnerships, and corporations a. are the three most common forms of business organizations in the U.S. b. are the three most common forms of business organizations internationally. c. are used in different proportions in different countries. d. all of the above are true. Ans: d SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action 177.
1 - 31
The conceptual framework that underlies IFRS a. is very similar to that used to develop GAAP. b. does not define assets or liabilities. c. does not define equity. d. does not define income or expenses. Ans: a SO8 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. a 55. a 56. a 57. a 58. 59. 60.
c b c a a c c b d b c a d c a c c c c c
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.
c c d b b d a c c b b a d b d c b c d b
81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.
c d b c d c a d d d b d c b a c a b a d
101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
a c d b b a c d b b c c a b c c d c c a
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140.
b c b d d d c c b b c c d b b b b b b b
141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160.
c d d c c c d c a c c c b d a b d a a c
161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177.
c c b d d a b c d a d a d c b d a
BRIEF EXERCISES BE 178 Match the following external users of financial accounting information with the type of decision that user will make with the information. a. b. c. d
Creditor Investor Regulatory Agency Internal Revenue Service
_______
(1) Is the company operating within prescribed guidelines?
_______
(2) Is the company complying with tax laws?
_______
(3) Is the company able to pay its debts?
_______
(4) Is the company a good investment? FOR INSTRUCTOR USE ONLY
1 - 32
Test Bank for Accounting Principles, Tenth Edition
Solution 178 1. 2. 3. 4.
c d a b
SO2 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 179 Match the following terms and definitions. a. Accounts receivable b. Creditor
c. Accounts payable d. Note payable
_______ (1) Amounts due from customers _______ (2) Amounts owed to suppliers for goods and services purchased _______ (3) Amounts owed to bank _______ (4) Party to whom money is owed Solution 179 1. 2. 3. 4.
a c d b
SO6 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 180 Indicate which of these items is an asset (A), liability (L) or owner’s equity (OE) account. _______
(1) Supplies
_______
(2) Owner’s Drawings
_______
(3) Buildings
_______
(4) Notes Payable
_______
(5) Salaries and Wages Payable
Solution 180 1. 2. 3. 4. 5.
Assets (A) Owner’s equity (OE) Asset (A) Liability (L) Liability (L)
SO6 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 33
BE 181 Use the accounting equation to answer the following questions. 1. Picaresque Sails Co. has total assets of $120,000 and total liabilities of $45,000. What is owner’s equity? 2. The Natenal Fun Center has total assets of $225,000 and owner’s equity of $100,000. What are total liabilities? 3. Okkervil River Restaurant has total liabilities of $40,000 and owner’s equity of $100,000. What are total assets?
Solution 181 1. $120,000 – $45,000 = $75,000 owner’s equity 2. $225,000 – $100,000 = $125,000 total liabilities 3. $40,000 + $100,000 = $140,000 total assets SO6 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 182 Determine the missing items. Assets = Liabilities + Owner’s Equity $75,000
$52,000
(a)
(b)
$28,000
$34,000
$84,000
(c)
$55,000
Solution 182 a. $23,000 b. $62,000 c. $29,000 SO6 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 183 Classify each of these items as an asset (A), liability (L), or owner’s equity (OE). _____ 1. Accounts receivable _____ 2. Accounts payable _____ 3. Owner’s Capital _____ 4. Office supplies FOR INSTRUCTOR USE ONLY
1 - 34
Test Bank for Accounting Principles, Tenth Edition
BE 183
(cont.)
_____ 5. Utilities expense _____ 6. Cash _____ 7. Notes payable _____ 8. Equipment
Solution 183 1. 2. 3. 4.
(5 min.)
A L OE A
5. 6. 7. 8.
OE A L A
SO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 184 Identify the impact on the accounting equation of each of the following transactions. 1. Purchase office supplies on account. 2. Paid secretary weekly salary. 3. Purchased office furniture for cash. 4. Received monthly utility bill to be paid at later time.
Solution 184 1. 2. 3. 4.
(5 min.)
Increase assets and increase liabilities. Decrease assets and decrease owner’s equity. Increase assets and decrease assets. Increase liabilities and decrease owner’s equity.
SO7 BT: C Difficulty: Medium FN: Reporting
TOT: 5 min.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA
BE 185 Balance sheet amounts as of December 31, 2011 for Matt Pond's Learning Service are listed below. Prepare a balance sheet in good form. Accounts Payable Accounts Receivable Cash Owner’s Capital
$
400 1,000 500 ?
FOR INSTRUCTOR USE ONLY
Accounting in Action Solution 185
1 - 35
(5 min.) MATT POND’s TUTORING SERVICE Balance Sheet December 31, 2011
Assets Cash Accounts Receivable Total assets
$ 500 1,000 $1,500
Liabilities and Owner’s Equity Accounts Payable Owner’s, Capital Total liabilities and owner’s equity
$ 400 1,100 $1,500
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 186 Identify whether the following items would be reported on the income statement (IS) or balance sheet (BS). 1. 2. 3. 4. 5.
Cash Service Revenue Notes Payable Interest Expense Accounts Receivable
Solution 186 1. 2. 3. 4. 5.
Balance Sheet (BS) Income Statement (IS) Balance Sheet (BS) Income Statement (IS) Balance Sheet (BS)
SO8 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 187 Use the following information to calculate for the year ended December 31, 2011 (a) net income, (b) ending owner’s equity, and (c) total assets. Supplies Operating expenses Accounts payable Accounts receivable Beginning Capital
$ 1,000 12,000 9,000 3,000 5,000
Revenues Cash Drawings Notes payable Equipment
FOR INSTRUCTOR USE ONLY
$23,000 15,000 1,000 1,000 6,000
1 - 36
Test Bank for Accounting Principles, Tenth Edition
Solution 187 (a)
$11,000
(b)
$15,000
(c)
$25,000
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 188 Listed below in alphabetical order are the balance sheet items of Madjack Company at December 31, 2011. Prepare a balance sheet and include a complete heading. Accounts payable Accounts receivable Buildings Cash Owner’s Capital Owner’s Equipment
$
21,000 15,000 96,000 6,000 113,000 17,000
Solution 188 MADJACK COMPANY Balance Sheet December 31, 2011 ASSETS Cash Accounts receivable Office equipment Building Total assets
$ 6,000 15,000 17,000 96,000 $134,000 LIABILITIES AND OWNER’S EQUITY
Liabilities Accounts payable
$
Owner’s equity Owner’s, Capital Total liabilities and owner’s equity
113,000 $134,000
21,000
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 37
EXERCISES Ex. 189 Below is a list of important abbreviations widely used in business. For each abbreviation give the full designation. 1.
CPA
_____________________________________________
2.
IRS
_____________________________________________
3.
FBI
_____________________________________________
4.
FASB
_____________________________________________
5.
GAAP
_____________________________________________
6.
SEC
_____________________________________________
Solution 189 1. 2. 3. 4. 5. 6.
Certified Public Accountant Internal Revenue Service Federal Bureau of Investigation Financial Accounting Standards Board Generally Accepted Accounting Principles Securities and Exchange Commission
SO2, 4 BT: K Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 190 Determine the missing amount for each of the following. Assets = Liabilities + Owner's Equity 1. (a) $50,000 $95,000 2. $125,000 (b) $85,000 3. $140,000 $65,000 (c)
Solution 190 1. (a) = $145,000 ($50,000 + $95,000) 2. (b) = $40,000 ($125,000 - $85,000) 3. (c) = $75,000 ($140,000 - $65,000) SO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 38
Test Bank for Accounting Principles, Tenth Edition
Ex. 191 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or owner's equity item. Code Asset A Liability L Owner's Equity OE _____ 1. Rent Expense
_____
6. Cash
_____ 2. Equipment
_____
7. Accounts Receivable
_____ 3. Accounts Payable
_____
8. Owner’s Drawings
_____ 4. Owner’s Capital
_____
9. Service Revenue
_____ 5. Insurance Expense
_____ 10. Notes Payable
Solution 191 1. 2. 3. 4. 5.
OE A L OE OE
6. 7. 8. 9. 10.
A A OE OE L
SO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 192 At the beginning of the year, Shaolin Company had total assets of $550,000 and total liabilities of $210,000. Answer the following questions viewing each situation as being independent of the others. (1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of owner's equity at the end of the year? (2) During the year, total liabilities increased $230,000 and owner's equity decreased $90,000. What is the amount of total assets at the end of the year? (3) If total assets decreased $40,000 and owner's equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 39
Solution 192 Beginning Change Ending
Beginning Change Ending
Beginning Change Ending
Total Assets $550,000 200,000 $750,000
–
Total Liabilities $210,000 (75,000) $135,000
=
Total Liabilities $210,000 230,000 $440,000
Total Assets $550,000 $690,000 (2) Total Assets $550,000 (40,000) $510,000
Owner's Equity
=
$615,000 (1)
+
Owner's Equity $340,000 (90,000) $250,000
+
Owner's Equity $340,000 130,000 $470,000
Total Liabilities $210,000 =
$ 40,000 (3)
SO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 193 Magnolia Electric Car Cleaning has the following accounts: Equipment Accounts Payable Cash Supplies Accounts Receivable
Notes Payable Owner’s Capital Owner’s, Drawing Equipment
Identify which items are (1) Assets (2) Liabilities (3) Owner's Equity
Solution 193 (1) Assets—Equipment, Cash, Supplies, Accounts Receivable, Equipment (2) Liabilities—Accounts Payable, Notes Payable (3) Owner's Equity— Owner’s, Capital, Owner’s, Drawing SO6 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 194 On June 1, 2011, Secretly Canadian Company prepared a balance sheet that shows the following: Assets (no cash) .............................................................. Liabilities.......................................................................... Owner's Equity ................................................................ FOR INSTRUCTOR USE ONLY
$100,000 40,000 60,000
1 - 40
Ex. 194
Test Bank for Accounting Principles, Tenth Edition
(cont.)
Shortly thereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets
Assets
Balances Immediately After Sale – Liabilities = Owner's Equity
Cash A
$110,000
$________
$________
$________
Cash B
100,000
________
________
________
Cash C
90,000
________
________
________
Solution 194
Cash A Cash B Cash C
Cash Received for the Assets $110,000 100,000 90,000
Balances Immediately After Sale Assets – Liabilities = Owner's Equity $110,000 $40,000 $70,000 100,000 40,000 60,000 90,000 40,000 50,000
SO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 195 At the beginning of 2011, Hold Steady Company had total assets of $550,000 and total liabilities of $250,000. Answer each of the following questions. 1. If total assets increased $60,000 and owner's equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year. 2. During the year, total liabilities decreased $75,000 and owner's equity increased $50,000. Compute the amount of total assets at the end of the year. 3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of owner's equity at the end of the year. Solution 195 1. Ending Total Liabilities = ($550,000 + $60,000) – ($550,000 – $250,000 - $90,000) = $610,000 – $210,000 = $400,000 2. Ending Total Assets = ($250,000 – $75,000) + ($550,000 – $250,000 + $50,000) = $175,000 + $350,000 = $525,000 3. Ending Owner's Equity = ($550,000 – $100,000) – ($250,000 + $55,000) = $450,000 – $305,000 = $145,000 SO6 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 41
Ex. 196 Compute the missing amount in each category of the accounting equation. Assets $349,000 $223,000 $ ?
(a) (b) (c)
Liabilities $ ? $ 79,000 $253,000
Owner's Equity $143,000 $ ? $325,000
Solution 196 (a) $206,000 ($349,000 – $143,000 = $206,000). (b) $144,000 ($223,000 – $79,000 = $144,000). (c) $578,000 ($253,000 + $325,000 = $578,000). SO6 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 197 From the following list of selected accounts taken from the records of Ward Homeopathic Center, identify those that would appear on the balance sheet. a. b. c. d. e.
Owner’s Capital Service Revenue Land Salaries and Wages Expense Notes Payable
f. g. h. i. j.
Accounts Payable Cash Rent Expense Supplies Utilities Expense
Solution 197 a, c, e, f, g, i SO6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 198 Selected transactions for Mountain Goats Tree Service are listed below. 1. Made cash investment to start business. 2. Paid for monthly advertising. 3. Purchased supplies on account. 4. Billed customers for services performed. 5. Withdrew cash for owner’s personal use. 6. Received cash from customers billed in (4). 7. Incurred utilities expense on account. 8. Purchased additional supplies for cash. 9. Received cash from customers when service was performed. FOR INSTRUCTOR USE ONLY
1 - 42
Test Bank for Accounting Principles, Tenth Edition
Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets and increase in owner’s equity.
Solution 198 1. 2. 3. 4. 5. 6. 7. 8. 9.
Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and increase in liabilities. Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in liabilities and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in assets and increase in owner’s equity.
SO6, 7 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 199 Wilco Legal Eagles Company entered into the following transactions during March 2011. 1. Purchased office equipment for $23,000 from Business Equipment, Inc. on account. 2. Paid $3,000 cash for March rent on office furniture. 3. Received $15,000 cash from customers for legal work billed in February. 4. Provided legal services to Amy Construction Company for $3,500 cash. 5. Paid Northern States Power Co. $2,700 cash for electric usage in March. 6. J. Wilco invested an additional $32,000 in the business. 7. Paid Business Equipment, Inc. for the office equipment purchased in (1) above. 8. Incurred advertising expense for March of $1,900 on account. Instructions Indicate with the appropriate letter whether each of the transactions above results in: (a) an increase in assets and a decrease in assets. (b) an increase in assets and an increase in owner’s equity. (c) an increase in assets and an increase in liabilities. (d) a decrease in assets and a decrease in owner’s equity. (e) a decrease in assets and a decrease in liabilities. (f) an increase in liabilities and a decrease in owner’s equity. (g) an increase in owner’s equity and a decrease in liabilities. Solution 199 1. 2. 3. 4.
(c) (d) (a) (b)
5. 6. 7. 8.
(d) (b) (e) (f)
SO6, 7 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 43
Ex. 200 Two items are omitted from each of the following summaries of balance sheet and income statement data for two proprietorships for the year 2012, Holly Enterprises and Cat Stevens. Black Sheep Enterprises Beginning of year: Total assets $ 98,000 Total liabilities 55,000 Total owner’s equity (a) End of year: Total assets 160,000 Total liabilities 100,000 Total owner’s equity 60,000 Changes during year in owner’s equity: Additional investment (b) Drawings 25,000 Total revenues 215,000 Total expenses 185,000 Instructions Determine the missing amounts.
Solution 200 (a)
Total assets (beginning of year) Total liabilities (beginning of year) Total owner’s equity (beginning of year)
$98,000 (55,000) $43,000
(b)
Total owner’s equity (end of year) Total owner’s equity (beginning of year) Increase in owner’s equity
$60,000 (43,000) $17,000
Total revenues Total expenses Net income
$215,000 185,000 $ 30,000
Increase in owner’s equity Less: Net income Add: Drawings Additional investment (c)
$17,000 $(30,000) 25,000)
Total assets (beginning of year) Total owner’s equity (beginning of year) Total liabilities (beginning of year)
(5,000) $12,000 $129,000 (75,000) $ 54,000
FOR INSTRUCTOR USE ONLY
Cat Stevens $129,000 (c) 75,000 180,000 50,000 130,000 25,000 (d) 100,000 65,000
1 - 44
Test Bank for Accounting Principles, Tenth Edition
Solution 200 (d)
(cont.)
Total owner’s equity (end of year) Total owner’s equity (beginning of year) Increase in owner’s equity
$130,000 (75,000) $ 55,000
Total revenues Total expenses Net income
$100,000 (65,000) $ 35,000
Increase in owner’s equity Less: Net income $ 35,000 Additional investment 25,000 Drawings
$55,000 (60,000) $(5,000)
SO6, 7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 201 An analysis of the transactions made by White Stripes & Co., a law firm, for the month of July is shown below. Each increase and decrease in owner’s equity is explained.
Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts Accounts Owner’s Equity Receivable + Supplies + Equipment = Payable + Owner’s Capital
+$15,000 - 2,000 750 + 2,500 +$4,600 - 1,500 - 2,500 750 + 550 550 - 3,500
+$15,000 Investment +$5,000
+$3,000
+$750
+
500
Instructions (a) Determine how much owner’s equity increased for the month. (b) Compute the amount of net income for the month.
Solution 201 (a)
Investment Service revenue Drawings Rent expense Salaries expense Utilities expense Increase in capital
+
7,100 Service Revenue
-
2,500 Drawings 750 Rent Expense
-
3,500 Salaries Expense 500 Utilities Expense
- 1,500
$15,000 7,100 (2,500) (750) (3,500) (500) $14,850 FOR INSTRUCTOR USE ONLY
Accounting in Action Solution 201 (b)
1 - 45
(cont.)
Service revenue Rent expense Salaries expense Utilities expense Net income
$7,100 (750) (3,500) (500) $2,350
SO7 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 202 The Constantine Company had the following assets and liabilities on the dates indicated. December 31 Total Assets Total Liabilities 2010 $480,000 $250,000 2011 $460,000 $210,000 2012 $590,000 $300,000 Constantine began business on January 1, 2010, with an investment of $100,000. Instructions From an analysis of the change in owner’s equity during the year, compute the net income (or loss) for: (a) 2010, assuming Constantine’s drawings were $35,000 for the year. (b) 2011, assuming Constantine made an additional investment of $50,000 and had no drawings in 2011. (c) 2012, assuming Constantine made an additional investment of $15,000 and had drawings of $30,000 in 2010. Solution 202 (a)
Owner’s equity—12/31/10 ($480,000 – $250,000) Owner’s equity—1/1/10 Increase in owner’s equity Add: Drawings Net income for 2010
$230,000 (100,000) 130,000 35,000 $165,000
(b)
Owner’s equity—12/31/11 ($460,000 – $210,000) Owner’s equity—1/1/11—see (a) Increase in owner’s equity Less: Additional investment Net loss for 2011
$250,000 (230,000) 20,000 50,000 $ (30,000)
(c)
Owner’s equity—12/31/12 ($590,000 – $300,000) Owner’s equity—1/1/12—see (b) Increase in owner’s equity Less: Additional investment
$290,000 250,000 40,000 (15,000) 25,000 30,000 $ 55,000
Add: Drawings Net income for 2012
SO7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 46
Test Bank for Accounting Principles, Tenth Edition
Ex. 203 For each of the following, indicate whether the transaction affects revenue (R), expense (E), owner's drawing (D), owner's investment (I), or no effect on owner's equity (NOE). 1. 2. 3. 4. 5.
Made an investment to start the business. Billed customers for services performed. Purchased equipment on account. Paid monthly rent. Withdrew cash for personal use.
Solution 203 1. 2. 3. 4. 5.
Investment (I) Revenue (R) No effect (NOE) Expense (E) Drawing (D)
SO7 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 204 Presented below is a balance sheet for Jim Henson Yard Service at December 31, 2011. JIM HENSON YARD SERVICE Balance Sheet December 31, 2011 Assets Cash Accounts receivable Supplies Equipment
$13,000 6,000 9,000 11,000
Total assets
$39,000
Liabilities and Owner's Equity Liabilities Accounts payable Notes payable Owner's equity Owner’s capital Total liabilities & owner’s equity
$ 8,000 15,000 16,000 $39,000
The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total $6,000. Supplies on January 1, were $11,000 and $5,000 of supplies were purchased during the year. Net income for the year was $8,000 and drawings were $6,000. Instructions Determine the following: (Show all computations.) 1. Supplies used during the year. 2. Total expenses for the year. 3. Service revenues for the year. 4. Owner’s capital balance on January 1.
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 47
Solution 204 1. Computation of Supplies Used: Beginning Supplies, Jan. 1 Add: Purchases Less: Ending Supplies, Dec. 31 Equals: Supplies Used
$11,000 5,000 (9,000) $ 7,000
2. Computation of Total Expenses: All Expenses (excluding supplies expense) Plus: Supplies Used Total Expenses
$ 6,000 7,000 $13,000
3. Computation of Revenues: Net Income Plus: Total Expenses Total Revenues
$ 8,000 13,000 $21,000
4. Computation of Owner’s Capital on January 1: Capital, December 31 Plus: Drawings Less: Net Income Capital, January 1
$16,000 6,000 (8,000) $14,000
SO7 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving
Ex. 205 Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Assets
=
Liabilities
+
Owner's Equity
1. Received cash for services rendered.
_______
______
_______
2. Purchased office equipment on credit.
_______
______
_______
3. Paid employees' salaries.
_______
______
_______
4. Received cash from customer in payment on account. _______
______
_______
5. Paid telephone bill for the month.
_______
______
_______
6. Paid for office equipment purchased in transaction 2.
_______
______
_______
7. Purchased office supplies on credit.
_______
______
_______
8. Owner withdrew cash for personal expenses.
_______
______
_______
9. Obtained a loan from the bank.
_______
______
_______
10. Billed customers for services rendered.
_______
______
_______
FOR INSTRUCTOR USE ONLY
1 - 48
Test Bank for Accounting Principles, Tenth Edition
Solution 205 Assets
=
Liabilities
1. Received cash for services rendered.
+
2. Purchased office equipment on credit.
+
3. Paid employees' salaries.
–
4. Received cash from customer in payment on account.
+,–
5. Paid telephone bill for the month.
–
6. Paid for office equipment purchased in transaction 2.
–
–
7. Purchased office supplies on credit.
+
+
8. Owner withdrew cash for personal expenses.
–
9. Obtained a loan from the bank.
+
10. Billed customers for services rendered.
+
+
Owner's Equity +
+ –
–
– + +
SO7 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 206 For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and owner's equity using the following format. Assets = Liabilities + Owner's Equity 1. 2. 3. 4. 5.
Made an investment to start the business. Billed customers for services performed. Purchased equipment on account. Withdrew cash for personal use. Paid for equipment purchased in 3. above.
Solution 206 Assets 1. 2. 3. 4. 5.
+ + + – –
=
Liabilities NE NE + NE –
+
Owner's Equity + + NE – NE
SO7 BT: C Difficulty: Easy TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 49
Ex. 207 Neko Case decides to open a cleaning and laundry service near the local college campus that will operate as a sole proprietorship. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in owner's equity. Transactions (1) Neko Case invests $20,000 in cash to start a cleaning and laundry business on June 1. (2) Purchased equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days. (3) Purchased supplies for $1,200 cash. (4) Received a bill from College News for $300 for advertising in the campus newspaper. (5) Cash receipts from customers for cleaning and laundry amounted to $2,400. (6) Paid salaries of $600 to student workers. (7) Billed the Lion Soccer Team $450 for cleaning and laundry services. (8) Paid $300 to College News for advertising that was previously billed in Transaction 4. (9) Neko Case withdrew $900 from the business for living expenses. (10) Incurred utility expenses for month on account, $400. TransAccounts Accounts Owner’s action Cash + Receivable + Supplies + Equipment = Payable + Capital (1) —————————————————————————————————————————— Balance (2) —————————————————————————————————————————— Balance (3) —————————————————————————————————————————— Balance (4) —————————————————————————————————————————— Balance (5) —————————————————————————————————————————— Balance (6) —————————————————————————————————————————— Balance (7) —————————————————————————————————————————— Balance (8) —————————————————————————————————————————— Balance
FOR INSTRUCTOR USE ONLY
1 - 50 Ex. 207
Test Bank for Accounting Principles, Tenth Edition (cont.)
(9) —————————————————————————————————————————— Balance (10) —————————————————————————————————————————— Totals
Solution 207 TransAccounts Accounts Owner’s action Cash + Receivable + Supplies + Equipment = Payable + Capital (1) +$20,000 +$20,000 —————————————————————————————————————————— Balance $20,000 $20,000 (2) – 3,000 +$5,000 +$2,000 —————————————————————————————————————————— Balance $17,000 $5,000 $2,000 $20,000 (3) – 1,200 +$1,200 —————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,000 $20,000 (4) + 300 – 300 —————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,300 $19,700 (5) + 2,400 + 2,400 —————————————————————————————————————————— Balance $18,200 $1,200 $5,000 $2,300 $22,100 (6) – 600 – 600 —————————————————————————————————————————— Balance $17,600 $1,200 $5,000 $2,300 $21,500 (7) +$450 + 450 —————————————————————————————————————————— Balance $17,600 $450 $1,200 $5,000 $2,300 $21,950 (8) – 300 – 300 —————————————————————————————————————————— Balance $17,300 $450 $1,200 $5,000 $2,000 $21,950 (9) – 900 – 900 —————————————————————————————————————————— Balance $16,400 $450 $1,200 $5,000 $2,000 $21,050 (10) + 400 – 400 —————————————————————————————————————————— Totals $16,400 $450 $1,200 $5,000 $2,400 $20,650 SO7 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 51
Ex. 208 For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation. (a) Increase one asset and decrease another asset. (b) Increase an asset and increase a liability. (c) Decrease an asset and decrease a liability. (d) Increase an asset and increase owner's equity. (e) Increase one asset, decrease one asset, and increase a liability.
Solution 208 (a) Receive cash from customers on account. Purchase supplies for cash. (b) Purchase supplies on account. Purchase equipment and signed a note payable. (c) Pay cash to reduce accounts payable. Pay cash to reduce a note payable. (d) Initial contribution by an owner. Additional contributions by an owner. Render services on account (or for cash). (e) Buy equipment with a cash down payment with the remainder financed by a note payable. SO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 209 The following transactions represent part of the activities of Bloc Party Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets. (a) The owner invested cash to start the business. (b) Purchased a computer for cash. (c) Purchased office equipment with money borrowed from the bank. (d) Paid the first month's utility bill. (e) Collected an accounts receivable. (f) Owner withdrew cash from the business.
Solution 209 (a) (b) (c) (d) (e)
Increased total assets. No change in total assets. Increased total assets. Decreased total assets. No change in total assets. FOR INSTRUCTOR USE ONLY
1 - 52
Test Bank for Accounting Principles, Tenth Edition
Solution 209 (f)
(cont.)
Decreased total assets.
SO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 210 Selected transactions for Parton Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and owner's equity. Sample: Made initial cash investment in the business. The answer would be—Increase in assets and increase in owner's equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in 4. Withdrew cash for owner's personal use. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.
Solution 210 1. 2. 3. 4. 5. 6. 7. 8. 9.
Decrease in assets and decrease in owner's equity. No net change in assets. Decrease in assets and decrease in owner's equity. Increase in assets and increase in owner's equity. No net change in assets. Decrease in assets and decrease in owner's equity. Increase in liabilities and decrease in owner's equity. Decrease in assets and decrease in owner's equity. Increase in assets and increase in owner's equity.
SO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 211 A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction. Accounts EquipAccounts Owner’s Cash + Rec. + ment + Land + Building = Payable + Capital —————————————————————————————————————————— $5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000 a) –2,000 –2,000 3,000 6,500 10,000 7,500 50,000 1,000 76,000 b) +1,000 – 1,000 4,000 5,500 10,000 7,500 50,000 1,000 76,000 FOR INSTRUCTOR USE ONLY
Accounting in Action Ex. 211
1 - 53
(cont.)
c) 4,000 d) +2,500 6,500 e) $6,500
5,500 5,500 +3,000 $8,500
+ 5,000 15,000
7,500
50,000
+5,000 6,000
15,000
7,500
50,000
6,000
$15,000
$7,500
$50,000
$6,000
76,000 + 2,500 78,500 + 3,000 $81,500
Solution 211 (a) (b) (c) (d) (e)
Paid cash to creditors. Received cash from customers on account. Bought equipment on account. Additional investment by owner or services rendered to customers for cash. Services rendered on account.
SO7 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 212 There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches. a. b. c. d. e. f. g. h. i. j.
Receive cash from customers on account. Initial cash contribution by an owner. Pay cash to reduce an accounts payable. Purchase supplies for cash. Pay cash to reduce a notes payable. Purchase supplies on account. Additional cash contribution by an owner. Purchase equipment with a note payable. Pay utilities with cash. Owner withdraws money from the business for personal use.
Solution 212 Match #1 #2 #3 #4 #5
= a, d = c, e = f, h = b, g = i, j
SO7 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 54
Test Bank for Accounting Principles, Tenth Edition
Ex. 213 An analysis of the transactions made by Cookie Mountain Legal & Co., a law firm, for the month of July is shown below. Each increase and decrease in owner’s equity is explained. Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts Accounts Owner’s Equity Receivable + Supplies + Equipment = Payable + Owner’s Capital
+$15,000 - 2,000 750 + 2,500 +$4,600 - 1,500 - 2,500 750 + 550 550 - 3,500
+$15,000 Investment +$5,000
+$3,000
+$750 +
7,100 Service Revenue
-
2,500 Drawings 750 Rent Expense
-
3,500 Salaries Expense 500 Utilities Expense
- 1,500
+
500
Instructions (a) Prepare an income statement for the month ending July 31, 2012. (b) Prepare an owner’s equity statement for the month ending July 31, 2012. Solution 213 (a) COOKIE MOUNTAIN LEGAL Income Statement For the Month Ended July 31, 2012 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Total expenses Net income
$7,100 $3,500 750 500 4,750 $2,350
(b) COOKIE MOUNTAIN LEGAL Owner’s Equity Statement For the Month Ended July 31, 2012 Owner’s Capital, July 1 Add: Investments Net income Less: Drawings Owner’s Capital, July 31
0 $15,000 2,350
17,350 17,350 2,500 $14,850
SO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 55
Ex. 214 An analysis of the transactions made by Cookie Mountain Legal, a law firm, for the month of July is shown below. Each increase and decrease in owner’s equity is explained.
Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts Accounts Owner’s Equity Receivable + Supplies + Equipment = Payable + Owner’s, Capital
+$15,000 - 2,000 750 + 2,500 +$4,600 - 1,500 - 2,500 750 + 550 550 - 3,500
+$15,000 Investment +$5,000
+$3,000
+$750 +
7,100 Service Revenue
-
2,500 Drawings 750 Rent Expense
-
3,500 Salaries Expense 500 Utilities Expense
- 1,500
+
500
Instructions Prepare a balance sheet at July 31, 2012. Solution 214 COOKIE MOUNTAIN LEGAL Balance Sheet July 31, 2012 Assets Cash Accounts receivable Supplies Equipment Total assets
$ 7,050 4,050 750 5,000 $16,850
Liabilities and Owner’s Equity Liabilities Accounts payable Owner’s equity Owner’s capital Total liabilities and owner’s equity
$ 2,000 14,850 $16,850
SO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 56
Test Bank for Accounting Principles, Tenth Edition
Ex. 215 The following information relates to Bonnie Billy Co. for the year 2012. Owner’s Capital, January 1, 2012 Drawings during 2012 Service revenue Salaries and wages expense
$ 67,000 6,000 67,500 29,000
Advertising expense $4,500 Rent expense 9,500 Utilities expense 1,400
Instructions After analyzing the data, prepare an income statement and an owner’s equity statement for the year ending December 31, 2012
Solution 215 BONNIE BILLY CO. Income Statement For the Year Ended December 31, 2012 Revenues Service revenue Expenses Salaries and wages expense Rent expense Advertising expense Utilities expense Total expenses Net income
$67,500 $29,000 9,500 4,500 1,400 44,400 $23,100
BONNIE BILLY CO. Owner’s Equity Statement For the Year Ended December 31, 2012 Owner’s Capital, January 1 Add: Net income Less: Drawings Owner’s Capital, December 31
$67,000 23,100 90,100 6,000 $84,100
SO8 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action Ex. 216 Van Occupanther is the bookkeeper for Roscoe Company. Van has been trying to get the balance sheet of Roscoe Company to balance. Roscoe ’s balance sheet is as follows.
ROSCOE COMPANY Balance Sheet December 31, 2012 Assets Cash $7,400 Supplies 7,100 Equipment 45,000 Owner’s drawings 9,200 Total assets $68,700
Accounts payable Accounts receivable Owner’s capital Total liabilities and owner’s equity
Liabilities $25,000 (19,500) 63,200 $68,700
Instructions Prepare a correct balance sheet.
Solution 216 ROSCOE COMPANY Balance Sheet December 31, 2012 Assets Cash Accounts receivable Supplies Equipment Total assets
$ 7,400 19,500 7,100 45,000 $79,000
Liabilities and Owner’s Equity Liabilities Accounts payable Owner’s equity Owner’s capital ($63,200 – $9,200) Total liabilities and owner’s equity
$25,000 54,000 $79,000
SO8 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytical AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 57
1 - 58
Test Bank for Accounting Principles, Tenth Edition
Ex. 217 Presented below is information related to the sole proprietorship of Anthony Scalici, consultant. Service revenue—2012 Total expenses—2012 Assets, January 1, 2012 Liabilities, January 1, 2012 Assets, December 31, 2012 Liabilities, December 31, 2012 Drawings—2012
$340,000 213,000 85,000 64,000 165,000 80,000 ?
Instructions Prepare the 2012 owner’s equity statement for Anthony Scalici’s consulting company.
Solution 217 ANTHONY SCALICI, ATTORNEY Owner’s Equity Statement For the Year Ended December 31, 2012 Owner’s Capital, January 1 Add: Net income
$ 21,000 127,000 148,000 63,000 $ 85,000
Less: Drawings Owner’s Capital, December 31
(a) (b)
(c)
Supporting Computations (a)
Assets, January 1, 2012 Liabilities, January 1, 2012 Capital, January 1, 2012
$85,000 (64,000) $21,000
(b)
Legal fees earned Total expenses Net income
$340,000 (213,000) $127,000
(c)
Assets, December 31, 2012 Liabilities, December 31, 2012 Capital, December 31, 2012
$165,000 (80,000) $ 85,000
SO8 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 59
Ex. 218 Prepare an income statement, an owner's equity statement, and a balance sheet for the accupuncture practice of Golda Bear, from the items listed below for the month of September. Owner’s Capital, September 1 Accounts payable Equipment Service revenue Owner’s Drawings Supplies expense Cash Utilities expense Supplies Salaries expense Accounts receivable Rent expense
$47,000 7,000 35,000 28,000 6,000 4,500 6,000 700 4,800 9,000 14,000 2,000
GOLDA BEAR, ACCUPUNCTURIST Income Statement For the Month Ended September 30, 2012 —————————————————————————————————————————— Revenues $ Expenses
$
$
Total expenses
$
Net income
$
GOLDA BEAR, ACCUPUNCTURIST Owner's Equity Statement For the Month Ended September 30, 2012 —————————————————————————————————————————— Owner’s Capital, September 1 $ Add: $ Less:
$
FOR INSTRUCTOR USE ONLY
1 - 60
Test Bank for Accounting Principles, Tenth Edition
Ex. 218
(cont.)
GOLDA BEAR, ACCUPUNCTURIST Balance Sheet September 30, 2012 —————————————————————————————————————————— Assets $
Total assets $ Liabilities and Owner's Equity Liabilities $
Owner's Equity Total liabilities and owner's equity
$ $
Solution 218 GOLDA BEAR, ACCUPUNCTURIST Income Statement For the Month Ended September 30, 2012 —————————————————————————————————————————— Revenues Service revenue.............................................................................. $28,000 Expenses Salaries expense ............................................................................ $9,000 Supplies expense ........................................................................... 4,500 Rent expense ................................................................................. 2,000 Utilities expense ............................................................................. 700 Total expenses ......................................................................... 16,200 Net income ............................................................................... $ 11,800
GOLDA BEAR, ACCUPUNCTURIST Owner's Equity Statement For the Month Ended September 30, 2012 Owner’s Capital, September 1 .............................................................. Add: Net income ................................................................................... Less: Drawings ..................................................................................... Owner’s Capital, September 30 ............................................................
FOR INSTRUCTOR USE ONLY
$47,000 11,800 58,800 6,000 $52,800
Accounting in Action Solution 218
1 - 61
(cont.)
GOLDA BEAR, ACCUPUNCTURIST Balance Sheet September 30, 2012 —————————————————————————————————————————— Assets Cash .................................................................................................... $ 6,000 Accounts receivable ............................................................................. 14,000 Supplies ............................................................................................... 4,800 Equipment............................................................................................ 35,000 Total assets .................................................................................... $59,800 Liabilities and Owner's Equity Liabilities Accounts payable ........................................................................... Owner's Equity Owner’s capital............................................................................... Total liabilities and owner's equity ..................................................
$ 7,000 52,800 $59,800
SO8 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 219 Indicate whether the following items would appear on the balance sheet (BS), income statement (IS), or owner's equity statement (OE). 1. 2. 3. 4. 5. 6.
Advertising expense Accounts receivable Owner’s drawings Rent revenue Salaries payable Supplies
Solution 219
(5 min.)
1. Income statement (IS) 2. Balance sheet (BS) 3. Owner's equity statement (OE)
4. Income statement (IS) 5. Balance sheet (BS) 6. Balance sheet (BS)
SO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 62
Test Bank for Accounting Principles, Tenth Edition
Ex. 220 Listed below in alphabetical order are the balance sheet items of Rock Plaza Central Company at December 31, 2011. Prepare a balance sheet and include a complete heading. Accounts Payable Accounts Receivable Buildings Cash Owner’s Capital Land Equipment
$ 24,000 15,000 56,000 7,000 107,000 42,000 11,000
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution 220
(5 min.) ROCK PLAZA CENTRAL Balance Sheet December 31, 2011 ASSETS
Cash Accounts receivable Land Buildings Equipment Total assets
$ 7,000 15,000 42,000 56,000 11,000 $131,000 LIABILITIES
Accounts payable
$ 24,000 OWNER'S EQUITY
Owner’s capital Total liabilities and owner's equity
107,000 $131,000
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 63
Ex. 221 One item is omitted in each of the following summaries of balance sheet and income statement data for three different sole proprietorships, X, Y, and Z. Determine the amounts of the missing items, identifying each proprietorship by letter. Proprietorship X Y Z Beginning of the Year: Assets $380,000 $150,000 $199,000 Liabilities 250,000 105,000 168,000 End of the Year: Assets 450,000 185,000 195,000 Liabilities 280,000 95,000 169,000 During the Year: Additional Investment by the owner ? 79,000 80,000 Withdrawals by the owner Revenue Expenses
90,000 195,000 170,000
83,000 ? 113,000
? 187,000 175,000
Solution 221 Proprietorship X ($105,000) Beginning Capital balance ($380,000 – $250,000) Additional investments ($260,000 – $130,000 – $25,000) Net income for year ($195,000 – $170,000) Less withdrawals Ending Capital balance ($450,000 – $280,000)
$130,000 105,000 25,000 260,000 90,000 $170,000
Proprietorship Y ($162,000) Beginning Capital balance ($150,000 – $105,000) Additional investments Net income for year [Revenues = $162,000 ($113,000 + $49,000)] Less withdrawals Ending Capital balance ($185,000 – $95,000)
$ 45,000 79,000 49,000 173,000 83,000 $ 90,000
Proprietorship Z ($97,000) Beginning Capital balance ($199,000 – $168,000) Additional investments Net income for year ($187,000 – $175,000) Less withdrawals ($123,000 – $26,000) Ending Capital balance ($195,000 – $169,000)
$ 31,000 80,000 12,000 123,000 97,000 $ 26,000
SO8 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA PC: Problem Solving
FOR INSTRUCTOR USE ONLY
1 - 64
Test Bank for Accounting Principles, Tenth Edition
Ex. 222 Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Balance Sheet (BS), or Owner's Equity Statement (OE): a.
____
Service Revenue
g. _____ Accounts Receivable
b.
____
Utilities Expense
h. _____ McCartney, Capital (ending)
c.
____
Cash
i.
_____ Equipment
d.
____
Accounts Payable
j.
_____ Advertising Expense
e.
____
Office Supplies
k. _____ McCartney, Drawing
f.
____
Wage Expense
l.
_____ Notes Payable
g. h. i. j. k. l.
BS OE, BS BS IS OE BS
Solution 222 a. IS b. IS c. BS d. BS e. BS f. IS
SO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 223 Maria Queen was reviewing her business activities at the end of the year (2011) and decided to prepare an Owner's Equity Statement. At the beginning of the year her assets were $500,000 and her liabilities were $190,000. At the end of the year the assets had grown to $750,000 but liabilities had also increased to $340,000. The net income for the year was $220,000. Maria had withdrawn $120,000 during the year for his personal use. Prepare an owner's equity statement in good form. Solution 223 MARIA QUEEN Owner's Equity Statement For the Year Ended 2011 Owner’s Beginning Capital Add: Net Income
$310,000 220,000 530,000 120,000 $410,000
Less: Drawings Owner’s Ending Capital
SO8 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 65
Ex. 224 At September 1, the balance sheet accounts for Stanley’s Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment
$ 3,800 1,600 68,000 10,000 18,700
Land Owner’s Capital Notes Payable Supplies
$33,000 ? 48,000 6,600
The following transactions occurred during the next two days: Stanley invested an additional $22,000 cash in the business. The accounts payable were paid in full. (No payment was made on the notes payable.) Instructions Prepare a balance sheet at September 3, 2011.
Solution 224 STANLEY'S RESTAURANT Balance Sheet September 3, 2011 ASSETS Cash Accounts receivable Supplies Land Buildings Equipment Total assets
$ 28,200 1,600 6,600 33,000 68,000 18,700 $156,100 LIABILITIES
Accounts payable Notes payable
$
OWNER'S EQUITY Owner’s capital Total liabilities and owner's equity Cash ($10,000 + $22,000 – $3,800) = $28,200 Accounts Payable ($3,800 – $3,800) = $0 Owner’s Capital: Beginning balance ($137,900 – $51,800) Additional investment Ending balance
-048,000
108,100 $156,100
$ 86,100 22,000 $108,100
SO8 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving
FOR INSTRUCTOR USE ONLY
1 - 66
Test Bank for Accounting Principles, Tenth Edition
Ex. 225 Presented below are balance sheet items for Black Angel Company at December 31, 2011. Accounts payable Accounts receivable Cash Equipment Owner’s capital Notes payable
$30,000 36,000 17,000 72,000 45,000 50,000
Compute each of the following: 1. Total assets. 2. Total liabilities.
Solution 225 1. Total assets = $125,000 ($36,000 + $17,000 + $72,000) 2. Total liabilities = $80,000 ($30,000 + $50,000) SO8 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 67
COMPLETION STATEMENTS 226.
Accounting is an information system that identifies, _____________, and _____________ the economic events of an organization.
227.
The mere recording of economic events is called ______________, and is just one part of the _______________ process.
228.
The three major services rendered by a certified public accountant are ______________, ________________, and management ________________.
229.
Accountants who are employees of business enterprises are referred to as ________________ accountants.
230.
A common set of standards that provides guidelines to accountants and indicates how to report economic events is called _________________.
231.
The ________________ principle states that assets should be recorded at the value exchanged at the time the asset is acquired.
232.
The _________________ assumption requires that the activities of an entity be kept separate from the activities of its owner.
233.
The residual claim on total assets of a business is known as ________________ and is equal to total assets minus total liabilities.
234.
Drawings ________________ owner's equity but are not expenses.
235.
The ________________ reports the assets, liabilities, and owner's equity of a business enterprise at a specific date.
Answers to Completion Statements 226. 227. 228. 229. 230.
records, communicates bookkeeping, accounting auditing, taxation, consulting private (or managerial) generally accepted accounting principles
231. 232. 233. 234. 235.
cost economic entity owner's equity reduce balance sheet
SO1-8 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 68
Test Bank for Accounting Principles, Tenth Edition
MATCHING 236. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
CPA Budgeting SEC Proprietorship Economic Entity Assumption
F. G. H. I. J.
Corporation Assets Equities Expenses Transaction
____
1. Activities of an entity must be kept separate from its owner’s activities.
____
2. Consumed assets or services.
____
3. Ownership is limited to one person.
____
4. Offers expert accounting service to the general public.
____
5. Creditor and ownership claims against the assets of the business.
____
6. A separate legal entity under state laws.
____
7. Government agency that can mandate accounting rules.
____
8. Quantifying goals and objectives.
____
9. Future economic benefits.
____ 10. Economic events recorded by accountants.
Answers to Matching 1. 2. 3. 4. 5.
E I D A H
6. 7. 8. 9. 10.
F C B G J
SO1-8 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action
1 - 69
SHORT-ANSWER ESSAY QUESTIONS S-A E 237 The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas.
Solution 237 The major fields that exist in accounting are in the areas of (1) public accounting, (2) private accounting, and (3) not-for-profit accounting. In public accounting, an accountant may practice as: (1) an auditor who examines the financial statements of companies and expresses an opinion as to the fairness of presentation; (2) a tax specialist who gives tax advice, prepares tax returns, and represents clients before governmental agencies; and (3) a management accountant who engages in the development of accounting and computer systems and the design of organizational systems. Private (managerial) accountants perform many different activities within a company. Private accountants may be involved in: cost accounting, budgeting, general financial accounting, accounting information systems, and tax accounting. SO9 BT: K Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
S-A E 238 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation? Solution 238 The basic accounting equation is expressed as follows: Assets = Liabilities + Owner's Equity Assets are defined as resources owned by the business. Liabilities are creditorship claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Owner's equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. Business transactions are economic events and activities that affect the elements of the basic accounting equation; that is, transactions cause increases or decreases in the assets, liabilities, and owner's equity. The financial statements report the results and effects of transactions on the business' assets, liabilities, and owner's equity. The balance sheet is a summary expression of the basic accounting equation. SO6 BT: C Difficulty: Medium TOT: 4 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
1 - 70
Test Bank for Accounting Principles, Tenth Edition
S-A E 239 Your friend, Angela, made this comment: My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting. What is your response to Angela? Solution 239 Angela, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements. SO2 BT: S Difficulty: Hard TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
S-A E 240 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Solution 240 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due? SO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Accounting in Action S-A E 241
1 - 71
(Ethics)
Joanna Newsom owns and operates Joanna's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joanna's Burgers began to have problems. Most of the problems were related to Joanna's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joanna does not have the cash or financial backing to expand further. She has therefore decided to sell her business. Vivian Girls is interested in purchasing the business. However, she is located in another city and is unfamiliar with Newton. She has asked Joanna why she is selling Joanna's Burgers. Joanna replies that her elderly mother requires extra care, and that her brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Joanna reasons that Vivian should not have asked her anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Joanna act ethically in not revealing fully his reasons for selling the business? Why or why not?
Solution 241 1. The stakeholders include Joanna Newsom Vivian Girls Newton, Ohio students of City College City College persons financing the purchase of Sam's Burgers 2. Joanna did not act ethically in not revealing fully her reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Joanna should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Joanna has shown an intent to deceive that is unethical, and might be actionable in court as well. SO3 BT: E Difficulty: Medium TOT: 5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
S-A E 242 (Communication) Rachel Bells Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients.
FOR INSTRUCTOR USE ONLY
1 - 72
Test Bank for Accounting Principles, Tenth Edition
She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.
Solution 242 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. As a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows:
1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Rachel, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature) SO8 BT: C Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
CHAPTER 2 THE RECORDING PROCESS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 5 5 6 6 7 2 2
K C K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
4 5 6 7 7
K K C K K
113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7
K K C K K AP K K K K K K K K K K K K K K C K C K K
138. 139. st 140. sg 141. st 142. sg 143. st 144. sg 145. sg 146. sg 147. st 148. sg 149. st 150. sg 151. 152. 153. 154. 155. 156. 157. 158.
7 1 2 2 3 3 4 4 4 4 6 6 7 7 7 7 7 7 7 7 7
C K K K K K K K K C K K K C K K K K K K K
166. 167.
6 6
AP AP
168. 169.
7 7
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 2 2 2 2
K K K K K K K K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 3 3
K K K K K K K K
17. 18. 19. 20. 21. 22. 23. 24.
3 3 4 4 4 4 4 5
K K K K K K K K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K K C K K K K K K K K K K K K C C C K K K K K K
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3
C C K K K K K C K K K C K K C AP AP AP AP AP AP C AP AP K
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.
3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5
K K K K C K K K K K K K K K K K C K K K K C AN K K
sg
Brief Exercises 159. 160. 161. sg st
2 2 2
AP C K
162. 163.
4 4
AP AP
164. 165.
4 4
K AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
2-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 170. 171. 172. 173. 174.
1 1 2 2 2
AP C C C C
175. 176. 177. 178. 179.
2 2 2 2 4
C C C C AP
180. 181. 182. 183. 184.
3 3 3 4 5
C AP C AP AP
185. 186. 187. 188. 189.
5 6 6 7 7
AP AN AP AN AN
190. 191. 192. 193.
7 7 7 7
AP AP AP AN
4 4
K K
202. 203.
5 7
K K
214. 4-6 215. 1 216. 2
S E S
Item
Type
Completion Statements 194. 195.
1 2
K K
196. 197.
2 2
K K
198. 199.
3 4
K K
200. 201.
Short-Answer Essay 205. 1,2 206. 2 3 207. 2
C C S
208. 209. 210.
7 3 3
AN S C
211. 4 212. 5,6 213. 6
C C S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
Type
1. 2. 3.
TF TF TF
4. 38. 39.
TF MC MC
40. 41. 42.
5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
TF TF TF TF TF TF TF TF TF TF
31. 32. 45. 46. 47. 48. 49. 50. 51. 52.
TF TF MC MC MC MC MC MC MC MC
53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
15. 16. 17. 18.
TF TF TF TF
81. 82. 83. 84.
MC MC MC MC
85. 86. 87. 88.
19. 20. 21. 22. 23.
TF TF TF TF TF
33. 97. 98. 99. 100.
TF MC MC MC MC
101. 102. 103. 104. 105.
Item
Type
Item
Study Objective 1 MC 43. MC 170. MC 44. MC 171. MC 139. MC 194. Study Objective 2 MC 63. MC 73. MC 64. MC 74. MC 65. MC 75. MC 66. MC 76. MC 67. MC 77. MC 68. MC 78. MC 69. MC 79. MC 70. MC 80. MC 71. MC 140. MC 72. MC 141. Study Objective 3 MC 89. MC 93. MC 90. MC 94. MC 91. MC 95. MC 92. MC 96. Study Objective 4 MC 106. MC 144. MC 107. MC 145. MC 108. MC 146. MC 109. MC 147. MC 110. MC 162.
Type
Item
Type
Ex Ex C
198. 215.
SA SA
MC MC MC MC MC MC MC MC MC MC
159. 160. 161. 172. 173. 174. 175. 176. 177. 178.
BE BE BE Ex Ex Ex Ex Ex Ex Ex
195. 196. 197. 205. 206. 207. 216.
C C C SA SA SA SA
MC MC MC MC
142. 143. 180. 181.
MC MC Ex Ex
182. 198. 209. 210.
Ex C SA SA
MC MC MC MC BE
163. 164. 165. 179. 183.
BE BE BE Ex Ex
199. 200. 201. 211. 214.
C C C SA SA
FOR INSTRUCTOR USE ONLY
The Recording Process
2-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 24. 25. 26.
TF TF TF
27. 34. 111.
TF TF MC
112. 113. 114.
28. 29. 35. 119.
TF TF TF MC
120. 121. 122. 123.
MC MC MC MC
124. 125. 126. 127.
30. 36. 37. 132. 133.
TF TF TF MC MC
134. 135. 136. 137. 138.
MC MC MC MC MC
150. 151. 152. 153. 154.
Note: TF = True-False MC = Multiple Choice
Study Objective 5 MC 115. MC 118. MC 116. MC 176. MC 117. MC 184. Study Objective 6 MC 128. MC 148. MC 129. MC 149. MC 130. MC 166. MC 131. MC 167. Study Objective 7 MC 155. MC 169. MC 156. MC 188. MC 157. MC 189. MC 158. MC 190. MC 168. BE 191.
MC Ex Ex
185. 202. 212.
Ex C SA
207.
SA
MC MC BE BE
186. 187. 212. 213.
Ex Ex SA SA
207.
SA
BE Ex Ex Ex Ex
192. 193. 203. 208.
Ex Ex C SA
BE = Brief Exercise Ex = Exercise
C = Completion SA = Short-Answer Essay
The chapter also contains one set of ten Matching questions and six Short-Answer Essay questions. A summary table of all learning outcomes, including AACSB, AICPA, and IMA professional standards, is available on the Weygandt Accounting Principles 9e instructor web site.
CHAPTER STUDY OBJECTIVES 1. Explain what an account is and how it helps in the recording process. An account is a record of increases and decreases in specific asset, liability, and owner's equity items. 2. Define debits and credits and explain their use in recording business transactions. The terms debit and credit are synonymous with left and right. Assets, drawings, and expenses are increased by debits and decreased by credits. Liabilities, owner's capital, and revenues are increased by credits and decreased by debits. 3. Identify the basic steps in the recording process. The basic steps in the recording process are: (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger. 4. Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 5. Explain what a ledger is and how it helps in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger keeps in one place all the information about changes in specific account balances.
FOR INSTRUCTOR USE ONLY
2-4
Test Bank for Accounting Principles, Tenth Edition
6. Explain what posting is and how it helps in the recording process. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 7. Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
TRUE-FALSE STATEMENTS 1.
A new account is opened for each transaction entered into by a business firm. Ans: F SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
2.
The recording process becomes more efficient and informative if all transactions are recorded in one account. Ans: F SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
3.
When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers. Ans: F SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
4.
An account is often referred to as a T-account because of the way it is constructed. Ans: T SO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
5.
A debit to an account indicates an increase in that account. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
6.
If a revenue account is credited, the revenue account is increased. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
7.
The normal balance of all accounts is a debit. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
8.
Debit and credit can be interpreted to mean increase and decrease, respectively. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
9.
The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
10.
A credit balance in a liability account indicates that an error in recording has occurred. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
11.
The drawing account is a subdivision of the owner's capital account and appears as an expense on the income statement. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
12.
Revenues are a subdivision of owner's capital. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
13.
Under the double-entry system, revenues must always equal expenses. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process 14.
2-5
Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
15.
Business documents can provide evidence that a transaction has occurred. Ans: T SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
16.
Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal. Ans: T SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
17.
Transactions are entered in the ledger accounts and then transferred to journals. Ans: F SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
18.
All business transactions must be entered first in the general ledger. Ans: F SO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
19.
A simple journal entry requires only one debit to an account and one credit to an account. Ans: T SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
20.
A compound journal entry requires several debits to one account and several credits to one account. Ans: F SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
21.
Transactions are recorded in alphabetic order in a journal. Ans: F SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
22.
A journal is also known as a book of original entry. Ans: T SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
23.
The complete effect of a transaction on the accounts is disclosed in the journal. Ans: T SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
24.
The account titles used in journalizing transactions need not be identical to the account titles in the ledger. Ans: F SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
25.
The chart of accounts is a special ledger used in accounting systems. Ans: F SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
26.
A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the balance sheet accounts. Ans: T SO5 BT:C K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
27.
The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises. Ans: F SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
28.
Posting is the process of proving the equality of debits and credits in the trial balance. Ans: F SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2-6
Test Bank for Accounting Principles, Tenth Edition
29.
After a transaction has been posted, the reference column in the journal should not be blank. Ans: T SO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
30.
A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Ans: T SO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
31.
The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction. Ans: T SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
32.
The normal balance of an expense is a credit. Ans: F SO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
33.
The journal provides a chronological record of transactions. Ans: T SO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
34.
The ledger is merely a bookkeeping device and therefore does not provide much useful data for management. Ans: F SO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
35.
The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger. Ans: T SO6 BT: C Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
36.
The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting. Ans: T SO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
37.
The trial balance will not balance when incorrect account titles are used in journalizing or posting. Ans: F SO7 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F F F T F T
7. 8. 9. 10. 11. 12.
F F F F F T
13. 14. 15. 16. 17. 18.
F F T T F F
19. 20. 21. 22. 23. 24.
T F F T T F
25. 26. 27. 28. 29. 30.
F T F F T T
31. 32. 33. 34. 35. 36.
T F T F T T
37.
F
FOR INSTRUCTOR USE ONLY
The Recording Process
2-7
MULTIPLE CHOICE QUESTIONS 38.
An account consists of a. one part. b. two parts. c. three parts. d. four parts. Ans: c SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
39.
The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account. Ans: c SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
40.
Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title Ans: b SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
41.
An account is a part of the financial information system and is described by all except which one of the following? a. An account has a debit and credit side. b. An account is a source document. c. An account may be part of a manual or a computerized accounting system. d. An account has a title. Ans: b SO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
42.
The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows all the balances of the accounts in the system. d. is the credit side. Ans: d SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
43.
An account consists of a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance. c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance. Ans: c SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2-8
44.
Test Bank for Accounting Principles, Tenth Edition
A T-account is a. a way of depicting the basic form of an account. b. what the computer uses to organize bytes of information. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance. Ans: a SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
45.
Credits a. decrease both assets and liabilities. b. decrease assets and increase liabilities. c. increase both assets and liabilities. d. increase assets and decrease liabilities. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
46.
A debit to an asset account indicates a. an error. b. a credit was made to a liability account. c. a decrease in the asset. d. an increase in the asset. Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
47.
The normal balance of any account is the a. left side. b. right side. c. side which increases that account. d. side which decreases that account. Ans: c SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
48.
The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process 49.
2-9
A credit is not the normal balance for which account listed below? a. Capital account b. Revenue account c. Liability account d. Drawings account Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
50.
Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Owner's Capital + Owner's Drawings – Revenue – Expenses. b. Assets + Owner's Drawings + Expenses = Liabilities + Owner's Capital + Revenues. c. Assets – Liabilities – Owner's Drawings = Owner's Capital + Revenues – Expenses. d. Assets = Revenues + Expenses – Liabilities. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
51.
Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Owner's Equity Credit Revenues Debit Expenses Credit b. Assets Liabilities Owner's Equity Revenues Expenses
Debit Credit Credit Credit Credit
c. Assets Liabilities Owner's Equity Revenues Expenses
Credit Debit Debit Credit Debit
d. Assets Liabilities Owner's Equity Revenues Expenses
Debit Credit Credit Credit Debit
Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
52.
The best interpretation of the word credit is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account. Ans: c SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 10
53.
Test Bank for Accounting Principles, Tenth Edition
In recording an accounting transaction in a double-entry system a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction. Ans: c SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
54.
An accounting convention is best described as a. an absolute truth. b. an accounting custom. c. an optional rule. d. something that cannot be changed. Ans: b SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
55.
A debit is not the normal balance for which account listed below? a. Drawings b. Cash c. Accounts Receivable d. Service Revenue Ans: d SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
56.
An accountant has debited an asset account for $1,200 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit an owner's equity account for $700. c. Debit another asset account for $700. d. Credit a different asset account for $700. Ans: d SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
57.
An accountant has debited an asset account for $1,300 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $800. b. Credit another liability account for $800. c. Credit an owner's equity account for $800. d. Debit an owner's equity account for $800. Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
58.
Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process 59.
2 - 11
An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
60.
For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts. b. affect two or more accounts. c. always affect exactly two accounts. d. affect the same number of asset and liability accounts. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
61.
Which of the following statements is true? a. Debits increase assets and increase liabilities. b. Credits decrease assets and decrease liabilities. c. Credits decrease assets and increase liabilities. d. Debits decrease liabilities and decrease assets. Ans: c SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
62.
Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
63.
An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the drawings account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account Ans: b SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
64.
If a company has overdrawn its bank balance, then a. its cash account will show a debit balance. b. its cash account will show a credit balance. c. the cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the cash account. Ans: b SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 12
Test Bank for Accounting Principles, Tenth Edition
65.
Which account below is not a subdivision of owner's equity? a. Drawings b. Revenues c. Expenses d. Liabilities Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
66.
When an owner makes a withdrawal a. it doesn't have to be cash, it could be another asset. b. the drawing account will be increased with a credit. c. the capital account will be directly increased with a debit. d. the drawing account will be decreased with a debit. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
67.
The drawings account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of owner's equity. Ans: c SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
68.
Which of the following statements is not true? a. Expenses increase owner's equity. b. Expenses have normal debit balances. c. Expenses decrease owner's equity. d. Expenses are a negative factor in the computation of net income. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
69.
A credit to a liability account a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error. d. must be accompanied by a debit to an asset account. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
70.
In the first month of operations, the total of the debit entries to the cash account amounted to $900 and the total of the credit entries to the cash account amounted to $600. The cash account has a(n) a. $600 credit balance. b. $900 debit balance. c. $300 debit balance. d. $300 credit balance. Ans: c SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
71.
2 - 13
TransAm Mail Service purchased equipment for $2,500. TransAm paid $400 in cash and signed a note for the balance. TransAm debited the Equipment account, credited Cash and a. nothing further must be done. b. debited the Capital account for $2,100. c. credited another asset account for $400. d. credited a liability account for $2,100. Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
72.
Radio Moscow Industries purchased supplies for $1,000. They paid $400 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for $1,000, a credit to a liability account for $600. Which of the following would be the correct way to complete the recording of the transaction? a. Credit an asset account for $400. b. Credit another liability account for $400. c. Credit the Capital account for $400. d. Debit the Capital account for $400. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
73.
On January 14, Edamame Industries purchased supplies of $700 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
74.
On June 1, 2012, Portugal Inc. reported a cash balance of $12,000. During June, Portugal made deposits of $3,000 and made disbursements totalling $14,000. What is the cash balance at the end of June? a. $1,000 debit balance b. $15,000 debit balance c. $1,000 credit balance d. $4,000 credit balance Ans: a SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
75.
At January 1, 2012, Alligator Industries reported owner’s equity of $130,000. During 2012, Alligator had a net loss of $30,000 and owner drawings of $15,000. At December 31, 2012, the amount of owner’s equity is a. $85,000. b. $100,000. c. $115,000. d. $145,000. Ans: a SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 14 76.
Test Bank for Accounting Principles, Tenth Edition Silver Mt. Zion pays its employees twice a month, on the 7th and the 21st. On June 21, Silver Mt. Zion paid employee salaries of $5,000. This transaction would a. increase owner’s equity by $5,000. b. decrease the balance in Salaries and Wages Expense by $5,000. c. decrease net income for the month by $5,000. d. be recorded by a $5,000 debit to Salaries and Wages Payable and a $4,000 credit to Salaries and Wages Expense. Ans: c SO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
77.
In the first month of operations for Gallowsbird Industries, the total of the debit entries to the cash account amounted to $9,000 ($4,000 investment by the owner and revenues of $5,000). The total of the credit entries to the cash account amounted to $5,500 (purchase of equipment $2,000 and payment of expenses $3,500). At the end of the month, the cash account has a(n) a. $1,500 credit balance. b. $1,500 debit balance. c. $3,500 debit balance. d. $3,500 credit balance. Ans: c SO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
78
Chik Chik Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Owner’s Capital Owner’s Drawings Revenues Expenses
$ 3,000 4,700 3,500 2,800 4,200 1,400 700 22,000 17,500
What did Chik Chik Company show as total credits on its trial balance? a. $25,700 b. $30,400 c. $31,100 d. $35,100 Ans: b SO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS
79.
Electrelane Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Owner’s Capital Owner’s Drawings Revenues Expenses
$ 2,000 3,500 2,500 2,000 3,000 1,000 500 16,000 12,500
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 15
What did Electrelene Company show as total credits on its trial balance? a. $4,500 b. $22,000 c. $22,500 d. $24,500 Ans: b SO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS
80.
During February 2012, its first month of operations, the owner of Ariel Pink Enterprises invested cash of $25,000. Ariel had cash revenues of $5,000 and paid expenses of $7,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $2,000 credit b. $2,000 debit c. $23,000 debit d. $27,000 debit Ans: c SO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
81.
At January 31, 2012, the balance in Aislers Inc.’s supplies account was $250. During February, Aislers purchased supplies of $300 and used supplies of $375. At the end of February, the balance in the supplies account should be a. $175 debit. b. $325 debit. c. $175 credit. d. $325 debit. Ans: a SO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
82.
At December 1, 2012, Cursive Company’s accounts receivable balance was $1,200. During December, Cursive had credit revenues of $4,800 and collected accounts receivable of $4,000. At December 31, 2012, the accounts receivable balance is a. $400 debit. b. $2,000 debit. c. $400 credit. d. $2,000 credit. Ans: b SO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
83.
At October 1, 2012, Padilla Industries had an accounts payable balance of $30,000. During the month, the company made purchases on account of $25,000 and made payments on account of $36,000. At October 31, 2012, the accounts payable balance is a. $19,000. b. $21,000. c. $41,000. d. $91,000. Ans: a SO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 16 84.
Test Bank for Accounting Principles, Tenth Edition During 2012, its first year of operations, Neko’s Bakery had revenues of $60,000 and expenses of $33,000. The business had owner drawings of $20,000. What is the amount of owner’s equity at December 31, 2012? a. $0 b. $7,000 credit c. $27,000 credit d. $18,000 debit Ans: b SO3 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
85.
On July 7, 2012, Hidden Comera Enterprises performed cash services of $1,700. The entry to record this transaction would include a. a debit to Service Revenue of $1,700. b. a credit to Accounts Receivable of $1,700. c. a debit to Cash of $1,700. d. a credit to Accounts Payable of $1,700. Ans: c SO3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
86.
At September 1, 2012, Promise Ring Co. reported owner’s equity of $136,000. During the month, Promise Ring generated revenues of $38,000, incurred expenses of $21,000, purchased equipment for $5,000 and withdrew cash of $2,000. What is the amount of owner’s equity at September 30, 2012? a. $146,000 b. $151,000 c. $153,000 d. $156,000 Ans: b SO3 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
87.
The final step in the recording process is to a. analyze each transaction. b. enter the transaction in a journal. c. prepare a trial balance. d. transfer journal information to ledger accounts. Ans: d SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
88.
The usual sequence of steps in the transaction recording process is: a. journal → analyze → ledger. b. analyze → journal → ledger. c. journal → ledger → analyze. d. ledger → journal → analyze. Ans: b SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
89.
2 - 17
In recording business transactions, evidence that an accounting transaction has taken place is obtained from a. business documents. b. the Internal Revenue Service. c. the public relations department. d. the SEC. Ans: a SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
90.
After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to a. the company's bank. b. owner's equity. c. ledger accounts. d. financial statements. Ans: c SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
91.
The first step in the recording process is to a. prepare financial statements. b. analyze each transaction for its effect on the accounts. c. post to a journal. d. prepare a trial balance. Ans: b SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
92.
Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check. Ans: c SO3 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 18 93.
Test Bank for Accounting Principles, Tenth Edition After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. book of original entry. d. ledger. Ans: d SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
94.
The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the a. journal, and transfer the information to the ledger accounts. b. ledger, and transfer the information to the journal. c. book of accounts, and transfer the information to the journal. d. book of original entry, and transfer the information to the journal. Ans: a SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
95.
The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets. Ans: c SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
96.
The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system. Ans: c SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
97.
A compound journal entry involves a. two accounts. b. three accounts. c. three or more accounts. d. four or more accounts. Ans: c SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
98.
A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions. Ans: d SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
99.
When three or more accounts are required in one journal entry, the entry is referred to as a a. compound entry. b. triple entry. c. multiple entry. d. simple entry. Ans: a SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
100.
When two accounts are required in one journal entry, the entry is referred to as a a. balanced entry. b. simple entry. c. posting. d. nominal entry. Ans: b SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
101.
Another name for journal is a. listing. b. book of original entry. c. book of accounts. d. book of source documents. Ans: b SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
102.
The standard format of a journal would not include a. a reference column. b. an account title column. c. a T-account. d. a date column. Ans: c SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
103
Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order. Ans: d SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
104
2 - 19
A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors. Ans: b SO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 20
105
Test Bank for Accounting Principles, Tenth Edition
A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited. Ans: b SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
106.
The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing. Ans: d SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
107.
The standard form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin. Ans: c SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
108.
When journalizing, the reference column is a. left blank. b. used to reference the source document. c. used to reference the journal page. d. used to reference the financial statements. Ans: a SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
109.
On June 1, 2012 Ted Leo Le buys a copier machine for his business and finances this purchase with cash and a note. When journalizing this transaction, he will a. use two journal entries. b. make a compound entry. c. make a simple entry. d. list the credit entries first, which is proper form for this type of transaction. Ans: b SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
110.
2 - 21
Which of the following journal entries is recorded correctly and in the standard format? a. Salaries and Wages Expense ............................................ 500 Cash ............................................................................ 1,500 Advertising Expense . ......................................................... 1,000 b. Salaries and Wages Expense . ........................................... Advertising Expense . ......................................................... Cash ............................................................................
500 1,000 1,500
c. Cash .................................................................................. Salaries and Wages Expense ...................................... Advertising Expense ....................................................
1,500
d. Salaries and Wages Expense ............................................ Advertising Expense .......................................................... Cash . ...........................................................................
500 1,000
500 1,000
1,500
Ans: d SO4 BT: AN Difficulty: Easy TOT: 1 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
111.
The ledger should be arranged in a. alphabetical order. b. chronological order. c. dollar amount order. d. financial statement order. Ans: d SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
112.
The entire group of accounts maintained by a company is called the a. chart of accounts. b. general journal. c. general ledger. d. trial balance. Ans: c SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
113.
An accounting record of the balances of all assets, liabilities, and owner's equity accounts is called a a. compound entry. b. general journal. c. general ledger. d. chart of accounts. Ans: c SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
114.
The usual ordering of accounts in the general ledger is a. assets, liabilities, owner's capital, drawings, revenues, and expenses. b. assets, liabilities, drawings, owner's capital, expenses, and revenues. c. liabilities, assets, owner's capital, revenues, expenses, and drawings. d. owner’s capital, assets, liabilities, drawings, expenses, and revenues. Ans: a SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 22 115.
Test Bank for Accounting Principles, Tenth Edition Management could determine the amounts due from customers by examining which ledger account? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies Ans: c SO5 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
116.
The ledger accounts should be arranged in a. chronological order. b. alphabetical order. c. financial statement order. d. order of appearance in the journal. Ans: c SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
117.
A three column form of account is so named because it has columns for a. debit, credit, and account name. b. debit, credit, and reference. c. debit, credit, and balance. d. debit, credit, and date. Ans: c SO5 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
118.
On August 13, 2012, Swell Maps Enterprises purchased office equipment for $1,300 and office supplies of $200 on account. Which of the following journal entries is recorded correctly and in the standard format? a. Office Equipment ................................................................ 1,300 Account Payable ........................................................... 1,500 Office Supplies .................................................................... 200 b. Office Equipment. ............................................................... Office Supplies .................................................................... Accounts Payable .........................................................
1,300 200 1,500
c. Accounts Payable ............................................................... Office Equipment ........................................................... Office Supplies ..............................................................
1,500
d. Office Equipment ................................................................ Office Supplies .................................................................... Accounts Payable. ........................................................
1,300 200
1,300 200
1,500
Ans: d SO5 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
119.
Delta72 Company received a cash advance of $700 from a customer. As a result of this event, a. assets increased by $700. b. owner’s equity increased by $700. c. liabilities decreased by $700. d. both a and b. Ans: a SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
120.
2 - 23
Camper Van Company purchased equipment for $2,600 cash. As a result of this event, a. owner’s equity decreased by $2,600. b. total assets increased by $2,600. c. total assets remained unchanged. d. Both a and b. Ans: c SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
121.
Beethoven Company provided consulting services and billed the client $3,100. As a result of this event, a. assets remained unchanged. b. assets increased by $3,100. c. owner’s equity increased by $3,100. d. Both b and c. Ans: d SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
122.
The first step in posting involves a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal. b. writing in the journal the account number to which the debit amount was posted. c. writing in the journal the account number to which the credit amount was posted. d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal. Ans: a SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
123.
A chart of accounts usually starts with a. asset accounts. b. expense accounts. c. liability accounts. d. revenue accounts. Ans: a SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
124.
The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting. Ans: d SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
125.
A number in the reference column in a general journal indicates a. that the entry has been posted to a particular account. b. the page number of the journal. c. the dollar amount of the transaction. d. the date of the transaction. Ans: a SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 24
126.
Test Bank for Accounting Principles, Tenth Edition
A chart of accounts for a business firm a. is a graph. b. indicates the amount of profit or loss for the period. c. lists the accounts and account numbers that identify their location in the ledger. d. shows the balance of each account in the general ledger. Ans: c SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
127.
Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating. Ans: b SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
128.
After journal entries are posted, the reference column a. of the general journal will be blank. b. of the general ledger will show journal page numbers. c. of the general journal will show "Dr" or "Cr". d. of the general ledger will show account numbers. Ans: b SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
129.
The explanation column of the general ledger a. is completed without exception. b. is nonexistent. c. is used infrequently. d. shows account titles. Ans: c SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
130.
A numbering system for a chart of accounts a. is prescribed by GAAP. b. is uniform for all businesses. c. usually starts with income statement accounts. d. usually starts with balance sheet accounts. Ans: d SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
131.
The first step in designing a computerized accounting system is the creation of the a. general ledger. b. general journal. c. trial balance. d. chart of accounts. Ans: d SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
132.
2 - 25
The steps in preparing a trial balance include all of the following except a. listing the account titles and their balances. b. totaling the debit and credit columns. c. proving the equality of the two columns. d. transferring journal amounts to ledger accounts. Ans: d SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
133.
A trial balance may balance even when each of the following occurs except when a. a transaction is not journalized. b. a journal entry is posted twice. c. incorrect accounts are used in journalizing. d. a transposition error is made. Ans: d SO7 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
134.
A list of accounts and their balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement. Ans: c SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
135.
If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation. Ans: d SO7 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
136.
A trial balance is a listing of a. transactions in a journal. b. the chart of accounts. c. general ledger accounts and balances. d. the totals from the journal pages. Ans: c SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
137.
Customarily, a trial balance is prepared a. at the end of each day. b. after each journal entry is posted. c. at the end of an accounting period. d. only at the inception of the business. Ans: c SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 26
138.
Test Bank for Accounting Principles, Tenth Edition
A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized b. A journal entry that is posted twice c. Offsetting errors are made in recording the transaction d. A transposition error when transferring the debit side of journal entry to the ledger Ans: d SO7 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
139.
An account is an individual accounting record of increases and decreases in specific a. liabilities. b. assets. c. expenses. d. assets, liabilities, and owner's equity items. Ans: d SO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
140.
A debit is not the normal balance for which of the following? a. Asset account b. Drawing account c. Expense account d. Capital account Ans: d SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
141.
Which of the following rules is incorrect? a. Credits decrease the drawing account. b. Debits increase the capital account. c. Credits increase revenue accounts. d. Debits decrease liability accounts. Ans: b SO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
142.
Which of the following statements is false? a. Revenues increase owner's equity. b. Revenues have normal credit balances. c. Revenues are a positive factor in the computation of net income. d. Revenues are increased by debits. Ans: d SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
143.
Which of the following is the correct sequence of steps in the recording process? a. Posting, journalizing, analyzing b. Journalizing, analyzing, posting c. Analyzing, posting, journalizing d. Analyzing, journalizing, posting Ans: d SO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
144.
2 - 27
Which of the following is false about a journal? a. It discloses in one place the complete effects of a transaction. b. It provides a chronological record of transactions. c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared. d. It keeps in one place all the information about changes in specific account balances. Ans: d SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
145.
Deerhoof Company purchases equipment for $1,700 and supplies for $400 from Milkman Co. for $2,100 cash. The entry for this transaction will include a a. debit to Equipment $1,700 and a debit to Supplies Expense $400 for Milkman. b. credit to Cash for Milkman. c. credit to Accounts Payable for Deerhoof. d. debit to Equipment $1,700 and a debit to Supplies $400 for Deerhoof. Ans: d SO4 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
146.
Devendra Banhart withdraws $600 cash from her business for personal use. The entry for this transaction will include a debit of $600 to a. Owner’s Drawings. b. Owner’s Capital. c. Owner's Salaries Expense. d. Salaries and Wages Expense. Ans: a SO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
147.
On October 3, Karl Schickele, a carpenter, received a cash payment for services previously billed to a client. Karl paid his telephone bill, and he also bought equipment on credit. For the three transactions, at least one of the entries will include a a. credit to Owner’s Capital. b. credit to Notes Payable. c. debit to Accounts Receivable. d. credit to Accounts Payable. Ans: d SO4 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
148.
Posting of journal entries should be done in a. account number order. b. alphabetical order. c. chronological order. d. dollar amount order. Ans: c SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 28
149.
Test Bank for Accounting Principles, Tenth Edition
The chart of accounts is a a. list of accounts and their balances at a given time. b. device used to prove the mathematical accuracy of the ledger. c. listing of the accounts and the account numbers which identify their location in the ledger. d. required step in the recording process. Ans: c SO6 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
150.
Which of the following is incorrect regarding a trial balance? a. It proves that the debits equal the credits after posting. b. It proves that the company has recorded all transactions. c. A trial balance uncovers errors in journalizing and posting. d. A trial balance is useful in the preparation of financial statements. Ans: b SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
151.
A trial balance will not balance if a. a journal entry is posted twice. b. a wrong amount is used in journalizing. c. incorrect account titles are used in journalizing. d. a journal entry is only partially posted. Ans: d SO7 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
152.
Which of the following are the same under both GAAP and IFRS? a. The account. b. Debit and credit rules. c. Steps in the recording process. d. All of the above. Ans: d SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
153.
Which of the following are the same under both GAAP and IFRS? a. The journal. b. The ledger. c. The chart of accounts. d. All of the above. Ans: d SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
154.
Which of the following is true? a. Transaction analysis is completely different under IFRS and GAAP. b. Most transactions are recorded differently under IFRS and GAAP. c. Transaction analysis is the same under IFRS and GAAP, but some transactions are recorded differently. d. All transactions are recorded the same under IFRS and GAAP. Ans: c SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process 155.
2 - 29
European companies rely a. less on historical cost and more on fair values than U.S. companies. b. less on fair values and more on historical cost than U.S. companies. c. completely on fair values for financial reporting. d. completely on historical cost for financial reporting. Ans: a SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
156.
The double–entry accounting system is the basis of accounting systems a. worldwide. b. worldwide, except for the U.S. c. in the U.S. only d. neither internationally nor in the U.S. Ans: a SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
157.
Under IFRS, the trial balance a. follows the same format as under GAAP. b. shows credits on the left and debits on the right. c. includes less accounts than under GAAP. d. includes more accounts than under GAAP. Ans: a SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
158.
In deciding whether the U.S. should adopt IFRS, the issue the SEC said should be considered is a. whether IFRS is sufficiently developed and consistent in application. b. whether the IFRS is established for the benefit of investors. c. the impact of a switch to IFRS on U.S. laws and regulations. d. all of the above. Ans: d SO7 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
c c b b d c a b d c a d b d c c b d
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
d d b a b c b b b d a c a a c d a a
74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
a a c c b b c a b a b c b d b a c b
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
c d a c c c d a b b c d b b d c a b
110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127.
d d c c a c c c d a c d a a d a c b
128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145.
b c d d d d c d c c d d d b d d d d
146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158.
a d c c b d d d c a a a d
FOR INSTRUCTOR USE ONLY
2 - 30
Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 159 At June 1, 2012, Coquehcot Industries had an accounts receivable balance of $12,000. During the month, the company performed credit services of $25,000 and collected accounts receivable of $22,000. What is the balance in accounts receivable at June 30, 2012? Solution 159 The balance at the end of the month is $15,000, calculated as follows: Beginning accounts receivable Add: Credit Sales Less: Collections Ending accounts receivable
$12,000 25,000 (22,000) $15,000
SO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 160 TNT has the following transactions during April of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis. Apr. 1 4 16 27
Opens a law office, investing $25,000 in cash. Pays rent in advance for 6 months, $9,000 cash. Receives $8,000 from clients for services provided. Pays secretary $2,800 salary.
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 31
Solution 160
(a) A u g .
Effect on Accounting Equation
(b)
Debit-Credit Analysis
The asset Cash is increased; the owner’s equity Capital account is increased.
Debits increase assets: debit Cash $25,000. Credits increase owner’s equity: credit Owner’s Capital $25,000.
The4asset Prepaid Rent is increased; the asset Cash is decreased.
Debits increase assets: debit Prepaid Rent $9,000. Credits decrease assets: credit Cash $9,000.
The 16asset Cash is increased; the revenue Service Revenue is increased.
Debits increase assets: debit Cash $8,000. Credits increase revenues: credit Service Revenue $8,000.
The 27expense Salaries and Wages Expense is increased; the asset Cash is decreased.
Debits increase expenses: debit Salaries and Wages Expense $2,800. Credits decrease assets: credit Cash $2,800.
1
SO2 BT: C Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 161 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit_
_Credit_
Normal Balance
1. Salaries and wages expense.
_______
______
_______
2. Accounts receivable.
_______
______
_______
3. Service revenue.
_______
______
_______
4. Owner’s Capital.
_______
______
_______
5. Owner’s Drawings.
_______
______
_______
FOR INSTRUCTOR USE ONLY
2 - 32
Test Bank for Accounting Principles, Tenth Edition
Solution 161 1. Salaries and wages expense.
Debit_ __ + __
_Credit_ ___–__
Normal Balance __ Dr___
2. Accounts receivable.
__ +__
___–__
__ Dr___
3. Service revenue.
__ –__
___+__
__ Cr___
4. Owner’s Capital.
__ –__
___+__
__ Cr___
5. Owner’s Drawings.
__ +_ _
___–__
__ Dr___
SO2 BT: K Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 162 For each of the following transactions of Neon Garden, identify the account to be debited and the account to be credited. 1. Purchased 18-month insurance policy for cash. 2. Paid weekly payroll. 3. Purchased supplies on account. 4. Received utility bill to be paid at later date.
Solution 162 Transaction 1 2 3 4
Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense
Credit Cash Cash Accounts Payable Accounts Payable
SO4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 163 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. Andrew Bird invested $30,000 cash to start an appliance repair business. 2. Hired an employee to be paid $400 per week, starting tomorrow. 3. Paid two years’ rent in advance, $7,440. 4. Paid the worker’s weekly wage. 5. Recorded revenue earned and received for the week, $1,900. Solution 163 1. Cash……. ....................................................................................... Owner’s Capital .....................................................................
30,000 30,000
2. No entry, not a transaction. 3. Prepaid Rent .................................................................................. Cash ...................................................................................... FOR INSTRUCTOR USE ONLY
7,440 7,440
The Recording Process Solution 163
2 - 33
(cont.)
4. Salaries and Wages Expense ........................................................ Cash ......................................................................................
400
5. Cash………. ................................................................................... Service Revenue ...................................................................
1,900
400
1,900
SO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 164 Identify the impact on the accounting equation of the following transactions. 1. Purchased 36-month insurance policy for cash. 2. Purchased supplies on account. 3. Received utility bill to be paid at later date. 4. Paid utility bill previously accrued. Solution 164 1. 2. 3. 4.
Net effect is no change: Increases assets and decreases assets. Increases assets and increases liabilities. Increases liabilities and decreases stockholders’ equity. Decreases assets and decreases liabilities
SO4 BT: K Difficulty: Easy TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 165 Journalize the following transactions for Xiu Xiu Company for June 2012, the company’s first month of operations. You may omit explanations for the transactions. 1. Purchased equipment on account for $7,000. 2. Billed customers $5,000 for services performed. 3. Made payment of $2,300 on account for equipment purchased earlier in month. 4. Collected $2,900 on customer accounts. Solution 165 1. Equipment ...................................................................................... Accounts Payable ..................................................................
7,000
2. Accounts Receivable ...................................................................... Service Revenue ...................................................................
5,000
3. Accounts Payable .......................................................................... Cash ......................................................................................
2,300
4. Cash .............................................................................................. Accounts Receivable .............................................................
2,900
SO4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
7,000 5,000 2,300 2,900
2 - 34
Test Bank for Accounting Principles, Tenth Edition
BE 166 Use the information in BE 165 to answer the following questions. 1. What is the balance in Accounts Payable at June 30, 2012? 2. What is the balance in Accounts Receivable at June 30, 2012?
Solution 166 1. Accounts Payable at June 30, 2012: Beginning accounts payable Purchases on account Payments on account Ending accounts payable
$ 0 7,000 (2,300) $4,700
2. Accounts Receivable at June 30, 2012: Beginning accounts receivable Billed to customers Collections from customers Ending accounts receivable
$ 0 5,000 (2,900) $2,100
SO6 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 167 The transactions of the Liberty Belle Store are recorded in the general journal below. You are to post the journal entries to T-accounts. General Journal ____________________________________________________________________________ Date Account Titles Debit Credit ____________________________________________________________________________ 2012 Aug. 5 Accounts Receivable 3,400 Service Revenue 3,400 10
Cash
3,000 Service Revenue
19
25
3,000
Rent Expense Cash
1,100
Cash
1,400
1,100
Accounts Receivable
FOR INSTRUCTOR USE ONLY
1,400
The Recording Process BE 167
2 - 35
(cont.) General Ledger Cash
Accounts Receivable
Service Revenue
Rent Expense
Solution 167 General Ledger Cash 8/10 8/25
3,000 1,400
8/31 Bal.
3,300
Accounts Receivable 8/19
1,100
8/5
3,400
8/31 Bal.
2,000
Service Revenue
8/25
1,400
Rent Expense
8/5 8/10 8/31 Bal.
3,400 3,000 6,400
8/19
1,100
8/31 Bal.
1,100
SO6 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 168 Prepare a trial balance from the ledger accounts of Black Diamond Express as of January 31, 2012. Accounts Payable Accounts Receivable Cash Owner’s Capital Owner’s Drawings
$ 500 1,700 800 2,000 1,000
Rent Expense Service Revenue Supplies Salaries and Wages Expense
FOR INSTRUCTOR USE ONLY
$ 500 3,000 200 1,300
2 - 36
Test Bank for Accounting Principles, Tenth Edition
Solution 168 BLACK DIAMOND EXPRESS Trial Balance January 31, 2012
Cash Accounts Receivable Supplies Accounts Payable Owner’s Capital Owner’s Drawings Service Revenue Rent Expense Salaries and Wages Expense
Debit $ 800 1,700 200
Credit
$ 500 2,000 1,000 3,000 500 1,300 $5,500
$5,500
SO7 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 169 Prepare a corrected trial balance for Stereolab Company. All accounts should have a normal balance. STEROELAB COMPANY Trial Balance For the Quarter Ended 3/31/12
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense
Debit $ 9,000
Credit $ 23,000
2,500 60,000 15,000 10,000 20,000 38,000 1,500 43,000 15,000 5,000 10,000 $111,500
FOR INSTRUCTOR USE ONLY
$140,500
The Recording Process Solution 169 STEREOLAB COMPANY Trial Balance For the Quarter Ended 3/31/12
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense
$
Debit 9,000 23,000 2,500 60,000
Credit
$ 15,000 10,000 20,000 38,000 1,500 43,000 15,000 5,000 10,000 $126,000
SO7 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
FOR INSTRUCTOR USE ONLY
$126,000
2 - 37
2 - 38
Test Bank for Accounting Principles, Tenth Edition
EXERCISES Ex. 170 The chart of accounts used by Notwist Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 101 Cash 209 Unearned Service Revenue 112 Accounts Receivable 301 Owner’s Capital 125 Supplies 306 Owner’s Drawings 157 Equipment 400 Service Revenue 200 Notes Payable 610 Advertising Expense 201 Accounts Payable 729 Rent Expense ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. M. Acher invests $70,000 cash to start the business. ——————————————————————————————————————————— 2. Purchased three pieces of equipment for $160,000, paying $50,000 cash and signing a 5year, 10% note for the remainder. ——————————————————————————————————————————— 3. Purchased $5,000 supplies on credit. ——————————————————————————————————————————— 4. Cash revenue amounted to $7,000. ——————————————————————————————————————————— 5. Paid $500 cash for radio advertising. ——————————————————————————————————————————— 6. Paid $800 on account for supplies purchased in transaction 3. ——————————————————————————————————————————— 7. Owner withdrew $2,100 from the business for personal expenses. ——————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. ——————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. ——————————————————————————————————————————— 10. Billed a customer for $575 for photocopy work done. ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 39
Solution 170 ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. M. Acher invests $70,000 cash to start the business. 101 301 ——————————————————————————————————————————— 2. Purchased three pieces of equipment for $160,000, paying $50,000 cash and signing a 5-year, 10% note for the remainder. 157 101,200 ——————————————————————————————————————————— 3. Purchased $5,000 supplies on credit. 125 201 ——————————————————————————————————————————— 4. Cash revenue amounted to $7,000. 101 400 ——————————————————————————————————————————— 5. Paid $500 cash for radio advertising. 610 101 ——————————————————————————————————————————— 6. Paid $800 on account for supplies purchased in transaction 3. 201 101 ——————————————————————————————————————————— 7. Owner withdrew $2,100 from the business for personal expenses. 306 101 ——————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. 729 101 ——————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. 101 209 ——————————————————————————————————————————— 10. Billed a customer for $575 for photocopy work done. 112 400 ——————————————————————————————————————————— SO1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 40
Test Bank for Accounting Principles, Tenth Edition
Ex. 171 Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.
An increase in Salaries and Wages Expense.
_________________
2.
A decrease in Accounts Payable.
_________________
3.
An increase in Prepaid Insurance.
_________________
4.
An increase in Owner's Capital.
_________________
5.
A decrease in Office Supplies.
_________________
6.
An increase in Owner's Drawings.
_________________
7.
An increase in Service Revenue.
_________________
8.
A decrease in Accounts Receivable.
_________________
9.
An increase in Rent Expense.
_________________
10.
A decrease in Store Equipment.
_________________
Solution 171 1.
An increase in Salaries and Wages Expense.
Debit ______
2.
A decrease in Accounts Payable.
Debit ______
3.
An increase in Prepaid Insurance.
Debit ______
4.
An increase in Owner's Capital.
Credit ______
5.
A decrease in Office Supplies.
Credit ______
6.
An increase in Owner's Drawings.
Debit ______
7.
An increase in Service Revenue.
Credit ______
8.
A decrease in Accounts Receivable.
Credit ______
9.
An increase in Rent Expense.
Debit ______
10.
A decrease in Store Equipment.
Credit ______
SO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 41
Ex. 172 Selected transactions for A. Byrjun, a property manager, in her first month of business, are as follows. Jan. 2 Invested $15,000 cash in business. 3 Purchased used car for $5,200 cash for use in business. 9 Purchased supplies on account for $500. 11 Billed customers $2,100 for services performed. 16 Paid $450 cash for advertising. 20 Received $1,300 cash from customers billed on January 11. 23 Paid creditor $300 cash on balance owed. 28 Withdrew $2,000 cash for personal use of owner. Instructions For each transaction indicate the following. (a) The basic type of account debited and credited (asset (A), liability (L), owner’s equity (OE)). (b) The specific account debited and credited (cash, rent expense, service revenue, etc.). (c) Whether the specific account is increased (incr.) or decreased (decr). (d) The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit
(a) Basic Type OE
Account Credited (b) (c) (d) Specific Normal Account Effect Balance Owner’s Incr. Credit Capital
FOR INSTRUCTOR USE ONLY
2 - 42
Test Bank for Accounting Principles, Tenth Edition
Solution 172 Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit 3 9
A A
11 A
(a) Basic Type OE
Equip. Supplies
Incr. Incr.
Debit Debit
A L
Accts. Rec.
Incr.
Debit
OE
Incr. Incr.
Debit Debit
A A
16 OE Advert. Expense 20 A Cash
Accts. Pay. Decr. 28 OE Owner’s Drawings Incr.
Account Credited (b) (c) (d) Specific Normal Account Effect Balance Owner’s Incr. Credit Capital Cash Decr. Debit Accts. Pay. Incr. Credit Service Revenue Incr. Credit Cash
Decr.
Debit
Accts. Rec.
Decr.
Debit
23 L
Credit
A
Cash
Decr.
Debit
Debit
A
Cash
Decr.
Debit
SO2 BT: C Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: PS
Ex. 173 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Accounts
Normal Balance Debit or Credit
1.
Service Revenue
_________________
2.
Rent Expense
_________________
3.
Accounts Receivable
_________________
4.
Accounts Payable
_________________
5.
Owner's Capital
_________________
6.
Supplies
_________________
7.
Insurance Expense
_________________
8.
Owner's Drawings
_________________
9.
Buildings
_________________
10.
Notes Payable
_________________ FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 43
Solution 173 Normal Balance Debit or Credit
Accounts 1.
Service Revenue
Credit
2.
Rent Expense
Debit
3.
Accounts Receivable
Debit
4.
Accounts Payable
Credit
5.
Owner's Capital
Credit
6.
Supplies
Debit
7.
Insurance Expense
Debit
8.
Owner's Drawings
Debit
9.
Buildings
Debit
10.
Notes Payable
Credit
SO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 174 For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance. 1. Notes Payable 2. Prepaid Insurance 3. Salaries and Wages Expense 4. Service Revenue 5. Equipment 6. Owner’s Capital
Solution 174 1. 2. 3. 4. 5. 6.
Notes Payable Prepaid Insurance Salaries and Wages Expense Service Revenue Equipment Owner’s Capital
Debit Effect Decrease Increase Increase Decrease Increase Decrease
Normal Balance Credit Debit Debit Credit Debit Credit
SO2 BT: C Difficulty: Easy TOT: 7 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 44
Test Bank for Accounting Principles, Tenth Edition
Ex. 175 During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. ____ ____ ____ ____ ____
(1) (2) (3) (4) (5)
____ (6) Owner’s Drawings ____ (7) Cash ____ (8) Salaries and Wages Expense ____ (9) Notes Payable ____ (10) Insurance Expense
Advertising Expense Service Revenue Accounts Payable Accounts Receivable Owner’s Capital
Solution 175 (1) (2) (3) (4)
(a) (b) (c) (c)
(5) (6) (7) (8)
(b) (a) (c) (a)
(9) (10)
(c) (a)
SO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 176 Eight transactions are recorded in the following T-accounts: CASH (1) (7)
25,000 22,500
ACCOUNTS RECEIVABLE
(2) (3) (4) (6) (8)
3,500 1,950 5,100 8,000 3,300
(5)
27,500
SUPPLIES (3)
1,950
(2)
25,000
(5) OWNER’S DRAWINGS
ACCOUNTS PAYABLE (2)
13,500 SERVICE REVENUE
(1)
8,000
10,000
(8)
3,300
SALARIES AND WAGES EXPENSE (4)
22,500
EQUIPMENT
OWNER’S CAPITAL
(6)
(7)
5,100
FOR INSTRUCTOR USE ONLY
27,500
The Recording Process Ex. 176
2 - 45
(cont.)
Indicate for each debit and each credit: (a) whether an asset, liability, capital, drawing, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Capital + ——————————————————————————————————————————— (2) ——————————————————————————————————————————— (3) ——————————————————————————————————————————— (4) ——————————————————————————————————————————— (5) ——————————————————————————————————————————— (6) ——————————————————————————————————————————— (7) ——————————————————————————————————————————— (8) ———————————————————————————————————————————
Solution 176 Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Capital + ——————————————————————————————————————————— (2) Asset + Asset – Liability + ——————————————————————————————————————————— (3) Asset + Asset – ——————————————————————————————————————————— (4) Expense + Asset – ——————————————————————————————————————————— (5) Asset + Revenue + ——————————————————————————————————————————— (6) Liability – Asset – ——————————————————————————————————————————— (7) Asset + Asset – ——————————————————————————————————————————— (8) Drawings + Asset –
SO2 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
2 - 46
Test Bank for Accounting Principles, Tenth Edition
Ex. 177 For each of the following accounts indicate (a) the type of account (Asset, Liability, Owner's Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash
a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts
1. 2. 3. 4.
Accounts Payable Accounts Receivable Owner’s Capital Owner’s Drawings
5. 6. 7. 8.
Service Revenue Insurance Expense Notes Payable Equipment
Solution 177 1. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.
5. a. Revenue account. b. Debit decreases, credit increases. c. Normal balance - credit.
2. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.
6. a. Expense account. b. Debit increases, credit decreases. c. Normal balance - debit.
3. a. Owner's Equity account. b. Debit decreases, credit increases. c. Normal balance - credit.
7. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.
4. a. Owner's Equity account. b. Debit increases, credit decreases. c. Normal balance - debit.
8. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.
SO2 BT: C Difficulty: Easy TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 178 For each transaction given, enter in the tabulation given below a "D" for debit and a "C" for credit to reflect the increases and decreases of the assets, liabilities, and owner's equity accounts. In some cases there may be a "D" and a "C" in the same box. Transactions: 1. Owner invests cash in the business. 2. Pays insurance in advance for six months. 3. Pays secretary's salary. 4. Purchases office supplies on account. 5. Pays electricity bill. 6. Borrows money from local bank. 7. Makes payment on account. 8. Receives cash due from customers. FOR INSTRUCTOR USE ONLY
The Recording Process Ex. 178 9. 10.
2 - 47
(cont.)
Provides services on account. Owner withdraws assets from the business.
1
2
3
4
Transaction # 5 6
7
8
9
10
1 D
2 D,C
3 C
4 D C
Transaction # 5 6 C D C
7 C D
8 D,C
9 D
10 C
Assets Liabilities Owner's Capital Account Owner's Drawings Revenues Expenses
Solution 178
Assets Liabilities Owner's Capital Account Owner's Drawings Revenues Expenses
C D C D
D
SO2 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 179 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The owner, Athena Lu, invests $35,000 in cash in starting a real estate office operating as a sole proprietorship. 2. Purchased $400 of supplies on credit. 3. Purchased equipment for $8,000, paying $2,000 in cash and signed a 30-day, $6,000, note payable. 4. Real estate commissions billed to clients amount to $4,000. 5. Paid $700 in cash for the current month's rent. 6. Paid $200 cash on account for supplies purchased in transaction 2. 7. Received a bill for $600 for advertising for the current month. 8. Paid $2,200 cash for office salaries and wages. 9. Lu withdrew $1,200 from the business for living expenses. 10. Received a check for $3,000 from a client in payment on account for commissions billed in transaction 4.
FOR INSTRUCTOR USE ONLY
2 - 48
Test Bank for Accounting Principles, Tenth Edition
Solution 179 1.
2.
3.
4. 5. 6. 7. 8. 9. 10.
Cash ......................................................................................... Owner’s Capital ................................................................
35,000
Supplies .................................................................................... Accounts Payable ............................................................
400
Equipment ................................................................................ Cash ................................................................................ Notes Payable..................................................................
8,000
Accounts Receivable ................................................................ Service Revenue ..............................................................
4,000
Rent Expense ........................................................................... Cash ................................................................................
700
Accounts Payable ..................................................................... Cash ................................................................................
200
Advertising Expense ................................................................. Accounts Payable ............................................................
600
Salaries Expense ...................................................................... Cash ................................................................................
2,200
Owner’s Drawings..................................................................... Cash ................................................................................
1,200
Cash ......................................................................................... Accounts Receivable........................................................
3,000
35,000
400
2,000 6,000 4,000 700 200 600 2,200 1,200
SO4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 180 Identify the accounts to be debited and credited for each of the following transactions. 1. The owner, O. Gulag, invested $8,000 cash in the business. 2. Purchased supplies on account for $1,000. 3. Billed customers $2,000 for services performed. 4. Paid salaries of $1,200. Solution 180 1. 2. 3. 4.
Account Debited Cash Supplies Accounts Receivable Salaries and Wages Expense
Account Credited Owner’s Capital Accounts Payable Service Revenue Cash
SO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
3,000
The Recording Process
2 - 49
Ex. 181 Transactions for Tom Petty Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Invested $40,000 cash in the business. Purchased land costing $28,000 for cash. Purchased equipment costing $12,000 for $3,000 cash and the remainder on credit. Purchased supplies on account for $800. Paid $1,000 for a one-year insurance policy. Received $3,000 cash for services performed. Received $4,000 for services previously performed on account. Paid wages to employees for $2,500. Petty withdrew $1,000 cash from the business.
Solution 181 1. Cash .............................................................................................. Owner’s Capital .....................................................................
40,000
2. Land ............................................................................................... Cash ......................................................................................
28,000
3. Equipment ...................................................................................... Cash ...................................................................................... Accounts Payable ..................................................................
12,000
4. Supplies ........................................................................................ Accounts Payable .................................................................
800
5. Prepaid Insurance .......................................................................... Cash ......................................................................................
1,000
6. Cash .............................................................................................. Service Revenue ...................................................................
3,000
7. Cash .............................................................................................. Accounts Receivable .............................................................
4,000
8. Salaries and Wages Expense ........................................................ Cash ......................................................................................
2,500
9. Owner’s Drawings .......................................................................... Cash ......................................................................................
1,000
40,000
28,000
SO3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
3,000 9,000
800
1,000
3,000
4,000
2,500
1,000
2 - 50
Test Bank for Accounting Principles, Tenth Edition
Ex. 182 Match the basic step in the recording process described by each of the following statements. A. Analyze each transaction B. Enter each transaction in a journal C. Transfer journal information to ledger accounts ____ 1. This step is called posting. ____ 2. Business documents are examined to determine the effects of transactions on the accounts. ____ 3. This step is called journalizing.
Solution 182 1. C
2. A
3. B
SO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 183 Prepare journal entries for each of the following transactions. 1. 2. 3. 4.
Performed services for customers on account $5,000. Purchased $20,000 of equipment on account. Received $3,000 from customers in transaction 1. The owner, R. Orbison, withdrew $1,000 cash for personal use.
Solution 183 1. Accounts Receivable ............................................................................ Service Revenue .........................................................................
5,000
2. Equipment ............................................................................................ Accounts Payable ........................................................................
20,000
3. Cash .................................................................................................... Accounts Receivable ...................................................................
3,000
4. Owner’s Drawings ................................................................................ Cash ............................................................................................
1,000
SO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
5,000
20,000
3,000
1,000
The Recording Process
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Ex. 184 Sigur Ros Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Prepaid Insurance Accounts Receivable Prepaid Rent Accumulated Depreciation Rent Expense Cash Salaries and Wages Expense Depreciation Expense Salaries and Wages Payable Equipment Service Revenue Insurance Expense Supplies Owner’s Capital Supplies Expense Owner’s Drawings Instructions Organize the accounts into the order in which they should appear in the ledger of Sigur Ros Company and assign account numbers. Use the following system to assign account numbers. 1—199 200—299 300—399 400—499 500—599
Assets Liabilities Owner's Equity Revenues Expenses
Solution 184 There are several possible correct account number assignments. The following is one of the correct solutions. 101- Cash 112- Accounts Receivable 125- Supplies 130- Prepaid Insurance 140- Prepaid Rent 157- Equipment 158- Accumulated Depreciation 201- Accounts Payable 212- Salaries and Wages Payable 301- Owner’s Capital 306- Owner’s Drawings 400- Service Revenue 510- Salaries and Wages Expense 520- Supplies Expense 530- Rent Expense 540- Insurance Expense 550- Depreciation Expense SO5 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 185 The transactions of Medina Information Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2012 Sept. 1 Cash 20,000 Owner’s Capital 20,000 (Invested cash in business) 4
8
15
18
Equipment Cash Notes Payable (Paid cash and issued 2-year, 9%, note for equipment)
30,000
Rent Expense Cash (Paid September rent)
1,000
Prepaid Insurance Cash (Paid one-year liability insurance) Cash
10,000 20,000
1,000
400 400
2,500 Service Revenue (Received cash for delivery services)
20
25
30
30
2,500
Salaries and Wages Expense Cash (Paid salaries for current period)
500
Utilities Expense Accounts Payable (Received a bill for September utilities)
100
500
100
Owner’s Drawings Cash (Withdrew cash for personal use)
1,500
Accounts Receivable Service Revenue (Billed customer for delivery service)
2,000
FOR INSTRUCTOR USE ONLY
1,500
2,000
The Recording Process Ex. 185
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(cont.) General Ledger
Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
2 - 54 Ex. 185
Test Bank for Accounting Principles, Tenth Edition (cont.)
Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Owner’s Capital Account No. 301 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Owner’s Drawing Account No. 306 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
The Recording Process Ex. 185
2 - 55
(cont.)
Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
MEDINA INFORMATION SERVICE Trial Balance September 30, 2012 ——————————————————————————————————————————— Accounts Debit Credit ———————————————————————————————————————————
———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 185 General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2012 Sept. 1 Cash 101 20,000 Owner’s Capital 301 20,000 (Invested cash in business) 4
8
15
18
Equipment 155 Cash 101 Notes Payable 205 (Paid cash and issued 2-year, 9%, note for equipment)
30,000
Rent Expense Cash (Paid September rent)
719 101
1,000
Prepaid Insurance Cash (Paid one-year liability insurance)
130 101
400
Cash
101 400
2,500
Salaries and Wages Expense Cash (Paid salaries for current period)
726 101
500
Utilities Expense Accounts Payable (Received a bill for September utilities)
735 201
100
Owner’s Drawings Cash (Withdrew cash for personal use)
306 101
1,500
Accounts Receivable Service Revenue (Billed customer for delivery service)
112 400
2,000
Service Revenue (Received cash for delivery services) 20
25
30
30
FOR INSTRUCTOR USE ONLY
10,000 20,000
1,000
400
2,500
500
100
1,500
2,000
The Recording Process Solution 185
2 - 57
(cont.) General Ledger
Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 1 J1 20,000 20,000 4 J1 10,000 10,000 8 J1 1,000 9,000 15 J1 400 8,600 18 J1 2,500 11,100 20 J1 500 10,600 30 J1 1,500 9,100
Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 30 J1 2,000 2,000
Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 15 J1 400 400
Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 4 J1 30,000 30,000
Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 25 J1 100 100
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 185
(cont.)
Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 4 J1 20,000 20,000 Owner’s Capital Account No. 301 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 1 J1 20,000 20,000
Owner’s Drawings Account No. 306 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 30 J1 1,500 1,500
Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 18 J1 2,500 2,500 30 J1 2,000 4,500 Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 8 J1 1,000 1,000 Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 20 J1 500 500
FOR INSTRUCTOR USE ONLY
The Recording Process Solution 185
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(cont.)
Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2012 Sept. 25 J1 100 100 MEDINA INFORMATION SERVICE Trial Balance September 30, 2012 ——————————————————————————————————————————— Accounts Debit Credit ——————————————————————————————————————————— Cash $ 9,100 Accounts Receivable 2,000 Prepaid Insurance 400 Equipment 30,000 Accounts Payable $ 100 Notes Payable 20,000 Owner’s Capital 20,000 Owner’s Drawings 1,500 Service Revenue 4,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 100 Totals $44,600 $44,600 ____________________________________________________________________________ SO5 BT: AP Difficulty: Hard TOT: 25 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 186 The bookkeeper for Panda Bear Yard Service made a number of errors in journalizing and posting as described below: 1. A debit posting to accounts receivable for $500 was omitted. 2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable. 3. A credit to accounts receivable for $750 was posted as $75. 4. A cash purchase of equipment for $893 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $839 while the debit posting was made for $893. 5. A debit posting of $400 for purchase of supplies was credited to supplies. 6. A debit to repairs expense for $481 was posted as $418. 7. A debit posting for salaries and wages expense for $900 was made twice. 8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit to cash for $70. FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Instructions For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. (A) (B) (C) Error In Balance Difference Larger Column 1 No $500 Credit
Solution 186 (A) In Balance No Yes No No No No No Yes
Error 1 2 3 4 5 6 7 8
(B) Difference $500 — 675 54 800 63 900 —
(C) Larger Column Credit — Debit Debit Credit Credit Debit —
SO6 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 187 Post the following transactions to T-accounts and determine each account's ending balance. 1. Supplies ......................................................................................... Accounts Payable ..................................................................
2,500
2. Accounts Receivable ...................................................................... Service Revenue ...................................................................
4,000
3. Cash .............................................................................................. Accounts Receivable .............................................................
3,000
4. Accounts Payable ........................................................................... Cash ......................................................................................
1,000
2,500
4,000
3,000
1,000
Solution 187 Cash 3.
3,000
Bal.
2,000
Accounts Payable 4.
1,000
4.
1,000
FOR INSTRUCTOR USE ONLY
1.
2,500
Bal.
1,500
The Recording Process Solution 187
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(cont.) Accounts Receivable
2.
4,000
Bal.
1,000
3.
Service Revenue 3,000
2.
4,000
Bal.
4,000
Supplies 1.
2,500
Bal.
2,500
SO6 BT: AP Difficulty: Easy TOT: 6 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 188 The trial balance of Red House Painters shown below does not balance. RED HOUSE PAINTERS Trial Balance June 30, 2012 ——————————————————————————————————————————— Debit Credit Cash .............................................................................................. $ 2,780 Accounts Receivable...................................................................... 7,420 Supplies ......................................................................................... 600 Equipment...................................................................................... 8,300 Accounts Payable .......................................................................... $ 9,777 Owner’s Capital.............................................................................. 1,952 Owner’s Drawings .......................................................................... 1,300 Service Revenue............................................................................ 15,200 Salaries and Wages Expense ........................................................ 3,800 Repair Expense ............................................................................. 1,600 Totals .................................................................................... $25,800 $26,929 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $270 received from a customer on account was debited to Cash $720 and credited to Accounts Receivable $720. 3. A withdrawal of $400 by the owner was posted as a credit to Owner’s Drawings, $400 and credit to Cash $400. 4. A debit of $300 was not posted to Salaries and Wages Expense. 5. The purchase of equipment on account for $700 was recorded as a debit to Repair Expense and a credit to Accounts Payable for $700. 6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51. 7. A payment on account for $235 was credited to Cash for $235 and credited to Accounts Payable for $253. FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Instructions Prepare a correct trial balance.
Solution 188 RED HOUSE PAINTERS Trial Balance June 30, 2012 ——————————————————————————————————————————— Debit Credit Cash [2,780 – 450 (2)] .................................................................... $ 2,330 $ Accounts Receivable [7,420 + 450 (2)] ........................................... 7,870 Supplies ......................................................................................... 600 Equipment [8,300 + 700 (5)] ........................................................... 9,000 Accounts Payable [9,777 – 488 (7)] ................................................ 9,289 Owner’s Capital .............................................................................. 1,952 Owner’s Drawings [1,300 + 400 + 400 (3)] ..................................... 2,100 Service Revenue [15,200 + 459 (6)] ............................................... 15,659 Salaries and Wages Expense [3,800 + 300 (4)].............................. 4,100 Repair Expense [1,600 – 700 (5)] ................................................... 900 Totals ...................................................................................... $26,900 $26,900
SO7 BT: AN Difficulty: Hard TOT: 25 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 189 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $800 to a creditor was recorded by a debit to Accounts Payable of $80 and a credit to Cash of $800. 2. A $480 payment for a printer was recorded by a debit to Equipment of $48 and a credit to Cash for $48. 3. An account receivable in the amount of $2,500 was collected in full. The collection was recorded by a debit to Cash for $2,500 and a debit to Accounts Payable for $2,500. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.
Solution 189 1. The trial balance totals will be unequal. The credit column will be $720 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. FOR INSTRUCTOR USE ONLY
The Recording Process Solution 189
2 - 63
(cont.)
3. The trial balance totals will be unequal. The debit column will be $5,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal. SO7 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 190 L. Phair and Associates is a financial planning service. The account balances at December 31, 2012 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Automobiles Buildings Cash Computer Computer Software Land Owner’s Capital Notes Payable Notes Receivable Equipment Supplies Technical Library
$
5,000 19,000 27,500 100,000 11,700 22,000 4,200 42,000 152,900 95,000 8,100 15,400 800 2,200
Instructions Prepare a trial balance with the accounts arranged in financial statement order.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 190 L. PHAIR AND ASSOCIATES Trial Balance December 31, 2012 Cash............................................................................................... Accounts Receivable ...................................................................... Supplies ......................................................................................... Notes Receivable ........................................................................... Computer ....................................................................................... Computer Software ........................................................................ Technical Library ............................................................................ Equipment ...................................................................................... Automobiles ................................................................................... Buildings ........................................................................................ Land ............................................................................................... Accounts Payable........................................................................... Notes Payable ................................................................................ Capital ............................................................................................ Totals ....................................................................................
Debit $ 11,700 19,000 800 8,100 22,000 4,200 2,200 15,400 27,500 100,000 42,000
Credit
$
$252,900
5,000 95,000 152,900 $252,900
SO7 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 191 The ledger accounts of the Fabulous Muscles Gym at June 30, 2012 are shown below: Accounts Payable Accounts Receivable Buildings Owner’s Capital Cash Equipment Notes Payable Supplies Owner’s Drawings
$ 9,100 1,050 43,000 54,800 6,100 42,900 40,000 350 10,500
Instructions Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading.
FOR INSTRUCTOR USE ONLY
The Recording Process
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Solution 191 FABULOUS MUSCLES GYM Trial Balance June 30, 2012
Cash .............................................................................................. Accounts Receivable...................................................................... Supplies ......................................................................................... Equipment...................................................................................... Buildings ........................................................................................ Notes Payable................................................................................ Accounts Payable .......................................................................... Owner’s Capital.............................................................................. Owner’s Drawings .......................................................................... Totals ....................................................................................
Debit $ 6,100 1,050 350 42,900 43,000
$ 40,000 9,100 54,800 10,500 $103,900
SO7 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 192 The ledger account balances for Galaxie 500 Company are listed below. Accounts Payable Accounts Receivable Cash Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Unearned Service Revenue Utilities Expense
$ 8,000 7,000 5,200 11,000 4,000 30,000 22,800 2,000 12,000
Instructions Prepare a trial balance in proper form for Galaxie at December 31, 2012.
FOR INSTRUCTOR USE ONLY
Credit
$103,900
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Test Bank for Accounting Principles, Tenth Edition
Solution 192 GALAXIE 500 Trial Balance December 31, 2012
Cash Accounts Receivable Accounts Payable Unearned Service Revenue Owner’s Capital Owner’s Drawings Repair Revenue Salaries and Wages Expense Utilities Expense
Debit $5,200 7,000
Credit
$ 8,000 2,000 11,000 4,000 30,000 22,800 12,000 $51,000
$51,000
SO7 BT: AP Difficulty: Medium TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex 193 The bookkeeper for Antony Johnson Auto Repair made a number of errors in journalizing and posting, as described below. 1. A credit posting of $500 to Accounts Receivable was omitted. 2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense. 3. A collection from a customer of $100 in payment of its account owed was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100. 4. A credit posting of $350 to Property Taxes Payable was made twice. 5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25. 6. A debit of $695 to Advertising Expense was posted as $659 Instructions For each error: (a) Indicate whether the trial balance will balance. (b) If the trial balance will not balance, indicate the amount of the difference. (c) Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example.
Error (1)
(a) In Balance No
(b) Difference $500
(c) Larger Column debit
FOR INSTRUCTOR USE ONLY
The Recording Process Solution 193
Error
(a) In Balance
(b) Difference
(c) Larger Column
1. 2. 3. 4. 5. 6.
No Yes Yes No Yes No
$500 — — 350 — 36
Debit — — Credit — Credit
SO7 BT: AN Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA BB: CT AICPA PC: PS
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
COMPLETION STATEMENTS 194.
An _______________ is a record of increases and decreases in specific assets, liabilities, and owner's equity items.
195.
The process of entering an amount on the left side of an account is called ____________ the account, and making an entry on the right side is called _________________ the account.
196.
______________, _______________, and _______________ have debit normal account balances whereas _______________, ________________, and ________________ have credit normal account balances.
197.
The four subdivisions of owner's equity are: ________________, ________________, ________________, and ________________.
198.
The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ________________, and transfer the _______________ information to appropriate accounts in the ________________.
199.
A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.
200.
An accounting record where transactions are initially recorded in chronological order is called a ________________.
201.
When three or more accounts are required in one journal entry, the entry is referred to as a ________________ entry.
202.
The entire group of accounts and their balances maintained by a company is called the ________________.
203.
A two column list of all accounts and their balances at a given time is a ______________.
Answers to Completion Statements 194. account 195. debiting, crediting 196. Assets, expenses, owner's drawings, owner's capital, liabilities, revenues 197. capital, drawings, revenues, expenses 198. analyze, journal, journal, ledger
199. 200. 201. 202. 203.
business documents journal compound general ledger trial balance
SO1-7 BT: K Difficulty: Easy TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 69
MATCHING 204. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Account Normal account balance Debit Revenue account Compound entry
F. G. H. I. J.
Journal Posting Chart of accounts Trial balance Simple entry
____
1. An entry that involves three or more accounts.
____
2. Transferring journal entries to ledger accounts.
____
3. The side which increases an account.
____
4. A list of all the accounts used by an enterprise.
____
5. A record of increases and decreases in specific assets, liabilities, and owner's equity items.
____
6. Left side of an account.
____
7. An entry that involves only two accounts.
____
8. A book of original entry.
____
9. A list of accounts and their balances at a given time.
____ 10. Has a credit normal balance
Answers to Matching 1. 2. 3. 4. 5.
E G B H A
6. 7. 8. 9. 10.
C J F I D
SO1-6 BT: K Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 205 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance.
Solution 205 An account is an individual accounting record of increases and decreases in specific asset, liability, and owner's equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, owner's equity, revenue, and expense. Accounts with a normal debit balance, such as assets and expenses, are increased when debited and decreased when credited. Accounts with a normal credit balance, such as liabilities and revenues, are increased when credited and decreased when debited. SO1,2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 206 Your roommate, a marketing major, thinks that debit means decrease and credit means increase. And, that every account can be debited and credited and as result, every account can have both a debit and a credit balance. Explain to your roommate (1) the meaning of debit and credit; (2) which accounts can only be debited, which can only be credited, and which can be both debited and credited; and (3) which accounts normally have debit balances and which credit balances.
Solution 206 The terms debit and credit mean the left and right side, respectively, of every account. Some accounts such as Drawings and Expenses are only debited; other accounts such as Capital and Revenues are only credited; and finally, some accounts such as Cash, Accounts Receivable, and Accounts Payable can be debited and credited. Accounts with debit balances include Assets, Drawings, and Expenses. Accounts with credit balances include Capital and Revenues. SO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
S-A E 207 A fellow classmate is confused about how debits and credits relate to the basic accounting equation. State the basic accounting equation, convert it into the expanded accounting equation, and then explain how it ties into the rules for debits and credits.
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 71
Solution 207 The basic accounting equation is: Assets = Liabilities + Owner’s Equity The expanded equation divides Owner’s Equity into its various parts, reflecting the owner’s investment, drawings, revenues, and expenses: Assets = Liabilities + Owner’s Capital – Owner’s Drawings + Reveues – Expenses This expanded equation can then be re-arranged to explain why certain accounts have debit (lefthand) balances, while other accounts have credit (right-hand) balances, as follows: Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenues The accounts on the left-hand side of the equation have left-hand, or debit, balances, while the accounts on the right-hand side of the equation have right-hand, or credit, balances. Accounts with debit balances are increased with debits and decreased with credits, while accounts with credit balances are increased with credits and decreased with debits. SO2 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication
S-A E 208 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain.
Solution 208 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. SO7 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
S-A E 209 A classmate who is a computer science major thinks that accountants are obsolete. She states that computers can do the entire process without any human assistance. Discuss the steps in the recording process and indicate what role the computer plays in that process.
Solution 209 The initial step in the recording process is to analyze each transaction. This is done by analyzing the source documents to determine which accounts were affected. The computer is not able to perform this step. The second step is enter the transaction in the journal using a journal entry. The computer is not able to perform this step and does not know if the correct accounts are being debited and credited, nor if the correct amounts were entered. It is only able to test the equality of the debits and credits comprising the entry. The final step is to transfer the journal entry to the specific accounts in the ledger (posting). The computer can perform this step efficiently and effectively. SO3 BT: S Difficulty: Medium TOT: 7 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 210 Amy Pond, a fellow employee, wants to understand the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur. Solution 210 The basic steps in the recording process are: 1.
Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.
2.
Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.
3.
Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.
SO3 BT: C Difficulty: Medium TOT: 5min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 73
S-A E 211 All recordable transactions are initially recorded in the journal. Discuss the contributions that the journal makes to the recording process. Solution 211 The journal makes several significant contributions to the recording process: (1) It discloses inn one place the complete effects of a transaction; (2) It provides a chronological record of transactions; and, (3) It helps to prevent and locate errors because the debit and credit amounts for each entry can be readily compared. SO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 212 A bookkeeping student has come to you for tutoring on the recording process. She is confused about the relationship between the chart of accounts and the ledger. Explain the purpose of the chart of accounts and the general ledger. In your explanation indicate the relationship between these two items as well. Solution 212 The chart of accounts lists all of the accounts that a company uses and their account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the balance sheet accounts followed by the income statement accounts. The general ledger contains all of the accounts of a company and their respective balances at any point in time. The ledger is organized by account number with assets coming first, then liabilities, owner’s equity, revenue, and expense accounts. SO5&6 BT: C Difficulty: Easy TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 213 The process of transferring the information in the journal to the general ledger is called posting. Explain the posting process, including the importance of the journal page number and the account numbers. Solution 213 The posting process begins with locating the account(s) being debited in the general ledger. Then entering the date of the entry, the journal page number where the entry originated and debit portion of the entry in the date, reference and debit columns, respectively. Once this done, the account number(s) of the account(s) being debited is (are) entered in the reference column in the journal. Next, the credit portion of the journal entry is posted to the appropriate accounts in the ledger following the same steps as noted for the debit portion.
FOR INSTRUCTOR USE ONLY
2 - 74
Test Bank for Accounting Principles, Tenth Edition
The importance of the journal page number, in the reference column of each account in the general ledger accounts, is to indicate where to find the original entry. And, the general ledger account numbers, in the reference column of the journal, indicate that the entry has been posted. SO6 BT: S Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 214 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise.
Solution 214 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T-accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. SO4-6 BT: S Difficulty: Medium TOT: 7 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 215 (Ethics) Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages residential rental properties. Linda Grider is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Coleman believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Jim Coleman, Sr. The elder Mr. Coleman has set up Maris Properties in order to test his son's management skills before allowing him to manage the more lucrative commercial property business. Mr. Coleman, Sr. provided the capital for Maris, and maintains close contact with the company. He allowed his son, however, to hire his own employees.
FOR INSTRUCTOR USE ONLY
The Recording Process
2 - 75
S-A E 215 (cont.) Mr. Coleman has asked Ms. Grider to change the name of the Travel and Entertainment account to Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Grider resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Grider agree to the change in the Travel and Entertainment account to Property Development? Explain.
Solution 215 1. The stakeholders in this situation include Mr. Coleman, Jr. Linda Grider Mr. Coleman, Sr. Bankers and others who might rely on the financial statements 2. Ms. Grider definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Grider was hired by Mr. Coleman, Jr., and though she may agree with his business methods, she cannot be a party to such deceit. SO1 BT: E Difficulty: Medium TOT: 7 min. AACSB: Ethics AICPA BB: CT AICPA PC: Professional Demeanor
S-A E 216 (Communication) A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits. a. Can the student be successful in the course without an understanding of the rules of debits and credits? b. Explain the rules of debits and credits in a way that will help him understand them.
Solution 216 a. Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 216
(cont.)
b. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: •
Make sure that you understand the accounting equation. Assets equal the total of liabilities and owners’ equity. Owners’ equity is not an account but rather a group of accounts that includes owner’s capital, revenues, expenses, and owner’s drawings. Owner’s capital and revenues cause owners’ equity to increase while expenses and drawings cause owners’ equity to decrease.
•
Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.
•
Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account—when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, owner’s capital, and revenues are all increased with credits. Expenses and owner’s drawing are the two accounts that cause owners’ equity to decrease, thus they must be increased with a debit.
SO2 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
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True-False Statements sg 1. 1 C 9. 2 C 17. 5 C 25. 5 K 33. sg 2. 1 K 10. 2 K 18. 5 K 26. 6 K 34. sg 3. 1 K 11. 3 C 19. 5 C 27. 7 K 35. a sg 4. 1 C 12. 3 K 20. 5 C 28. 8 C 36. a sg,a 5. 1 K 13. 3 K 21. 5 C 29. 8 C 37. a 6. 2 C 14. 3 K 22. 5 K 30. 8 C sg 7. 2 K 15. 4 C 23. 5 K 31. 2 K 8. 2 K 16. 4 K 24. 5 C sg32. 3 K Multiple Choice Questions a 38. 1 K 65. 3 K 92. 5 C 119. 5 AP 146. a 39. 1 K 66. 3 C 93. 5 AP 120. 5 C 147. a 40. 1 K 67. 3 C 94. 5 AN 121. 5 C 148. 41. 1 C 68. 3 K 95. 5 K 122. 5 AN sg149. st 42. 1 K 69. 3 C 96. 5 AN 123. 5 AN 150. st 43. 1 K 70. 3 C 97. 5 C 124. 6 C 151. sg 44. 1 C 71. 3 C 98. 5 AP 125. 6 C 152. st 45. 1 C 72. 3 C 99. 5 K 126. 6 AN 153. 46. 1 C 73. 4 K 100. 5 K 127. 6 AN sg154. 47. 1 K 74. 4 C 101. 5 K 128. 6 AN sg155. st 48. 2 K 75. 4 K 102. 5 C 129. 6 C 156. sg 49. 2 K 76. 4 K 103. 5 C 130. 6 AN 157. st 50. 2 K 77. 4 K 104. 5 K 131. 6 AN 158. sg 51. 2 K 78. 4 K 105. 5 C 132. 6 AN 159. 52. 2 C 79. 4 K 106. 5 AN 133. 6 AP 160. 53. 2 C 80. 4 K 107. 5 AN 134. 6 AP 161. 54. 2 C 81. 4 C 108. 5 AN 135. 6 AN 162. 55. 2 C 82. 4 K 109. 5 AN 136. 6 AP 163. 56. 2 C 83. 4 AN 110. 5 AN 137. 6 AP 164. 57. 2 C 84. 5 C 111. 5 AN 138. 6 AP 165. 58. 2 K 85. 5 AP 112. 5 AP 139. 7 K 166. 59. 2 C 86. 5 K 113. 5 AN 140. 7 K 167. 60. 2 C 87. 5 K 114. 5 AP 141. 7 K 168. 61. 2 C 88. 5 AN 115. 5 AN 142. 7 C 169. 62. 2 AP 89. 5 AN 116. 5 AN a143 8 C 63. 2 AP 90. 5 K 117. 5 AP a144. 8 C 64. 2 AP 91. 5 K 118. 5 AP a145. 8 AN . sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter.
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8 8 8 2 2 2 4 4 5 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7
AN AN AN C K K K K AP AP K AP K K K K K K K K K K K K
3-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY 160. 161. 162. 163. 177. 178. 179. 180. 181. 182.
4 5 5 5 2 2 3 3 4 4
K AP AN AN AN AN AN AN C AN
164. 165. 166. 167. 183. 184. 185. 186. 187. 188.
5 5 5 5 4 4 4,5 5 5 5,6
206. 207. 208.
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K K K
209. 210. 211.
2 2 5
218. 219.
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C AP
220. 221.
3 7
AN AN AN AN
Brief Exercises 168. 5,8 AN 169. 6 AN 170. 6 AN 171. 6 K
172. 173. 174. 175.
6 7 7 7
AN AP AP AP
176.
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AP
C C AN AN AN AN
Exercises 189. 5,6 AN 190. 5,6 AN 191. 5,6 AN 192. 5,6 AN 193. 5,6 AN 194. 5,6 C
195. 196. 197. 198. 199. 200.
6 6 6 5,6 7 7
AN AN AN AN AN AP
201. 202. 203. 204. a 205.
7 7 7 7 8
AP AN AP AP AN
6 7
K K
Completion Statements K 212. 5 K 215. K 213. 5 K 216. K 214. 5 K Short-Answer Essay AP a222. 8 AP AP a223. 8 AP
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TF MC MC MC MC
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TF TF TF
14. 32. 33.
TF TF TF
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Study Objective 1 MC 42. MC 45. MC 43. MC 46. MC 44. MC 47. Study Objective 2 MC 57. MC 62. MC 58. MC 63. MC 59. MC 64. MC 60. MC 149. MC 61. MC 150. Study Objective 3 MC 68. MC 71. MC 69. MC 72. MC 70. MC 189. Study Objective 4 MC 80. MC 83. MC 81. MC 152. MC 82. MC 153.
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MC MC MC
216. 217. 227.
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151. 187. 188. 218. 219.
MC Ex Ex C C
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190. 229. 230.
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170. 191. 192.
BE Ex Ex
193. 194. 195.
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FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 17. 18. 19. 20. 21. 22. 23. 24. 25. 34. 84.
TF TF TF TF TF TF TF TF TF TF MC
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.
MC MC MC MC MC MC MC MC MC MC MC
96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
26. 35. 124. 125. 126. 127.
TF TF MC MC MC MC
128. 129. 130. 131. 132. 133.
MC MC MC MC MC MC
134. 135. 136. 137. 138. 155.
27. 36. 139. 140. 141.
TF TF MC MC MC
142. 158. 159. 160. 161.
MC MC MC MC MC
162. 163. 164. 165. 166.
a
TF TF
a
TF TF
28. 29.
a
30. 37.
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a
143. 144.
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Note: TF = True-False MC = Multiple Choice
Study Objective 5 MC 107. MC 118. MC 108. MC 119. MC 109. MC 120. MC 110. MC 121. MC 111. MC 122. MC 112. MC 123. MC 113. MC 154. MC 114. MC 171. MC 115. MC 172. MC 116. MC 173. MC 117. MC 174. Study Objective 6 MC 156. MC 198. MC 157. MC 199. MC 179. BE 200. MC 180. BE 201. MC 181. BE 202. MC 182. BE 203. Study Objective 7 MC 167. MC 184. MC 168. MC 185. MC 169. MC 186. MC 170. MC 209. MC 183. BE 210. a Study Objective 8 MC a145. MC a147. MC a146. MC a148.
MC MC MC MC MC MC MC BE BE BE BE
175. 176. 177. 178. 195. 196. 197. 198. 199. 200. 201.
BE BE BE BE Ex Ex Ex Ex Ex Ex Ex
Ex Ex Ex Ex Ex Ex
204. 205. 206. 207. 208. 225.
Ex Ex Ex Ex Ex C
BE BE BE Ex Ex
211. 212. 213. 214.
178. 215.
MC MC
BE = Brief Exercise Ex = Exercise
a
202. 203. 204. 208. 201. 202. 203. 204.
Ex Ex Ex Ex C C C C
Ex Ex Ex Ex
226. 231.
C S-A
BE Ex
232. 233.
S-A S-A
C = Completion SA = Short-Answer Essay
This chapter also contains one set Matching questions and Short-Answer Essay questions. A summary table of all learning outcomes, including AACSB, AICPA, and IMA professional standards, is available on the Weygandt Accounting Principles 9e instructor web site..
FOR INSTRUCTOR USE ONLY
3-4
Test Bank for Accounting Principles, Tenth Edition
CHAPTER STUDY OBJECTIVES 1. Explain the time period assumption. The time period assumption assumes that the economic life of a business is divided into artificial time periods. 2. Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a company's financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash. 3. Explain the reasons for adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred. 4. Identify the major types of adjusting entries. The major types of adjusting entries are deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses). 5. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period. 6. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 7. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments. a
8. Prepare adjusting entries for the alternative treatment of deferrals. Companies may initially debit prepayments to an expense account. Likewise they may credit unearned revenues to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses are a debit to an asset account and a credit to an expense account. Adjusting entries for unearned revenues are a debit to a revenue account and a credit to a liability account.
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3-5
TRUE-FALSE STATEMENTS 1.
Many business transactions affect more than one time period.
Ans: T, SO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
2.
The time period assumption states that the economic life of a business entity can be divided into artificial time periods.
Ans:T, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
3.
The time period assumption is often referred to as the expense recognition principle.
Ans: F, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
4.
A company's calendar year and fiscal year are always the same.
Ans: F, SO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
5.
Accounting time periods that are one year in length are referred to as interim periods.
Ans: F, SO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
6.
Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.
Ans: F, SO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
7.
The cash basis of accounting is not in accordance with generally accepted accounting principles.
Ans: T, SO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
8.
The expense recognition principle requires that efforts be matched with accomplishments.
Ans: T, SO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
9.
Expense recognition is tied to revenue recognition.
Ans: T, SO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
10.
The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.
Ans: F, SO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
11.
Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.
Ans: F, SO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
12.
An adjusting entry always involves two balance sheet accounts.
Ans: F, SO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
13.
Adjusting entries are often made because some business events are not recorded as they occur.
Ans: T, SO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
14.
Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.
Ans: F, SO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3-6 15.
Test Bank for Accounting Principles, Tenth Edition Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities.
Ans: F, SO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
16.
Accrued revenues are revenues which have been received but not yet earned.
Ans: F, SO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
17.
The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.
Ans: F, SO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
18.
Accumulated Depreciation is a liability account and has a credit normal account balance.
Ans: F, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
19.
A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.
Ans: T, SO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
20.
The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.
Ans: F, SO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
21.
Unearned revenue is a prepayment that requires an adjusting entry when services are performed.
Ans: T, SO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
22.
Asset prepayments become expenses when they expire.
Ans: T, SO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
23.
A contra asset account is subtracted from a related account in the balance sheet.
Ans: T, SO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
24.
If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.
Ans: F, SO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
25.
The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.
Ans: T, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
26.
Accrued revenues are revenues that have been earned and received before financial statements have been prepared.
Ans: F, SO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
27.
Financial statements can be prepared from the information provided by an adjusted trial balance.
Ans: T, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
28.
The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.
Ans: T, SO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts a
29.
3-7
Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.
Ans: T, SO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
30.
An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.
Ans: F, SO 8, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Additional True-False Questions 31.
The expense recognition principle requires that expenses be matched with revenues.
Ans: T, SO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
32.
In general, adjusting entries are required each time financial statements are prepared.
Ans: T, SO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
33.
Every adjusting entry affects one balance sheet account and one income statement account.
Ans: T, SO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
34.
The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet.
Ans: T, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
35.
Accrued revenues are amounts recorded and received but not yet earned.
Ans: F, SO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
36.
An adjusted trial balance should be prepared before the adjusting entries are made.
Ans: F, SO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
37.
When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.
Ans: F, SO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
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T T F F F F
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7. 8. 9. 10. 11. 12.
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T T T F F F
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T F T T T F
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FOR INSTRUCTOR USE ONLY
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Ans.
T T T T F F
a
F
37.
3-8
Test Bank for Accounting Principles, Tenth Edition
MULTIPLE CHOICE QUESTIONS 38.
Monthly and quarterly time periods are called a. calendar periods. b. fiscal periods. c. interim periods. d. quarterly periods.
Ans: c, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
39.
The time period assumption states that a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.
Ans: d, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
40.
An accounting time period that is one year in length, but does not begin on January 1, is referred to as a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.
Ans: a, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
41.
Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.
Ans: d, SO 1, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
42. Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly Ans: b, SO 1, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
43.
The time period assumption is also referred to as the a. calendar assumption. b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption.
Ans: c, SO 1, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 44.
3-9
In general, the shorter the time period, the difficulty of making the proper adjustments to accounts a. is increased. b. is decreased. c. is unaffected. d. depends on if there is a profit or loss.
Ans: a, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
45.
Which of the following is not a common time period chosen by businesses as their accounting period? a. Daily b. Monthly c. Quarterly d. Annually
Ans: a, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
46.
Which of the following time periods would not be referred to as an interim period? a. Monthly b. Quarterly c. Semi-annually d. Annually
Ans: d, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
47.
The fiscal year of a business is usually determined by a. the IRS. b. a lottery. c. the business. d. the SEC.
Ans: c, SO 1, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
48.
Which of the following are in accordance with generally accepted accounting principles? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting
Ans: a, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
49.
The revenue recognition principle dictates that revenue should be recognized in the accounting records a. when cash is received. b. when it is earned. c. at the end of the month. d. in the period that income taxes are paid.
Ans: b, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
3 - 10
Test Bank for Accounting Principles, Tenth Edition
50.
In a service-type business, revenue is considered earned a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.
Ans: c, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
51.
The expense recognition principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.
Ans: b, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
52.
Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was earned? a. July 31 b. August 1 c. August 5 d. August 6
Ans: a, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
53.
A company spends $15 million dollars for an office building. Over what period should the cost be written off? a. When the $15 million is expended in cash. b. All in the first year. c. Over the useful life of the building. d. After $15 million in revenue is earned.
Ans: c, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
54.
The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. owner withdrawals should be matched with owner contributions. d. cash payments should be matched with cash receipts.
Ans: b, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
55.
A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be earned? a. December 5. b. December 10. c. November 30. d. December 1.
Ans: c, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 56.
3 - 11
A candy factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in a. February. b. March. c. the period when the workers receive their checks. d. either in February or March depending on when the pay period ends.
Ans: a, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
57.
Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period? a. Due from Employees. b. Due to Employer. c. Wages Payable. d. Wages Expense.
Ans: c, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
58.
Under accrual-basis accounting a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
Ans: c, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
59.
Adjusting entries are required a. yearly. b. quarterly. c. monthly. d. every time financial statements are prepared.
Ans: d, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
60.
Which is not an application of revenue recognition? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Accepting cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.
Ans: b, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 12 61.
Test Bank for Accounting Principles, Tenth Edition Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting.
Ans: b, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
62.
The following is selected information from Motley Corporation for the fiscal year ending October 31, 2012. Cash received from customers Revenue earned Cash paid for expenses Cash paid for computers on November 1, 2011 that will be used for 3 years (annual depreciation is $16,000) Expenses incurred, not including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers
$300,000 350,000 180,000 48,000 220,000 100,000
Based on the accrual basis of accounting, what is Motley Corporation’s net income for the year ending October 31, 2012? a. $62,000. b. $104,000. c. $114,000. d. $130,000. Ans: c, SO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
63. • • • •
Crue Company had the following transactions during 2012: Sales of $4,500 on account Collected $2,000 for services to be performed in 2013 Paid $1,625 cash in salaries Purchased airline tickets for $250 in December for a trip to take place in 2013 What is Crue’s 2012 net income using accrual accounting? a. $2,625. b. $2,875. c. $4,625. d. $4,875.
Ans: b, SO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 64. • • • •
3 - 13
Crue Company had the following transactions during 2012: Sales of $4,500 on account Collected $2,000 for services to be performed in 2013 Paid $1,625 cash in salaries Purchased airline tickets for $250 in December for a trip to take place in 2013 What is Crue’s 2012 net income using cash basis accounting? a. $125. b. $375. c. $4,625. d. $4,875.
Ans: a, SO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
65.
Adjusting entries are required a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are incurred. d. when revenues are recorded in the period in which they are earned.
Ans: a, SO 3, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
66.
A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.
Ans: c, SO 3, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
67.
Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.
Ans: d, SO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
68.
An adjusting entry a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. is always a compound entry.
Ans: c, SO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
69.
The preparation of adjusting entries is a. straight forward because the accounts that need adjustment will be out of balance. b. often an involved process requiring the skills of a professional. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared. FOR INSTRUCTOR USE ONLY
3 - 14
Test Bank for Accounting Principles, Tenth Edition
Ans: b, SO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
70.
If a resource has been consumed but a bill has not been received at the end of the accounting period, then a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received.
Ans: c, SO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
71.
Accounts often need to be adjusted because a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.
Ans: b, SO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
72.
Adjusting entries are a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to balance sheet accounts only.
Ans: b, SO 3, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICP A PC: Problem solving
73.
Expenses incurred but not yet paid or recorded are called a. prepaid expenses. b. accrued expenses. c. interim expenses. d. unearned expenses.
Ans: b, SO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
74.
A law firm received $3,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Legal Fees. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
Ans: d, SO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 75.
3 - 15
Adjusting entries can be classified as a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.
Ans: b, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
76.
Accrued revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
77.
Prepaid expenses are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: a, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
78.
Accrued expenses are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
79.
Unearned revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.
Ans: a, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
80.
A liability—revenue relationship exists with a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
81.
Which of the following reflect the balances of prepayment accounts prior to adjustment? a. Balance sheet accounts are understated and income statement accounts are understated. b. Balance sheet accounts are overstated and income statement accounts are overstated. c. Balance sheet accounts are overstated and income statement accounts are understated. d. Balance sheet accounts are understated and income statement accounts are overstated.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 16 82.
Test Bank for Accounting Principles, Tenth Edition An asset—expense relationship exists with a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
83.
Lake of Fire Company purchased supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $2,400 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. Debit Supplies Expense, $2,400; Credit Supplies, $2,400. b. Debit Supplies, $4,600; Credit Supplies Expense, $4,600. c. Debit Supplies Expense, $4,600; Credit Supplies, $4,600. d. Debit Supplies, $2,400; Credit Supplies Expense, $2,400.
Ans: c, SO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
84.
If an adjustment is needed for unearned revenues, the a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment. c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment.
Ans: c, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
85.
The balance in the office supplies account on June 1 was $5,200, supplies purchased during June were $2,500, and the supplies on hand at June 30 were $3,000. The amount to be used for the appropriate adjusting entry is a. $2,500. b. $4,700. c. $5,500. d. $10,700.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
86.
Depreciation expense for a period is computed by taking the a. original cost of an asset – accumulated depreciation. b. depreciable cost of the asset ÷ depreciation rate. c. cost of the asset ÷ useful life. d. market value of the asset ÷ useful life.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
87.
Accumulated Depreciation is a. an expense account. b. an owner's equity account. c. a liability account. d. a contra asset account.
Ans: d, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 88.
3 - 17
Meat Puppets Company purchased a computer for $4,800 on December 1. It is estimated that annual depreciation on the computer will be $1,200. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. Debit Depreciation Expense, $1,200; Credit Accumulated Depreciation, $1,200. b. Debit Depreciation Expense, $100; Credit Accumulated Depreciation, $100. c. Debit Depreciation Expense, $3,600; Credit Accumulated Depreciation, $3,600. d. Debit Office Equipment, $4,800; Credit Accumulated Depreciation, $4,800.
Ans: b, SO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
89.
REM Real Estate received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $24,000. Financial statements will be prepared on July 31. REM Real Estate should make the following adjusting entry on July 31: a. Debit Unearned Rent, $4,000; Credit Rental Revenue, $4,000. b. Debit Rental Revenue, $4,000; Credit Unearned Rent, $4,000. c. Debit Unearned Rent, $24,000; Credit Rental Revenue, $24,000. d. Debit Cash, $24,000; Credit Rental Revenue, $24,000.
Ans: a, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
90.
As prepaid expenses expire with the passage of time, the correct adjusting entry will be a a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
91.
A company usually determines the amount of supplies used during a period by a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.
Ans: d, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
92.
If a company fails to make an adjusting entry to record supplies expense, then a. owner's equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
93.
What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of policies of $6,000? a. Debit Insurance Expense, $6,000; Credit Prepaid Insurance, $6,000. b. Debit Insurance Expense, $15,500; Credit Prepaid Insurance, $15,500. c. Debit Prepaid Insurance, $9,500; Credit Insurance Expense, $9,500. d. Debit Insurance Expense, $9,500; Credit Prepaid Insurance, $9,500.
Ans: d, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 18 94.
Test Bank for Accounting Principles, Tenth Edition At December 31, 2012, before any year-end adjustments, Murmur Company's Insurance Expense account had a balance of $1,450 and its Prepaid Insurance account had a balance of $3,800. It was determined that $2,800 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. $1,450. b. $2,450. c. $2,800. d. $4,250.
Ans: d, SO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
95.
Depreciation is the process of a. valuing an asset at its fair market value. b. increasing the value of an asset over its useful life in a rational and systematic manner. c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner. d. writing down an asset to its real value each accounting period.
Ans: c, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
96.
A new accountant working for Spirit Walker Company records $900 Depreciation Expense on store equipment as follows: Dr. Depreciation Expense ............................................ 900 Cr. Cash .............................................................. 900 The effect of this entry is to a. adjust the accounts to their proper amounts on December 31. b. understate total assets on the balance sheet as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
97.
From an accounting standpoint, the acquisition of productive facilities can be thought of as a long-term a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepayment for services.
Ans: d, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
98.
The balance in the Prepaid Rent account before adjustment at the end of the year is $18,000, which represents three months’ rent paid on December1. The adjusting entry required on December 31 is to a. debit Rent Expense, $6,000; credit Prepaid Rent, $6,000. b. debit Rent Expense, $12,000; credit Prepaid Rent $12,000. c. debit Prepaid Rent, $6,000; credit Rent Expense, $6,000. d. debit Prepaid Rent, $12,000; credit Rent Expense, $12,000.
Ans: a, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 99.
3 - 19
An accumulated depreciation account a. is a contra-liability account. b. increases on the debit side. c. is offset against total assets on the balance sheet. d. has a normal credit balance.
Ans: d, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
100.
The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the a. market value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.
Ans: c, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
101.
If a business has several types of long-term assets such as equipment, buildings, and trucks, a. there should be only one accumulated depreciation account. b. there should be separate accumulated depreciation accounts for each type of asset. c. all the long-term asset accounts will be recorded in one general ledger account. d. there won't be a need for an accumulated depreciation account.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
102.
Which of the following would not result in unearned revenue? a. Rent collected in advance from tenants b. Services performed on account c. Sale of season tickets to football games d. Sale of two-year magazine subscriptions
Ans: b, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
103.
If business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue.
Ans: c, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
104.
Unearned revenue is classified as a. an asset account. b. a revenue account. c. a contra-revenue account. d. a liability account.
Ans: d, SO 5, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 20 105.
Test Bank for Accounting Principles, Tenth Edition If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be a. debit Unearned Revenue and credit Cash. b. debit Unearned Revenue and credit Service Revenue. c. debit Unearned Revenue and credit Prepaid Expense. d. debit Unearned Revenue and credit Accounts Receivable.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
106.
Dreamtime Laundry purchased $7,000 worth of supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the supplies indicated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is a. Debit Supplies Expense, $2,000; Credit Supplies, $2,000. b. Debit Supplies, $2,000; Credit Supplies Expense, $2,000. c. Debit Supplies, $5,000; Credit Supplies Expense, $5,000. d. Debit Supplies Expense, $5,000; Credit Supplies, $5,000.
Ans: d, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
107.
On July 1, Runner's Sports Store paid $10,000 to Corona Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Runner’s Sports Store is a. Debit Rent Expense, $10,000; Credit Prepaid Rent, $2,500. b. Debit Prepaid Rent, $2,500; Credit Rent Expense, $2,500. c. Debit Rent Expense, $2,500; Credit Prepaid Rent, $2,500. d. Debit Rent Expense, $10,000; Credit Prepaid Rent, $10,000.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
108.
Fugazi City College sold season tickets for the 2012 football season for $200,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30 a. is not required. No adjusting entries will be made until the end of the season in November. b. will include a debit to Cash and a credit to Ticket Revenue for $50,000. c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $75,000. d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $66,667.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
109.
Fugazi City College sold season tickets for the 2012 football season for $200,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Revenue at October 31 is a. $0. b. $50,000. c. $75,000. d. $125,000.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 110.
3 - 21
Fugazi City College sold season tickets for the 2012 football season for $200,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Revenue balance that will be reported on the December 31 balance sheet will be a. $0. b. $75,000. c. $125,000. d. $200,000.
Ans: a, SO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
111.
At March 1, 2012, Minutemen Corp. had supplies on hand of $500. During the month, Minutemen purchased supplies of $1,200 and used supplies of $1,400. The March 31 adjusting journal entry should include a a. debit to the supplies account for $1,400. b. credit to the supplies account for $500. c. debit to the supplies account for $1,200. d. credit to the supplies account for $1,400.
Ans: d, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
112.
Double Nickels Company purchased a computer system for $4,500 on January 1, 2012. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is a. $0. b. $125. c. $1,500. d. $4,500.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
113.
Husker Du Supplies Inc. purchased a 12-month insurance policy on March 1, 2012 for $1,200. At March 31, 2012, the adjusting journal entry to record expiration of this asset will include a a. debit to Prepaid Insurance and a credit to Cash for $1,200. b. debit to Prepaid Insurance and a credit to Insurance Expense for $133. c. debit to Insurance Expense and a credit to Prepaid Insurance for $100. d. debit to Insurance Expense and a credit to Cash for $100.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
114.
Mary Chain Investments purchased an 18-month insurance policy on May 31, 2012 for $3,240. The December 31, 2012 balance sheet would report Prepaid Insurance of a. $0 because Prepaid Insurance is reported on the Income Statement. b. $1,260. c. $1,980. d. $3,240.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 22 115.
Test Bank for Accounting Principles, Tenth Edition At March 1, Psychocandy Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $750 and consumed supplies of $700. If no adjusting entry is made for supplies a. owner’s equity will be overstated by $700. b. expenses will be understated by $750. c. assets will be understated by $250. d. net income will be understated by $700.
Ans: a, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
116.
Pixies Inc. pays its rent of $90,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $7,500 and net income and owner’s equity will be understated by $7,500. c. Assets will be overstated by $15,000 and net income and owner’s equity will be understated by $15,000. d. Assets will be overstated by $7,500 and net income and owner’s equity will be overstated by $7,500.
Ans: d, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
117.
On January 1, 2011, Doolittle Company purchased a computer system for $5,670. The company expects to use the system for 3 years. The asset has no salvage value. The book value of the system at December 31, 2012 is a. $0. b. $1,890. c. $3,780. d. $5,670.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
118.
On January 1, 2011, Mudhoney Inc. purchased equipment for $30,000. The company is depreciating the equipment at the rate of $500 per month. At January 31, 2012, the balance in Accumulated Depreciation is a. $500. b. $6,000. c. $6,500. d. $23,500.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
119.
On January 1, 2012, Superfuzz Company purchased equipment for $30,000. The company is depreciating the equipment at the rate of $600 per month. The book value of the equipment at December 31, 2012 is a. $0. b. $7,200. c. $22,800. d. $30,000.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 120.
3 - 23
Ultramega Company collected $11,760 in May of 2012 for 4 months of service which would take place from October of 2012 through January of 2013. The revenue reported from this transaction during 2012 would be a. 0. b. $2,840. c. $8,820. d. $11,760.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
121.
Soundgarden Company collected $9,100 in May of 2012 for 5 months of service which would take place from October of 2012 through February of 2013. The revenue reported from this transaction during 2012 would be a. $0. b. $3,640. c. $5,460. d. $9,100.
Ans: c, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
122.
Sonic Youth Corporation purchased a one-year insurance policy in January 2012 for $82,500. The insurance policy is in effect from March 2012 through February 2013. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by $68,750. b. Net income and assets will be overstated by $68,750. c. Net income and assets will be understated by $13,750. d. Net income and assets will be overstated by $13,750.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
123.
Dinosaur Junior Corporation purchased a one-year insurance policy in January 2012 for $60,000. The insurance policy is in effect from May 2012 through April 2013. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by $40,000. b. Net income and assets will be overstated by $40,000. c. Net income and assets will be understated by $20,000. d. Net income and assets will be overstated by $20,000.
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
124.
If an adjusting entry is not made for an accrued revenue, a. assets will be overstated. b. expenses will be understated. c. owner's equity will be understated. d. revenues will be overstated.
Ans: c, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
125.
If an adjusting entry is not made for an accrued expense, a. expenses will be overstated. b. liabilities will be understated. c. net income will be understated. d. owner's equity will be understated.
Ans: b, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 24 126.
Test Bank for Accounting Principles, Tenth Edition Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.
Ans: c, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
127.
Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.
Ans: b, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
128.
Sebastian Belle has performed $2000 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Sebastian make? a. Debit Cash and credit Unearned Revenue b. Debit Accounts Receivable and credit Unearned Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Revenue and credit Service Revenue
Ans: c, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
129.
Sebastian Belle, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Sebastian make upon receipt of the payments? a. Debit Unearned Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue
Ans: b, SO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
130.
NWA Air Charter signed a four-month note payable in the amount of $10,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is a. $75. b. $100. c. $300. d. $900.
Ans: a, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 131.
3 - 25
Uncle Tupelo's Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $60,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense ................................................................. 1,200 Interest Payable ......................................................... 1,200 b. Interest Expense ................................................................. 1,800 Interest Payable ......................................................... 1,800 c. Interest Expense ................................................................. 1,200 Cash .......................................................................... 1,200 d. Interest Expense ................................................................. 1,200 Notes Payable............................................................ 1,200
Ans: a, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
132.
Stone Roses Candies paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29– 31). Employees work 5 days a week and the company pays $1,000 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense ............................................. 1,000 Salaries and Wages Payable ..................................... 1,000 b. Salaries and Wages Expense ............................................. 5,000 Salaries and Wages Payable ..................................... 5,000 c. Salaries and Wages Expense ............................................. 3,000 Salaries and Wages Payable ..................................... 3,000 d. No adjusting entry is required.
Ans: c, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
133.
A company shows a balance in Salaries and Wages Payable of $38,000 at the end of the month. The next payroll amounting to $45,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries and Wages Expense ............................................. 45,000 Salaries and Wages Payable ..................................... 45,000 b. Salaries and Wages Expense ............................................. 45,000 Cash .......................................................................... 45,000 c. Salaries and Wages Expense ............................................. 7,000 Cash .......................................................................... 7,000 d. Salaries and Wages Expense ............................................. 7,000 Salaries and Wages Payable .............................................. 38,000 Cash .......................................................................... 45,000
Ans: d, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 26 134.
Test Bank for Accounting Principles, Tenth Edition A business pays weekly salaries of $25,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is a. debit Salaries and Wages Payable, $20,000; credit Cash, $20,000. b. debit Salaries and Wages Expense, $20,000; credit Cash, $20,000. c. debit Salaries and Wages Expense, $20,000; credit Salaries and Wages Payable, $20,000. d. debit Salaries and Wages Expense, $5,000; credit Salaries and Wages Payable, $5,000.
Ans: c, SO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
135.
SurferRosa Music Store borrowed $15,000 from the bank signing a 9%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be a. Debit Interest Expense, $1,350; Credit Interest Payable, $1,350. b. Debit Interest Expense, $112.50; Credit Interest Payable, $112.50. c. Debit Notes Payable, $1,350; Credit Cash, $1,350. d. Debit Cash, $337.50; Credit Interest Payable, $337.50.
Ans: b, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
136.
Nirvana Corporation issued a one-year, 9%, $300,000 note on April 30, 2012. Interest expense for the year ended December 31, 2012 was a. $15,750. b. $18,000. c. $20,250. d. $27,000.
Ans: b, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
137.
Yo La Corporation issued a one-year, 12%, $100,000 note on August 31, 2012. Interest expense for the year ended December 31, 2012 was a. $12,000. b. $5,000. c. $4,000. d. $3,000.
Ans: c, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
138.
Employees at Tengo Corporation are paid $10,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2? a. $10,000 b. $6,000 c. $4,000 d. None, matching requires the weekly salary to be accrued on December 31.
Ans: c, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 139.
3 - 27
Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared.
Ans: b, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
140.
The adjusted trial balance is prepared a. after financial statements are prepared. b. before the trial balance. c. to prove the equality of total assets and total liabilities. d. after adjusting entries have been journalized and posted.
Ans: d, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
141.
An adjusted trial balance a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements.
Ans: b, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
142.
Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized.
Ans: d, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
143. Sebadoah is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Sebadoah purchased $1,500 of supplies in January and his inventory at the end of January shows $600 of supplies remaining. What adjusting entry should Sebadoah make on January 31? a. Supplies Expense ............................................................... 600 Supplies ..................................................................... 600 b. Supplies Expense ............................................................... 1,500 Cash .......................................................................... 1,500 c. Supplies .............................................................................. 600 Supplies Expense ...................................................... 600 d. Supplies Expense ............................................................... 1,100 Supplies ..................................................................... 1,100
Ans: c, SO 8, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 28
Test Bank for Accounting Principles, Tenth Edition
a
144. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses. c. unearned revenues. d. prepaid expenses and unearned revenues.
Ans: a, SO 8, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a
145. Elliott Smith is a lawyer who requires that his clients pay him in advance of legal services rendered. Elliott routinely credits Service Revenue when his clients pay him in advance. In June Elliott collected $12,000 in advance fees and completed 70% of the work related to these fees. What adjusting entry is required by Elliott's firm at the end of June? a. Unearned Service Revenue ............................................... 8,400 Service Revenue ....................................................... 8,400 b. Unearned Service Revenue ............................................... 3,600 Service Revenue ....................................................... 3,600 c. Cash .................................................................................. 12,000 Service Revenue ....................................................... 12,000 d. Service Revenue ................................................................ 3,600 Unearned Service Revenue ....................................... 3,600
Ans: d, SO 8, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a
146. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause a. assets to be understated. b. assets to be overstated. c. expenses to be understated. d. contra-expenses to be overstated.
Ans: a, SO 8, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
147. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause a. liabilities to be overstated. b. revenues to be understated. c. revenues to be overstated. d. accounts receivable to be overstated.
Ans: c, SO 8, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
148. On January 2, 2012, Superchunk purchased a general liability insurance policy for $2,100 for coverage for the calendar year. The entire $2,100 was charged to Insurance Expense on January 2, 2012. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2012, will be: a. Insurance Expense ............................................................. 1,925 Prepaid Insurance ...................................................... 1,925 b. Prepaid Insurance ............................................................... 1,925 Insurance Expense..................................................... 1,925 c. Insurance Expense ............................................................. 175 Prepaid Insurance ...................................................... 175 d. Prepaid Insurance ............................................................... 175 Insurance Expense..................................................... 175
Ans: b, SO 8, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 29
Additional Multiple Choice Questions 149.
Which of the following statements concerning accrual-basis accounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle. b. Accrual-basis accounting is the method required by generally accepted accounting principles. c. Accrual-basis accounting recognizes expenses when they are paid. d. Accrual-basis accounting follows the expense recognition principle.
Ans: c, SO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
150.
The revenue recognition principle dictates that revenue be recognized in the accounting period a. before it is earned. b. after it is earned. c. in which it is earned. d. in which it is collected.
Ans: c, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
151.
An expense is recorded under the cash basis only when a. services are performed. b. it is earned. c. cash is paid. d. it is incurred.
Ans: c, SO 2, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
152.
For prepaid expense adjusting entries a. an expense—liability account relationship exists. b. prior to adjustment, expenses are overstated and assets are understated. c. the adjusting entry results in a debit to an expense account and a credit to an asset account. d. none of these.
Ans: c, SO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
153.
Expenses paid and recorded as assets before they are used are called a. accrued expenses. b. interim expenses. c. prepaid expenses. d. unearned expenses.
Ans: c, SO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
154.
Buffalo Tom Cruises purchased a five-year insurance policy for its ships on April 1, 2012 for $50,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2012 is a. Prepaid Insurance............................................................... 7,500 Insurance Expense ...................................................... 7,500 b. Insurance Expense ............................................................. 7,500 Prepaid Insurance ....................................................... 7,500 c. Insurance Expense ............................................................. 10,000 Prepaid Insurance ....................................................... 10,000 d. Insurance Expense ............................................................. 2,500 Prepaid Insurance ....................................................... 2,500
Ans: b, SO 5, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 30 155.
Test Bank for Accounting Principles, Tenth Edition Pavement Company purchased a truck from Bee Thousand Corp. by issuing a 6-month, 8% note payable for $80,000 on November 1. On December 31, the accrued expense adjusting entry is a. No entry is required. b. Interest Expense ................................................................. 6,400 Interest Payable ........................................................... 6,400 c. Interest Expense ................................................................. 12,800 Interest Payable ........................................................... 12,800 d. Interest Expense ................................................................. 1067 Interest Payable ........................................................... 1067
Ans: d, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
156.
If the adjusting entry for depreciation is not made, a. assets will be understated. b. owner's equity will be understated. c. net income will be understated. d. expenses will be understated.
Ans: d, SO 6, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
157.
Ryan Adams, an employee of Heartbreaker Corp., will not receive her paycheck until April 2. Based on services performed from March 15 to March 31, his salary was $1,000. The adjusting entry for Heartbreaker Corp. on March 31 is a. Salaries Expense ................................................................. 1,000 Salaries Payable ........................................................... 1,000 b. No entry is required. c. Salaries Expense ................................................................. 1,000 Cash ............................................................................. 1,000 d. Salaries Payable .................................................................. 1,000 Cash ............................................................................. 1,000
Ans: a, SO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
158.
Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period. b. It is prepared before adjusting entries have been made. c. It proves the equality of the total debit balances and the total credit balances in the ledger. d. Financial statements can be prepared directly from the adjusted trial balance.
Ans: b, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
159.
Financial statements are prepared directly from the a. general journal. b. ledger. c. trial balance. d. adjusted trial balance.
Ans: d, SO 7, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
160.
Accrual-basis accounting is allowed under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts 161.
3 - 31
Cash-basis accounting is allowed under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP.
Ans: d, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
162.
The time period assumption is used under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
163.
IFRS requires that companies present a. a complete set of financial statement, including comparative information, annually. b. only a statement of financial position, including comparative information, annually. c. only an income statement, including comparative information, annually. d. only a statement of changes in cash flows, including comparative information, annually.
Ans: a, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
164.
Revenue recognition under IFRS is a. substantially different from revenue recognition under GAAP. b. generally the same as revenue recognition under GAAP, but with more detailed guidance. c. generally the same as revenue recognition under GAAP, but with less detailed guidance. d. exactly the same as revenue recognition under GAAP.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
165.
Revenue recognition fraud is a. a major issue in the U.S. but not worldwide. b. a major issue internationally, but not in the U.S. c. a major issue in the U.S. and worldwide. d. not a major issue anywhere.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
166.
The IFRS standard dealing specifically with revenue recognition is based on a. whether the revenue is realized or realizable. b. whether the revenue is earned. c. whether the revenue is realized or realizable, and earned. d. the probability that economic benefits will flow to the company, and reliability of measurement.
Ans: d, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
167.
Depreciation based on revaluation of land and buildings is permitted under a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP.
Ans: b, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 32 168.
Test Bank for Accounting Principles, Tenth Edition Under IFRS, income is defined as a. revenue less expenses. b. revenues and gains, less expenses and losses. c. revenues and gains. d. revenues, gains, and contributions by owners.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
169.
The procedures of the closing process are applicable to all companies when they are using a. GAAP but not IFRS. b. IFRS but not GAAP. c. both IFRS and GAAP. d. neither IFRS nor GAAP.
Ans: c, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.
c d a d b c a a d c a b c b a c b c a
57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.
c c d b b c b a a c d c b c b b b d b
76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.
c a c a c c c c c b c d b a b d b d d
95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113.
c c d a d c b b c d b d c c c a d b c
114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.
c a d b c c c c b b c b c b c b a a c
133. 134. 135. 136. 137. 138. 139. 140. 141. 142. a 143. a 144. a 145. a 146. a 147. a 148. 149. 150. 151.
d c b b c c b d b d c a d a c b c c c
152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169.
c c b d d a b d c d c a c c d b c c
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 33
BRIEF EXERCISES BE 170 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. Unrecorded interest on savings bonds is $245. 2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. 3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. 4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Solution 170 1. 2. 3. 4.
(3 min.)
AR AE UR PE
SO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 171 Prepare adjusting entries for the following transactions. Omit explanations. 1. Depreciation on equipment is $900 for the accounting period. 2. There was no beginning balance of supplies and purchased $500 of office supplies during the period. At the end of the period $120 of supplies were on hand. 3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 was unexpired. Solution 171
(6 min.)
1. Depreciation Expense .................................................................... Accumulated Depreciation—Equipment ................................
900
2. Supplies Expense .......................................................................... Supplies ................................................................................ ($500 – $120)
380
3. Rent Expense................................................................................. Prepaid Rent ......................................................................... ($1,000 – $400)
600
900
380
600
SO 5, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 34
Test Bank for Accounting Principles, Tenth Edition
BE 172 On June 1, during its first month of operations, Crooked Rain purchased supplies for $3,500 and debited the supplies account for that amount. At January 30, an inventory of supplies showed $1,000 of supplies on hand. What adjusting journal entry should be made for June? Solution 172
(3 min.)
Supplies Expense....................................................................... Supplies ..........................................................................
2,500 2,500
SO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 173 On January 1, Chan & Chan, CPAs received a $12,000 cash retainer for accounting services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 3-month period, what adjusting journal entry should be made at January 31? Solution 173
(3 min.)
Unearned Service Revenue ....................................................... Service Revenue ...............................................................
4,000 4,000
SO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 174 On February 1, Results Income Tax Service received a $2,000 cash retainer for tax preparation services to be rendered equally over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 4-month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue? Solution 174
(5 min.)
Revenue earned monthly = $2,000/ 4 months = $500 per month Feb 28 balance in Unearned Service Revenue = $2,000 - $500 revenue earned in February = $1,500 SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 35
BE 175 Bakesale Enterprises purchased computer equipment on May 1, 2012 for $6,300. The company expects to use the equipment for 3 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $2,100)? 2. What is the book value of the equipment at May 31, 2012? Solution 175
(5 min.)
1. Depreciation Expense ................................................................ Accumulated Depreciation ................................................. 2. Cost Accumulated Depreciation Book value
175 175
$6,300 – 175 $6,125
SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 176 Rhodes National purchased software on October 1, 2012 for $10,800. The company expects to use the software for 3 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is $3,600) 2. What balance will be reported on the December 31, 2012 balance sheet for Accumulated Depreciation? Solution 176
(5 min.)
1. Depreciation Expense ................................................................ Accumulated Depreciation .................................................
300 300
2. Balance in Accumulated Depreciation at December 31, 2012: 3 months × $300 per month = $900 SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 36
Test Bank for Accounting Principles, Tenth Edition
BE 177 Teenage Fanclub Printings sold annual subscriptions to their magazine for $24,000 in December, 2011. The magazine is published monthly. The new subscribers received their first magazine in January, 2012. 1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? 2. What amount will be reported on the January 2012 balance sheet for Unearned Revenue? Solution 177
(5 min.)
1. Unearned Subscription Revenue .............................................. Sales Revenue ...............................................................
2,000 2,000
2. Unearned Subscription Revenue at January 31: $24,000 – $2,000 = $22,000 SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 178 On January 1, 2012, Bottle Rockets Corp. purchased a general liability insurance policy for $10,800 to provide coverage for the calendar year. 1. If the company recorded the policy as an asset when purchased, what is the monthly adjusting journal entry that should be recorded at January 31, 2012? *2. If the company expensed the cost of the policy on January 1, 2012, what is the monthly adjusting entry that should be recorded at January 31, 2012? Solution 178
(5 min.)
1. Insurance Expense ................................................................... Prepaid Insurance .............................................................
900
*2. Prepaid Insurance .................................................................... Insurance Expense............................................................
9,900
900
9,900
SO 5 and 8, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 37
BE 179 Identify the impact on the balance sheet if the following information is not used to adjust the accounts. 1. Supplies consumed totaled $3,000. 2. Interest accrues on notes payable at the rate of $200 per month. 3. Insurance of $450 expired during the month. 4. Plant and equipment are depreciated at the rate of $1,200 per month. Solution 179 1. 2. 3. 4.
(5 min.)
Assets overstated and Owner’s Equity overstated by $3,000. Liabilities understated and Owner’s Equity overstated by $200. Assets overstated and Owner’s Equity overstated by $450. Assets overstated and Owner’s Equity overstated by $1,200.
SO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 180 Determine the impact on the balance sheet accounts if the following information is not used to adjust the accounts of Mood Food Company for the month of January, 2012. Round answers to the nearest dollar. 1. The company rents extra office space to Beulah, CPAs. Beulah pays the $6,000 rent annually on January 1. 2. The company has an outstanding loan to its President in the amount of $100,000. The loan accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2014. 3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $3,100. Solution 180
(5 min.)
1. Liabilities overstated and Owner’s Equity understated by $500. 2. Assets understated and Owner’s Equity understated by $500. 3. Assets understated and Owner’s Equity understated by $3,100. SO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 181 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____
1.
Failure to record revenue earned but not yet received.
_____
2.
Failure to record expired prepaid rent.
_____
3.
Failure to record accrued interest on the bank savings account.
_____
4.
Failure to record depreciation.
_____
5.
Failure to record accrued wages.
_____
6.
Failure to recognize the earned portion of unearned revenues.
FOR INSTRUCTOR USE ONLY
3 - 38
Test Bank for Accounting Principles, Tenth Edition
Solution 181 1. 2. 3. 4. 5. 6.
(5 min.)
U O U O NA NA
SO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 182 Blue Guitar Music School borrowed $30,000 from the bank signing a 10%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 182
(3 min.)
Interest Expense ($30,000 × 10% × 1/12) ...................................... Interest Payable ...................................................................
250 250
SO 6, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 39
BE 183 The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2012 includes the following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Notes Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service Revenue, $19,600; Salaries and Wages Expense, $4,000; Supplies, $200; Supplies Expense, $1,200; Salaries and Wages Payable, $600. Prepare an income statement for the month of December. Solution 183
(10 min.) Rocky Acre Spread Inc. Income Statement For the Month Ended December 31, 2012
Service Revenue Expenses: Salaries and wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income
$19,600 $4,000 2,000 1,200 500 300 150
8,150 $11,450
SO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 184 The adjusted trial balance of Old 97 Automotive Service Company on June 30, 2012 includes the following accounts: Supplies, $300; Accumulated Depreciation, $9,500; Salaries Payable, $1,550, Notes Payable $6,750; Service Revenue, $22,100; Salaries and Wages Expense, $6,750; Depreciation Expense, $3,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June. Solution 184
(10 min.) Old 97 Automotive Service Company Income Statement For the Month Ended June 30, 2012
Service Revenue Expenses: Salaries and wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income
$22,100 $6,750 3,250 1,000 400 350 250
12,000 $10,100
SO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 40
Test Bank for Accounting Principles, Tenth Edition
BE 185 The adjusted trial balance of Sodajerk Company at December 31, 2012 includes the following accounts: Owner's Capital $12,600; Owner's Drawings $7,000; Service Revenue $35,000; Salaries and Wages Expense $13,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $2,500; and Depreciation Expense $2,000. Prepare an owner’s equity statement for the year.
Solution 185
(5 min.)
SODAJERK COMPANY Owner’s Equity Statement For the Year Ended December 31, 2012 ——————————————————————————————————————————— Owner's January 1 $12,600 Plus: Net Income 12,000 24,600 Less: Drawings 7,000 Owner's December 31 $17,600 SO 7, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 186 The adjusted trial balance of Hanson Hawk Company at September 30, 2012 includes the following accounts: Owner's Capital $27,700; Owner's Drawings $9,750; Service Revenue $42,800; Insurance Expense $1,950; Salaries Expense $18,000; Rent Expense $3,000; Supplies Expense $650; and Depreciation Expense $1,100. Prepare an owner’s equity statement for the year.
Solution 186
(10 min.)
HANSON HAWK COMPANY Owner’s Equity Statement For the Year Ended September 30, 2012 ——————————————————————————————————————————— Owner's Capital, January 1 $27,700 Plus: Net Income 18,100 45,800 Less: Drawings 9,750 Owner's Capital, December 31 $36,050 SO 7, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 41
EXERCISES Ex. 187 The balance sheets of Red House Painters include the following: 12/31/12 Interest Receivable $0 Supplies 3000 Wages Payable 3,800 Unearned Revenue 4,000 The income statement for 2012 shows the following: Interest Revenue Service Revenue Supplies Expense Wages Expense
12/31/11 $6,300 5,000 3,600 -0-
$18,400 72,700 8,700 39,000
Instructions Calculate the following for 2012: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for wages. 4. Cash received for revenue. Solution 187
(15 min.)
1. Cash received for interest = Interest Revenue Plus: Interest Receivable Cash Received
$24,700 $18,400 6,300 $24,700
2. Cash paid for supplies = Supplies Expense Less: Supplies (2011)
$6,700 $8,700 5,000 3,700 3,000 $6,700
Add: Supplies (2012) Cash Paid 3. Cash paid for wages = Wages Expense Add: Wages Payable (2011)
$38,800
Less: Wages Payable (2012) Cash Paid
$39,000 3,600 42,600 3,800 $38,800
4. Cash received for revenue = Service Revenue Plus: Unearned Revenue (2011) Cash Received
$72,700 4,000 $76,700
$76,700
SO 2, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 42
Test Bank for Accounting Principles, Tenth Edition
Ex. 188 Hal Corp. prepared the following income statement using the cash basis of accounting: HAL CORP. Income Statement, Cash Basis For the Year Ended December 31, 2012 Service revenue (does not include $20,000 of services rendered on account because the collection will not be until 2012) ................................................... Expenses (does not include $20,000 of expenses on account because payment will not be made until 2012)............................................................... Net income ............................................................................................................
$370,000 220,000 $150,000
Additional data: 1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above. 2. On January 1, 2012, paid for a two-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above. Instructions (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b)
Explain which basis (cash or accrual) provides a better measure of income.
Solution 188 (a)
(15 min.)
HAL CORP. Income Statement For the Year Ended December 31, 2012 Service revenue ............................................................................................. Expenses ....................................................................................................... Net income .....................................................................................................
$390,000 245,100 $144,900
Service revenue should include the $20,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($370,000 + $20,000 = $390,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,800 insurance premium since $900 applies to 2010. The other $900 is an asset and should be reflected on the balance sheet as prepaid insurance. The $6,000 of depreciation for the automobile is included as an expense in 2010. ($220,000 + $20,000 – $900 + $6,000 = $245,100). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when earned and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted.
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts Solution 188
3 - 43
(cont.)
The cash basis often fails to recognize revenue in the period when earned and expenses when incurred. Additionally, expenses are not matched with revenues when earned; therefore, the expense recognition principle is violated. SO 2, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 189 Before month-end adjustments are made, the February 28 trial balance of Neutral Milk Hotel contains revenue of $6,000 and expenses of $4,400. Adjustments are necessary for the following items: • Depreciation for February is $1,800. • Revenue earned but not yet billed is $2,700. • Accrued interest expense is $700. • Revenue collected in advance that is now earned is $2,500. • Portion of prepaid insurance expired during February is $400. Instructions Calculate the correct net income for Neutral Milk Hotel’s Income Statement for February. Solution 189
(5 min.)
Net Income before Adjustments ($6,000 – 4,400)
$ 1,600
Add: Unearned Revenues Accrued Revenues
$2,500 2,700
Subtract: Depreciation Expense Interest Expense Insurance Expense
1,800 700 400
Net Income after Adjustments
5,200 6,800
2,900 $ 3,900
SO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 190 On December 31, 2012, Fashion Nugget Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $35,000. The balance sheet showed total assets, $115,000; total liabilities, $45,000; and owner's equity, $70,000. The data for the three adjusting entries were: (1) Depreciation of $10,000 was not recorded on equipment. (2) Wages amounting to $9,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. (3) Rent of $15,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 190 (cont.) Instructions Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Incorrect balances Effects of: Depreciation
Total Assets $115,000
Total Liabilities $ 45,000
Owner’s Equity $ 70,000
Net Income $35,000
Total Assets $115,000
Total Liabilities $45,000
Owner’s Equity $70,000
(10,000) (9,000) 7,500 $23,500
(10,000)
Net Income $ 35,000
Wages Rent Correct Balances Solution 190
(5 min.)
Item Incorrect balances Effects of: Depreciation Wages Rent Correct Balances
9,000 7,500 $112,500
$54,000
(10,000) (9,000) 7,500 $58,500
SO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 191 Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following: 1. 2. 3. 4.
Supplies of $200 have been used. Salaries of $600 are unpaid. Rent received in advance totaling $300 has been earned. Services provided but not recorded total $500.
Solution 191 (7 min.) (a) Type of Adjustment 1. Prepaid Expense
(b) Accounts before Adjustment Assets Overstated Expenses Understated
2.
Accrued Expense
Expenses Understated Liabilities Understated
3.
Unearned Revenue
Liabilities Overstated Revenues Understated
4.
Accrued Revenue
Assets Understated Revenues Understated
SO 4, BT: AP, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 45
Ex. 192 Buena Vista Social Club accumulates the following adjustment data at December 31. 1. Revenue of $1,100 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $500 has expired. 4. Supplies of $450 have been used. 5. Revenue earned but unbilled total $750. 6. Utility expenses of $200 are unpaid. 7. Interest of $300 has accrued on a note payable. Instructions (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (asset/liability, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $15,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.
Type of Adjustment
Account Relationship
Account Balances Before Adjustment (Understatement or Overstatement)
FOR INSTRUCTOR USE ONLY
Adjusting Entry
3 - 46
Test Bank for Accounting Principles, Tenth Edition
Solution 192
(20 min.)
(a) Type of Account Adjustment Relationship 1. Unearned revenue. L/R
Account Balances Before Adjustment (Understatement or Overstatement) Liab. O Rev. U
Adjusting Entry Unearned Revenue Service Revenue
2. Accrued expense.
E/L
Exp. U Liab. U
Salary Expense Salaries Payable
3. Prepaid expense.
E/A
Exp. U Asset O
Rent Expense Prepaid Rent
4. Prepaid expense.
E/A
Exp. U Asset O
Supplies Expense Supplies
5. Accrued revenue.
A/R
Asset U Rev. U
Accounts Receivable Service Revenue
6. Accrued expense.
E/L
Exp. U Liab. U
Utilities Expense Accounts Payable
7. Accrued expense.
E/L
Exp. U Liab. U
Interest Expense Interest Payable
Codes: A = L = E = (b)
Asset Liability Expense
R = O = U =
Revenue Overstatement Understatement
Net income before adjustments ................................................... Add: Unearned revenue (1) ...................................................... Accrued revenue (5)......................................................... Less: Accrued salaries (2) ......................................................... Prepaid rent expired (3).................................................... Supplies used (4) ............................................................. Accrued utilities (6)........................................................... Accrued interest (7) .......................................................... Adjusted net income ....................................................................
$15,500 $1,100 750 600 500 450 200 300
1,850 17,350
2,050 $15,300
SO 4, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 47
Ex. 193 The adjusted trial balance of the Victoria Lane Paving Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries Payable 7. Unearned Revenue
Solution 193
(15 min.)
Balance Sheet Account
(a) Type of Adjusting Entry
(b) Related Account
1. Supplies
Prepaid Expense
Supplies Expense
2. Accounts Receivable
Accrued Revenue
Service Revenue
3. Prepaid Insurance
Prepaid Expense
Insurance Expense
4. Accumulated Depreciation— Equipment
Prepaid Expense
Depreciation Expense
5. Interest Payable
Accrued Expense
Interest Expense
6. Salaries Payable
Accrued Expense
Salaries Expense
7. Unearned Revenue
Unearned Revenue
Service Revenue
SO 4, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 48
Test Bank for Accounting Principles, Tenth Edition
Ex. 194 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ____ 1. A revenue not yet earned; collected in advance. ____ 2. Office supplies on hand that will be used in the next period. ____ 3. Interest revenue collected; not yet earned. ____ 4. Rent not yet collected; already earned. ____ 5. An expense incurred; not yet paid or recorded. ____ 6. A revenue earned; not yet collected or recorded. ____ 7. An expense not yet incurred; paid in advance. ____ 8. Interest expense incurred; not yet paid. Solution 194 1. 2. 3. 4.
B A B C
(5 min.) 5. 6. 7. 8.
D C A D
SO 4, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 195 The Shins, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a)
Paid $180,000 to Kansas City as advance rent for use of Kansas City Stadium for the six month period April 1 through September 30.
(b)
Collected $375,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.
During the month of April, the Shins played four home games and five road games. Instructions Prepare the adjusting entries required at April 30 for the transactions above.
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts Solution 195
3 - 49
(5 min.)
(a) Rent Expense ............................................................................... Prepaid Rent....................................................................... ($180,000 ÷ 6 = $30,000)
30,000
(b) Unearned Sales Revenue ............................................................. Sales Revenue ................................................................... ($375,000 ÷ 20 = $18,750; $18,750 × 4 = $75,000)
75,000
30,000
75,000
SO 4 and 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 196 On July 1, 2012, Damlen Jurado Company pays $9,000 to its insurance company for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Damlen Jurado on July 1 and December 31.
Solution 196
(5 min.)
July 1 Prepaid Insurance Cash
9,000 9,000
Dec. 31 Insurance Expense Prepaid Insurance ($9,000 × 6/24)
2,250 2,250
SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 197 On July 1, 2010, Jeffrey Underwriters Associates received $10,000 from a client for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and December 31. Solution 197 July 1
Dec. 31
(5 min.)
Cash ................................................................................... Unearned Sales Revenue .............................................
10,000
Unearned Sales Revenue................................................... Sales Revenue ($10,000 × 6/24) ...................................
2,500
10,000
2,500
SO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 50
Test Bank for Accounting Principles, Tenth Edition
Ex. 198 Mother Hips Garment Company purchased equipment on June 1 for $80,000, paying $20,000 cash and signing a 12%, 2-month note for the remaining balance. The equipment is expected to depreciate $15,000 each year. Mother Hips Garment Company prepares monthly financial statements. Instructions (a) Prepare the general journal entry to record the acquisition of the equipment on June 1st. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the equipment will be reflected on Mother Hips Garment Company’s balance sheet on June 30th. Solution 198
(10 min.)
(a) June 1 Equipment ..................................................................... Cash ..................................................................... Notes Payable ...................................................... (To record acquisition of equipment and signing of a 2-month, 12% note)
80,000
(b) June 30 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ............... (To record monthly depreciation) $15,000 ÷ 12 = $1,250/month
1,250
30 Interest Expense ........................................................... Interest Payable.................................................... (To accrue interest on notes payable) $60,000 × 12% × 1/12 = $600
600
(c) Assets Equipment Less: Accumulated Depreciation—Equipment
20,000 60,000
1,250
600
$80,000 1,250
$78,750
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 51
Ex. 199 Scotsman Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September. SCOTSMAN COMPANY Trial Balance (Selected Accounts) September 30, 2012 ——————————————————————————————————————————— Debit Credit Supplies ............................................................................................... $ 2,700 Prepaid Insurance ................................................................................ 4,200 Equipment............................................................................................ 16,200 Accumulated Depreciation—Equipment ............................................... $1,000 Unearned Rent Revenue ..................................................................... 1,200 (Note: Debit column does not equal credit column because this is a partial listing of selected account balances) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for $4,800. 3. Equipment depreciated $6,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $500. Instructions Using the above additional information, prepare the adjusting entries that should be made by Scotsman Company on September 30. Solution 199
(10 min.)
1. Supplies Expense .......................................................................... Supplies ................................................................................ (To record the amount of office supplies used)
1,700
2. Insurance Expense ........................................................................ Prepaid Insurance ................................................................. (To record insurance expired $4,800 ÷ 24)
200
3. Depreciation Expense .................................................................... Accumulated Depreciation—Equipment ................................ (To record monthly depreciation $6,000 ÷ 12)
500
4. Unearned Rent Revenue ................................................................ Rent Revenue ....................................................................... (To record rent revenue earned)
700
1,700
200
500
SO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
700
3 - 52
Test Bank for Accounting Principles, Tenth Edition
Ex. 200 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 Sleater-Kinney Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $7,400 worth of supplies had been used during the year. No adjusting entry has been made until year end. Case 2 Western Company has a calendar year-end accounting period. On July 1, the company purchased equipment for $30,000. It is estimated that the equipment will depreciate $250 each month. No adjusting entry has been made until year end. Case 3 Ranch Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $700 per month apartments and one tenant in the $1,200 per month apartment had not paid their August rent as of August 31st. Solution 200
(10 min.)
Case 1—December 31 Supplies Expense .............................................................. Supplies ................................................................. (To record office supplies used during the year) Case 2—December 31 Depreciation Expense ....................................................... Accumulated Depreciation—Equipment ................. (To record depreciation expense for six months) $250 × 6 months = $1,500 Depreciation Case 3—August 31 Accounts Receivable ......................................................... Rent Revenue ........................................................ (To accrue rent earned but not yet received)
7,400 7,400
1,500 1,500
3,300 3,300
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 53
Ex. 201 Aeroplane Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. AEROPLANE INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Sales revenue ............................................................................. $35,000 Expenses Salaries and wages expense ....................................................... $6,000 Rent expense .............................................................................. 4,200 Depreciation expense .................................................................. 2,800 Advertising expense .................................................................... 800 Total expenses ............................................................................ 13,800 Net income........................................................................................... $21,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $2,500 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $30,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $3,500 in cash and $2,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $22,000 cash. The car will depreciate $5,400 per year. 5. Salaries owed to employees at the end of the month total $6,100. The salaries will be paid on July 5. Instructions Prepare a correct income statement. Solution 201
(15 min.)
AEROPLANE INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Sales revenue ($35,000 + $6,000) .............................................. $41,000 Expenses Salaries and wages expense ($6,000 + $6,100) .......................... $12,100 Supplies expense ($0 + $4,300) .................................................. 4,300 Rent expense .............................................................................. 4,200 Depreciation expense ($2,800 + $450) ........................................ 3,250 Utilities expense ($0 + $2,500) .................................................... 2,500 Advertising expense .................................................................... 800 Total expenses ................................................................... 27,600 Net income........................................................................................... $13,400
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
SO 5 and 6, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 202 One part of eight adjusting entries is given below. Instructions Indicate the account title for the other part of each entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Salaries and Wages Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Supplies Expense is debited. Solution 202 1. 2. 3. 4.
(5 min.)
Service Revenue Rent Expense Service Revenue Accumulated Depreciation
5. 6. 7. 8.
Salaries and Wages Payable Interest Expense Accounts Receivable or Unearned Service Revenue Supplies
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 203 For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry. 1. Depreciation Expense 2. Salaries and Wages Payable 3. Service Revenue 4. Supplies 5. Unearned Service Revenue Solution 203
(5 min.)
Account 1. Depreciation Expense 2. Salaries and Wages Payable 3. Service Revenue 4. Supplies 5. Unearned Service Revenue
Type of Entry Prepaid expense Accrued expense Accrued revenue Prepaid expense Unearned revenue
Related Account Accum. Depreciation – Equip. Salaries and Wages Expense Accounts Receivable Supplies Expense Service Revenue
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 55
Ex. 204 Prepare the necessary adjusting entry for each of the following: 1. Services provided but unrecorded totaled $900. 2. Accrued salaries at year-end are $1,000. 3. Depreciation for the year is $600. Solution 204
(5 min.)
1. Accounts Receivable ...................................................................... Service Revenue ...................................................................
900
2. Salaries and Wages Expense ........................................................ Salaries and Wages Payable .................................................
1,000
3. Depreciation Expense .................................................................... Accumulated Depreciation – Equipment ................................
600
900
1,000
600
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 205 The following ledger accounts are used by the Sebastopol Dog Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Sales Revenue Advertising Expense Rent Expense Sales Revenue Instructions For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year. (a) On September 1, paid rent on the track facility for three months, $210,000. (b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $960,000. (c) On September 1, borrowed $350,000 from First National Bank by issuing a 9% note payable due in three months. (d) On September 5, programs for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,000. (e) The accountant for the concessions company reported that gross receipts for September were $150,000. Ten percent is due to the track and will be remitted by October 10.
FOR INSTRUCTOR USE ONLY
3 - 56
Test Bank for Accounting Principles, Tenth Edition
Solution 205
(15 min.)
(a) Journal Entry Prepaid Rent .......................................................................... Cash .............................................................................
210,000
Adjusting Entry Rent Expense ........................................................................ Prepaid Rent .................................................................
70,000
(b) Journal Entry Cash ...................................................................................... Unearned Sales Revenue .............................................
960,000
Adjusting Entry Unearned Sales Revenue ...................................................... Sales Revenue .............................................................. ($960,000 ÷ 12 = $80,000) (c) Journal Entry Cash ...................................................................................... Notes Payable ............................................................... Adjusting Entry Interest Expense .................................................................... Interest Payable ............................................................ ($350,000 × .09 × 1 ÷ 12 = $2,625) (d) Journal Entry Prepaid Advertising ................................................................ Cash ............................................................................. Adjusting Entry Advertising Expense .............................................................. Prepaid Advertising ....................................................... ($3,000 × 20 ÷ 60 = $1000)
210,000
70,000
960,000 80,000 80,000
350,000 350,000 2,625 2,625
2,400 2,400 1000 1000
(e) Journal Entry None Adjusting Entry Accounts Receivable ............................................................. Sales Revenue ..............................................................
15,000 15,000
SO 6, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 57
Ex. 206 Gwynn Company has an accounting fiscal year which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,000 Tuesday June 29 3,800 Wednesday June 30 2,800 Thursday July 1 3,000 Friday July 2 2,400 Instructions (a) Prepare any necessary adjusting journal entries that should be made at year end on June 30. (b) Prepare the journal entry to record the payment of the weekly payroll on July 2. Solution 206
(10 min.)
(a) June 30 Salaries and Wages Expense ....................................... Salaries and Wages Payable ............................... (To accrue salaries incurred but not yet paid)
9,600
(b) July 2
9,600 5,400
Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash .................................................................... (To record payment of July 2 payroll)
9,600
15,000
SO 6, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 207 On Friday of each week, Spoon Company pays its factory personnel weekly wages amounting to $50,000 for a five-day work week. Instructions (a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday. (b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year. Solution 207 (a) Dec. 31
(b) Jan. 2
(5 min.) Salaries and Wages Expense ....................................... Salaries and Wages Payable ...............................
30,000
Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash ....................................................................
30,000 20,000
30,000
50,000
SO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 58
Test Bank for Accounting Principles, Tenth Edition
Ex. 208 Presented below is the Trial Balance and Adjusted Trial Balance for Morning Jacket Company on December 31. MORNING JACKET Trial Balance December 31 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 2,000 $ 2,000 Accounts Receivable 2,800 3,800 Prepaid Rent 2,100 1,400 Supplies 1,200 650 Equipment 18,000 18,000 Accumulated depreciation— Equipment $ 1,300 $ 1,550 Accounts Payable 2,700 3,070 Notes Payable 10,000 10,000 Interest Payable 140 Salaries and Wages Payable 900 Unearned Service Revenue 4,460 3,960 Owner's Capital 7,200 7,200 Owner's Drawings 3,200 3,200 Service Revenue 8,000 9,500 Salaries and Wages Expense 3,860 5,130 Rent Expense 500 1,200 Supplies Expense 550 Depreciation Expense— Equipment 250 Interest Expense 140 Totals $33,660 $33,660 $36,320 $36,320 Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.
Solution 208
(15 min.)
Accounts Receivable ............................................................................ Service Revenue ......................................................................... (To record revenue earned but not yet received)
1000
Rent Expense....................................................................................... Prepaid Rent................................................................................ (To record expiration of prepaid rent)
700
Supplies Expense................................................................................. Supplies....................................................................................... (To record supplies used)
550
FOR INSTRUCTOR USE ONLY
1000
700
550
Adjusting the Accounts Solution 208
3 - 59
(cont.)
Depreciation Expense .......................................................................... Accumulated Depreciation—Equipment ...................................... (To record depreciation expense)
250
Salaries and Wages Expense .............................................................. Salaries and Wages Payable....................................................... (To record salaries owed, not yet paid)
1,270
Interest Expense .................................................................................. Interest Payable .......................................................................... (To record accrued interest payable)
140
Unearned Service Revenue ................................................................. Service Revenue ......................................................................... (To record revenue earned)
500
250
1,270
140
500
SO 5 and 6, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 209 Compute the net income for 2012 based on the following amounts presented on the adjusted trial balance of D-Lay Company. Accumulated Depreciation – Equip. Depreciation Expense Salaries and Wages Expense Service Revenue Unearned Service Revenue Solution 209
$20,000 10,000 15,000 40,000 8,000
(5 min.)
Service Revenue Depreciation Expense Salaries and Wages Expense Net Income
$40,000 $10,000 15,000
25,000 $15,000
SO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 60
Test Bank for Accounting Principles, Tenth Edition
Ex. 210 New Slang Pest Control has the following balances in selected accounts on December 31, 2012. Accounts Receivable $0 Accumulated Depreciation – Equipment 0 Equipment 6,650 Interest Payable 0 Notes Payable 15,000 Prepaid Insurance 2,220 Salaries and Wages Payable 0 Supplies 2,940 Unearned Service Revenue 30,000 All of the accounts have normal balances. The information below has been gathered at December 31, 2012. 1. Depreciation on the equipment for 2012 is $1,300. 2. New Slang Pest Control borrowed $15,000 by signing a 10%, one-year note on July 1, 2012. 3. New Slang Pest Control paid $2,220 for 12 months of insurance coverage on October 1, 2012. 4. New Slang Pest Control pays its employees total salaries of $11,000 every Monday for the preceding 5-day week (Monday-Friday). On Monday, December 27, 2012, employees were paid for the week ending December 24, 2010. All employees worked the five days ending December 31, 2012. 5. New Slang Pest Control performed disinfecting services for a client in December 2012. The client will be billed $3,200. 6. On December 1, 2012, New Slang Pest Control collected $30,000 for disinfecting processes to be performed from December 1, 2012, through May 31, 2012. 7. A count of supplies on December 31, 2012, indicates that supplies of $650 are on hand.
Instructions Prepare in journal form with explanations, the adjusting entries for the seven items listed for Ben Cartwright Pest Control. Solution 210 (1)
(2)
(3)
(15 min.)
Depreciation Expense ................................................................. Accumulated Depreciation - Equipment ................................. (To record depreciation for the period
1,300
Interest Expense.......................................................................... Interest Payable ..................................................................... (To record accrued interest on note payable) [$15,000 * 10% * (6/12) = $750)]
750
Insurance Expense ...................................................................... Prepaid Insurance .................................................................. (To recognize period insurance expense) [($2,220 / 12) * 3 = $555)]
555
FOR INSTRUCTOR USE ONLY
1,300
750
555
Adjusting the Accounts
3 - 61
Solution 210 Cont’d (4)
(5)
(6)
(7)
Salaries and Wages Expense...................................................... Salaries and Wages Payable ................................................. (To record wages for the week)
11,000
Accounts Receivable ................................................................... Service Revenue ................................................................... (To record revenue earned but not yet received)
3,200
Unearned Service Revenue ........................................................ Service Revenue ................................................................... (To record revenue earned with prior payment)
5,000
Supplies Expense........................................................................ Supplies ................................................................................ (To record supplies expense) [$2,940 - 650 = $2,290]
2,290
11,000
3,200
5,000
2,290
SO 7, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 211 The trial balances before and after adjustments for Old Julian Calendars at the end of its fiscal year are presented below. Old Julian Calendars Trial Balance September 31, 2012 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 15,080 $ 15,080 Accounts Receivable 14,960 16,110 Supplies 2,760 885 Prepaid Insurance 5,800 1,450 Equipment 13,300 13,300 Accumulated Depreciation – Equip $ 5,220 $ 6,960 Accounts Payable 9,860 9,860 Salaries and Wages Payable 2,750 Rent Payable 1,750 Unearned Sales Revenues 2,175 1,150 Unearned Rent Revenues 2,100 525 Owner's Capital 18,395 18,395 Sales Revenue 48,800 50,975 Rent Revenue 1,575 3,150 Salaries and Wages Expense 36,225 40,725 Supplies Expense 1,875 Insurance Expense 0 4,350 Depreciation Expense 0 1,740 $ 88,125 $ 88,125 $ 95,515 $ 95,515 0
FOR INSTRUCTOR USE ONLY
0
3 - 62 Ex. 211
Test Bank for Accounting Principles, Tenth Edition Cont’d
Instructions Prepare the adjusting entries that were made. Solution 211 (1)
(2)
(3)
(4)
(5)
(6)
(7)
(20 min.)
Accounts Receivable ................................................................... Service Revenue ................................................................... (To record service revenue not yet billed to customers)
1,150
Supplies Expense ........................................................................ Supplies ................................................................................. (To record supplies expense)
1,875
Insurance Expense ...................................................................... Prepaid Insurance .................................................................. (To recognize period insurance expense)
4,350
Depreciation Expense.................................................................. Accumulated Depreciation - Equipment ................................. (To record depreciation for the period)
1,740
Salaries and Wages Expense ...................................................... Salaries and Wages Payable ................................................. (To record salaries payable)
4,500
Unearned Service Revenue ......................................................... Service Revenue ................................................................... (To record revenue earned with prior payment)
1,025
Unearned Rent Revenue ............................................................. Rent Revenue ........................................................................ (To record revenue earned with prior payment)
1,575
1,150
1,875
4,350
1,740
4,500
1,025
1,575
SO 7, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
3 - 63
Ex. 212 The White Stripes Animal Encounters operates a drive through tourist attraction. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent Buildings Accumulated Depreciation—Buildings Unearned Sales Revenue
$12,000 30,000 6,600 400
Other data: 1. Three months' rent had been prepaid on April 1. 2. The buildings are being depreciated at $7,200 per year. 3. The unearned Sales revenue represents tickets sold for future visits. The tickets were sold at $5.00 each on April 1. During April, twenty of the tickets were used by customers. Instructions (a) Calculate the following: 1. Monthly rent expense. 2. The age of the buildings in months. 3. The number of tickets sold on April 1. (b) Prepare the adjusting entries that were made by the Poway Animal Encounters on April 30. Solution 212 (a)
(15 min.)
1. $6,000. The $12,000 balance on the adjusted trial balance reflects two months remaining on the prepaid lease. This indicates that the monthly lease is $6,000. 2. The buildings are 11 months old. By dividing annual depreciation ($7,200) by 12, the monthly depreciation expense is $600. The accumulated depreciation account shows $6,600 which means that depreciation has been taken for 11 months. 3. 100 tickets were originally sold. Twenty tickets were used in April at $5.00 each. The adjusted trial balance shows a balance of $400 indicating that 80 tickets are still outstanding. By adding the 20 used in April to the 80 still remaining to be used, 100 tickets must have been sold on April 1.
(b)
1. Rent Expense ........................................................................ Prepaid Rent .................................................................
6,000
2. Depreciation Expense............................................................ Accumulated Depreciation—Buildings ..........................
600
3. Unearned Sales Revenue ...................................................... Sales Revenue ............................................................. (20 × $5 = $100)
100
6,000
600
SO 7, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
100
3 - 64
Test Bank for Accounting Principles, Tenth Edition
Ex. 213 The adjusted trial balance of C.S. Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31, 2012: 1. an income statement. 2. an owner's equity statement. 3. a balance sheet. C.S. Financial Planners Adjusted Trial Balance December 31, 2012 ——————————————————————————————————————————— Debit Credit Cash..................................................................................................... $ 5,400 Accounts Receivable ............................................................................ 2,200 Supplies ............................................................................................... 1,800 Equipment ............................................................................................ 15,000 Accumulated Depreciation—Equipment ............................................... $ 4,000 Accounts Payable................................................................................. 3,300 Unearned Service Revenue ................................................................. 6,000 Owner's Capital .................................................................................... 14,400 Owner's Drawings ................................................................................ 2,500 Service Revenue .................................................................................. 4,200 Supplies Expense................................................................................ 600 Depreciation Expense .......................................................................... 2,500 Rent Expense....................................................................................... 1,900 $31,900 $31,900 Solution 213
(20 min.)
1.
C.S. Financial Planners Income Statement For the Month Ended December 31, 2012 ——————————————————————————————————————————— Revenues Service Revenue ......................................................................... $ 4,200 Expenses Depreciation expense .................................................................. $2,500 Rent expense .............................................................................. 1,900 Supplies expense ........................................................................ 600 Total expenses ...................................................................... 5,000 Net loss ................................................................................................ $ (800) 2.
C.S. Financial Planners Owner's Equity Statement For the Month Ended December 31, 2012 ——————————————————————————————————————————— Owner's Capital, December 1 ............................................................... $14,400 Less: Net loss .................................................................................... $ 800 Drawings................................................................................... 2,500 3,300 Owner's Capital, December 31 ............................................................ $11,100 FOR INSTRUCTOR USE ONLY
Adjusting the Accounts Solution 213
3 - 65
(Cont.)
3.
C.S. Financial Planners Balance Sheet December 31, 2012 ——————————————————————————————————————————— Assets Cash .................................................................................................... $ 5,400 Accounts receivable ............................................................................. 2,200 Supplies .............................................................................................. 1,800 Equipment............................................................................................ $15,000 Less: Accumulated depreciation—equipment .................................... 4,000 11,000 Total assets ................................................................................. $20,400 Liabilities and Owner's Equity Liabilities Accounts payable ........................................................................ Unearned service revenue .......................................................... Total liabilities ........................................................................ Owner's Equity Owner's capital ............................................................................ Total liabilities and owner's equity..........................................
$3,300 6,000 $ 9,300 11,100 $20,400
SO 7, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 214 Yankee Hotel Foxtrot initiated operations on July 1, 2012. To manage the company officers and managers have requested monthly financial statements starting July 31, 2012. The adjusted trial balance amounts at July 31 are shown below. Debits Credits Cash $ 8,680 Accumulated Depreciation – Equipment $ 840 Accounts Receivable 810 Notes Payable 6,000 Prepaid Rent 1,965 Accounts Payable 1,140 Supplies 1,160 Salaries and Wages Payable 360 Equipment 11,400 Interest Payable 40 Owner's Drawings 800 Unearned Sales Revenue 580 Salaries and Wages Expense 7,145 Owner's Capital 10,640 Rent Expense 1,740 Sales Revenue 15,390 Depreciation Expense 665 Total credits $ 34,990 Supplies Expense 580 Interest Expense 45 Total debits $ 34,990 (a) Determine the net income for the month of July. (b) Determine the total assets and total liabilities at July 31, 2012 for Yankee Hotel Foxtrot. (c) Determine the amount that appears for Will Coe, Capital at July 31, 2012.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 214 (a)
(15 min.) Revenues Sales Revenues Expenses Salaries and Wages Expense Rent Expense Depreciation Expense Supplies Expense Interest Expense Net income
(b)
Assets Cash $ 8,680 Accounts Receivable 810 Prepaid Rent 1,965 Supplies 1,160 Equipment 11,400 Accum. Deprec. – Equip ($ 840) Total assets $ 23,175
$ 15,390
$7,145 1,740 665 580 45
10,175 $ 5,215
Liabilities Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Sales Revenue Total liabilities
6,000 1,140 360 40 580 $ 8,120
(c) Owner's Capital, July 1, 2012 Add: Net Income Less: Drawings Owner's Capital, July 31, 2012
$ 10,640 5,215 15,855 -800 $ 15,055
SO 7, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
a
Ex. 215
1. Drive-by Truckers prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional supplies were purchased for $4,800 and that amount was debited to Supplies Expense. On July 31, a physical count of supplies revealed that there was $2,200 on hand. Prepare the adjusting journal entry that Drive-by Truckers should make on July 31. 2. Alesandro Rental Agency prepares monthly financial statements. On September 1, a check for $7,800 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30.
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts a
Solution 215
1. July 31
2. Sept. 30
3 - 67
(5 min.) Supplies Expense ......................................................... Supplies ............................................................... (To record supplies used)
800
Rent Revenue ............................................................... Unearned Rent Revenue ...................................... (To record unearned rent)
6,500
800
6,500
SO 8, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
COMPLETION STATEMENTS 216.
The ______________ assumption divides the economic life of a business into artificial time periods.
Ans: time period, SO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
217.
An accounting period that is one year in length is referred to as a ______________ year.
Ans: fiscal, SO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
218.
The ______________ principle gives accountants guidance as to when revenue is to be recorded.
Ans: revenue recognition, SO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
219.
In a service company, revenue is earned when the service is ______________.
Ans: performed, SO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
220.
The expense recognition ______________.
principle
attempts
to
match
______________
with
Ans: expenses, revenues, SO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
221.
Expenses paid and recorded in an asset account before they are used or consumed are called ______________. Revenue received and recorded as a liability before it is earned is referred to as ______________.
Ans: prepaid expenses, unearned revenue, SO 5, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
3 - 68 222.
Test Bank for Accounting Principles, Tenth Edition Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated.
Ans: expenses, assets, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
223.
Depreciation is a ______________ allocation process rather than a process of ______________.
Ans: cost, valuation, SO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
224.
Depreciation expense for a period is an ______________ rather than a factual measurement of cost that has expired.
Ans: estimate, SO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
225.
An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been ________________ but has not yet been ________________ or recorded.
Ans: incurred, paid, SO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
226.
An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.
Ans: equality, adjusting, SO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Answers to Completion Statements 216. 217. 218. 219. 220. 221.
time period fiscal revenue recognition performed expenses, revenues prepaid expenses, unearned revenue
222. 223. 224. 225. 226.
expenses, assets cost, valuation estimate incurred, paid equality, adjusting
FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
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MATCHING 227. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Time period assumption Fiscal year Revenue recognition principle Prepaid expenses Expense recognition principle
F. G. H. I. J.
Accrued revenues Depreciation Accumulated depreciation Accrued expenses Book value
____
1. A twelve month accounting period
____
2. Expenses paid before they are incurred
____
3. Cost less accumulated depreciation
____
4. Divides the economic life of a business into artificial time periods
____
5. Efforts are related to accomplishments
____
6. A contra asset account
____
7. Recognition of revenue when it is recorded when earned
____
8. Revenues earned but not yet received
____
9. Expenses incurred but not yet paid
____ 10. A cost allocation process
Answers to Matching 1. 2. 3. 4. 5.
B D J A E
6. 7. 8. 9. 10.
H C F I G
SO 1, BT: C, Difficulty: Medium, TOT: 8 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 228 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 228 The time period assumption divides the economic life of an accounting entity, such as a business enterprise, into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under accrual- basis accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized; that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses; that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. SO 1, BT: C, Difficulty: Medium, TOT: 6 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
S-A E 229 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 229 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recorded. Prepayments and deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are: prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are: salaries and wages payable and interest payable. SO 3, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
S-A E 230 You are visiting with a friend, Jim Borke, who wants to start a new business. During discussions on forming the business, Jim makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Jim. FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
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Solution 230 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when it is earned and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the balance sheet. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were earned. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the balance sheet. Thus, the user can see that these assets are available for future use. Also, generally accepted accounting principles require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. SO 3, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Communication, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Communication
S-A E 231 The long-term liability section of Escovedo Company’s Balance Sheet includes the following accounts: Notes Payable Mortgage Payable Salaries Payable Accumulated Depreciation Total Long-Term Liabilities
$100,000 250,000 75,000 125,000 $550,000
Escovedo Company is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 231 Salaries Payable should not be reported as a long-term liability. This represents the amounts owed to employees. If the company does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the balance sheet. Are all of the notes payable actually long-term (due after one year)? If not, the portion due within one year should be reported as a current liability instead. SO 7, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
S-A E 232 (Ethics) Jay Farrar Company is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Jay Farrar introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success. The success of the product has Josh Ritter, the manager of the New Products division, worried, however. He was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. He did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. He preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Mr. Ritter then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best. Solution 232 The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow his instructions. 3. Report the manager's actions to his superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. FOR INSTRUCTOR USE ONLY
Adjusting the Accounts
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SO 8, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Professional demeanor
S-A E 233 (Communication) A new sales representative, Jiggs Lucero, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't ... Right??! Is this how you guys lower our commissions? Reply to j.lucero@sbd Required: Write a response to send to Jiggs. Solution 233 Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows:
Jiggs—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Jiggs—unearned revenue is the result of your getting customers of the kind we like—they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how we (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. You will receive your commissions the same month the company records the revenue as “earned.” (Take heart—It'll seem like Christmas all over again.) Thanks again for actually using the system. Talk to me again sometime. . . Reply to mking@sbd
SO 8,, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Communication, AICPA BB: N, AICPA FN: Decision modeling, AICPA PC: Communication
FOR INSTRUCTOR USE ONLY
CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
6 6 6 6 6 7 1 2
C K K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
2 3 6 6 6
K K C K K
38. 1 K 66. 2 K 94. 3 C 122. 6 AN 150. 39. 1 K 67. 2 K 95. 3 C 123. 6 AN 151. a 40. 1 K 68. 2 C 96. 3 C 124. 6 K 152. a 41. 1 C 69. 2 K 97. 4 K 125. 6 K 153. sg 42. 1 C 70. 2 K 98. 4 K 126. 6 C 154. sg 43. 1 K 71. 2 C 99. 4 K 127. 6 K 155. sg 44. 1 C 72. 2 K 100. 4 K 128. 6 K 156. sg 45. 1 K 73. 2 K 101. 4 K 129. 6 C 157. st 46. 1 K 74. 2 C 102. 4 K 130. 6 C 158. sg 47. 1 K 75. 2 C 103. 4 K 131. 6 K 159. st 48. 1 K 76. 2 C 104. 4 K 132. 6 K 160. sg 49. 1 K 77. 2 C 105. 4 K 133. 6 K 161. st 50. 1 K 78. 2 C 106. 5 K 134. 6 K 162. sg 51. 1 C 79. 2 AN 107. 5 AN 135. 6 K 163. st,a 52. 1 K 80. 2 C 108. 5 K 136. 6 K 164. 53. 1 C 81. 2 C 109. 5 C 137. 6 K 165. 54. 1 AP 82. 2 C 110. 5 K 138. 6 C 166. 55. 1 C 83. 2 C 111. 5 AN 139. 6 AN 167. 56. 2 K 84. 2 AN 112. 5 AN 140. 6 AN 168. 57. 2 K 85. 2 C 113. 5 AN 141. 6 AN 169. 58. 2 K 86. 2 C 114. 5 AN 142. 6 AN 170. 59. 2 K 87. 3 K 115. 5 AN 143. 6 AN 171. 60. 2 K 88. 3 C 116. 6 AN 144. 6 AN 172. 61. 2 K 89. 3 K 117. 6 AN 145. 6 AN 173. 62. 2 K 90. 3 K 118. 6 AN 146. 6 K 174. 63. 2 K 91. 3 K 119. 6 AN 147. 6 K 175. 64. 2 K 92. 3 K 120. 6 AN 148. 6 K 65. 2 K 93. 3 K 121. 6 AN 149. 6 K sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter.
6 6 7 7 1 2 2 3 4 4 5 5 6 6 7 7 7 7 7 7 7 7 7 7 7 7
AP AP K K C K K K K K K AN K K K
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 1 2
K K C C K K C K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 3 3
K K K K K K C K
17. 18. 19. 20. 21. 22. 23. 24.
4 4 5 5 5 6 6 6
K C C K C K C C
25. 26. 27. 28. 29. a 30. sg 31. sg 32.
sg
Multiple Choice Questions
K K K K K K K
4-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Brief Exercises 176. 177. 178.
2 2 2
AN 179. AN 180. AN 181.
2 3 5
K 182. K 183. AN 184.
5 6 6
AN AN AP
185. 186. a 187.
6 6 7
AP K AP
206. 207. 208. 209. 210. 211.
5 5 5 6 6 6
AN AN AN AP AN AP
Exercises 188. 189. 190. 191. 192. 193.
1 1 1 1 1 1
C C AN AN AN AN
194. 194. 196. 197. 198. 199.
1,6 2 2 2 2 2
AP AN AP AP AP AP
200. 201. 202. 203. 204. 205.
2 3 3 4 5 5
AP C AN C AN AN
212. 213. a 214. a 215. a
6 7 7 7
AP AN AN AN
Completion Statements 216. 217. 218.
1 1 2
K K K
228.
6
K
229. 230.
1 2
K K
219. 220.. 221.
231. 232.
2 2 3
K K K
222. 4 K 223. 6 K 224. 6 K Matching
225. 226. 227.
6 6 6
K K K
6 6
Short-Answer Essay K a233. 7 K 225. K 234. 5 K
5
K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 6.
TF TF TF TF TF TF
7. 31. 38. 39. 40. 41.
TF TF MC MC MC MC
42. 43. 44. 45. 46. 47.
8. 9. 10. 11. 12. 13. 14. 32.
TF TF TF TF TF TF TF TF
33. 56. 57. 58. 59. 60. 61. 62.
TF MC MC MC MC MC MC MC
63. 64. 65. 66. 67. 68. 69. 70.
15. 16. 34.
TF TF TF
87. 88. 89.
MC MC MC
90. 91. 92.
Type
Item
Type
Item
Study Objective 1 MC 48. MC 54. MC 49. MC 55. MC 50. MC 154. MC 51. MC 188. MC 52. MC 189. MC 53. MC 190. Study Objective 2 MC 71. MC 79. MC 72. MC 80. MC 73. MC 81. MC 74. MC 82. MC 75. MC 83. MC 76. MC 84. MC 77. MC 85. MC 78. MC 86. Study Objective 3 MC 93. MC 96. MC 94. MC 157. MC 95. MC 180.
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MC MC MC Ex Ex Ex
191. 192. 193. 194. 216. 217.
Ex Ex Ex Ex C C
229.
SA
MC MC MC MC MC MC MC MC
155. 156. 176. 177. 178. 179. 195. 196.
MC MC BE BE BE BE Ex Ex
197. 198. 199. 200. 218. 219. 220. 230.
Ex Ex Ex Ex C C C SA
MC MC BE
201. 202. 221.
Ex Ex C
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle
17. 18. 97.
TF TF MC
98. 99. 100.
MC MC MC
101. 102. 103.
Study Objective 4 MC 104. MC 159. MC 105. MC 203. MC 158. MC 222.
4-3
MC Ex C
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 19. 20. 21. 106.
TF TF TF MC
22. 23. 24. 25. 26. 27. 28. 29. 35. 36.
TF TF TF TF TF TF TF TF TF TF
30. 152. a 153.
TF MC MC
a
a
107. 108. 109. 110.
MC MC MC MC
111. 112. 113. 114.
37. 116. 117. 118. 119. 120. 121. 122. 123. 124.
TF MC MC MC MC MC MC MC MC MC
125. 126. 127. 128. 129. 130. 131. 132. 133. 134.
164. 165. 166.
MC MC MC
167. 168. 169.
a
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 5 MC 115. MC 182. MC 160. MC 204. MC 161. MC 205. MC 181. BE 206. Study Objective 6 MC 135. MC 145. MC 136. MC 146. MC 137. MC 147. MC 138. MC 148. MC 139. MC 149. MC 140. MC 150. MC 141. MC 151. MC 142. MC 162. MC 143. MC 163. MC 144. MC 183. a Study Objective 7 MC 170. MC 173. MC 171. MC 174. MC 172. MC 175.
BE Ex Ex Ex
207. 208. 234. 235.
Ex Ex SA SA
MC MC MC MC MC MC MC MC MC BE
184. 185. 186. 183. 209. 210. 211. 212. 223. 224.
BE BE BE Ex Ex Ex Ex Ex C C
187. 213. a 214.
BE Ex Ex
MC MC MC
BE = Brief Exercise Ex = Exercise
a a
225. 226. 227. 228. 231. 232.
C C C MA SA SA
215. 233.
Ex SA
a
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Prepare a worksheet. The steps in preparing a worksheet are: (a) Prepare a trial balance on the worksheet, (b) Enter the adjustments in the adjustments columns, (c) Enter adjusted balances in the adjusted trial balance columns, (d) Extend adjusted trial balance amounts to appropriate financial statement columns, and (e) Total the statement columns, compute net income (or net loss), and complete the worksheet. 2. Explain the process of closing the books. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then rule and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Owner's Capital, and Owner's Drawings to Owner's Capital. Only temporary accounts are closed. 3. Describe the content and purpose of a post-closing trial balance. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances. FOR INSTRUCTOR USE ONLY
4-4
Test Bank for Accounting Principles, Tenth Edition
4. State the required steps in the accounting cycle. The required steps in the accounting cycle are: (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance. 5. Explain the approaches to preparing correcting entries. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry. 6. Identify the sections of a classified balance sheet. A classified balance sheet categorizes assets as current assets; long-term investments; property, plant, and equipment; and intangibles. Liabilities are classified as either current or long-term. There is also an owner's (owners’) equity section, which varies with the form of business organization. a
7. Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.
TRUE-FALSE STATEMENTS 1.
A worksheet is a mandatory form that must be prepared along with an income statement and balance sheet.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
2.
If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
3.
If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4.
It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
6.
The adjusted trial balance columns of a worksheet are obtained by subtracting the adjustment columns from the trial balance columns.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 7.
4-5
The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
8.
Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
9.
The owner's drawings account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
10.
After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
11.
Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12.
Closing the drawings account to Owner’s Capital is not necessary if net income is greater than owner's drawings during the period.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
13.
The owner's drawings account is a permanent account whose balance is carried forward to the next accounting period.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
14.
Closing entries are journalized after adjusting entries have been journalized.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
15.
The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
16.
The post-closing trial balance is entered in the first two columns of a worksheet.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
17.
A business entity has only one accounting cycle over its economic existence.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
18.
The accounting cycle begins at the start of a new accounting period.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4-6 19.
Test Bank for Accounting Principles, Tenth Edition Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
20.
Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
21.
An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
22.
In a corporation, Retained Earnings is a part of owners' equity.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
23.
A company's operating cycle and fiscal year are usually the same length of time.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
24.
Cash and supplies are both classified as current assets.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
25.
Long-term investments would appear in the property, plant, and equipment section of the balance sheet.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
26.
A liability is classified as a current liability if the company is to pay it within the forthcoming year.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
A company's liquidity is concerned with the relationship between long-term investments and long-term debt.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
28.
Current assets are customarily the first items listed on a classified balance sheet.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
29.
The operating cycle of a company is determined by the number of years the company has been operating.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
30.
Reversing entries are an optional bookkeeping procedure.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 31.
4-7
After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
32.
To close net income to owner's capital, Income Summary is debited and Owner's Capital is credited.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
33.
In one closing entry, Owner's Drawings is credited and Income Summary is debited.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
34.
The post-closing trial balance will contain only owner's equity statement accounts and balance sheet accounts.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
35.
The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
36.
Current assets are listed in the order of liquidity.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
37.
Current liabilities are obligations that the company is to pay within the coming year.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T T F F F
7. 8. 9. 10. 11. 12.
T F F T F F
13. 14. 15. 16. 17. 18.
F T F F F T
19. 20. 21. 22. 23. 24.
F T F T F T
25. 26. 27. 28. 29. a 30.
F T F T F T
31. 32. 33. 34. 35. 36.
T T F F F T
37.
T
MULTIPLE CHOICE QUESTIONS 38.
Preparing a worksheet involves a. two steps. b. three steps. c. four steps. d. five steps.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4-8 39.
Test Bank for Accounting Principles, Tenth Edition The adjustments entered in the adjustments columns of a worksheet are a. not journalized. b. posted to the ledger but not journalized. c. not journalized until after the financial statements are prepared. d. journalized before the worksheet is completed.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
40.
The information for preparing a trial balance on a worksheet is obtained from a. financial statements. b. general ledger accounts. c. general journal entries. d. business documents.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
41.
After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the a. adjusted trial balance. b. post-closing trial balance. c. the general journal. d. adjustments columns of the worksheet.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
42.
If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has a. earned net income for the period. b. an error because debits do not equal credits. c. suffered a net loss for the period. d. to make an adjusting entry.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
43.
A worksheet is a multiple column form that facilitates the a. identification of events. b. measurement process. c. preparation of financial statements. d. analysis process.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
44.
Which of the following companies would be least likely to use a worksheet to facilitate the adjustment process? a. Large company with numerous accounts b. Small company with numerous accounts c. All companies, since worksheets are required under generally accepted accounting principles d. Small company with few accounts
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 45.
4-9
A worksheet can be thought of as a(n) a. permanent accounting record. b. optional device used by accountants. c. part of the general ledger. d. part of the journal.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
46.
The account, Supplies, will appear in the following debit columns of the worksheet. a. Trial balance b. Adjusted trial balance c. Balance sheet d. All of these
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
47.
When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet? a. They should be inserted in alphabetical order into the trial balance accounts already given. b. They should be inserted in chart of account order into the trial balance already given. c. They should be inserted on the lines immediately below the trial balance totals. d. They should not be inserted on the trial balance until the next accounting period.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
48.
When using a worksheet, adjusting entries are journalized a. after the worksheet is completed and before financial statements are prepared. b. before the adjustments are entered on to the worksheet. c. after the worksheet is completed and after financial statements have been prepared. d. before the adjusted trial balance is extended to the proper financial statement columns.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
49.
Assuming that there is a net loss for the period, debits equal credits in all but which section of the worksheet? a. Income statement columns b. Adjustments columns c. Trial balance columns d. Adjusted trial balance columns
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
50.
Adjusting entries are prepared from a. source documents. b. the adjustments columns of the worksheet. c. the general ledger. d. last year's worksheet.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 10 51.
Test Bank for Accounting Principles, Tenth Edition The net income (or loss) for the period a. is found by computing the difference between the income statement credit column and the balance sheet credit column on the worksheet. b. cannot be found on the worksheet. c. is found by computing the difference between the income statement columns of the worksheet. d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
52.
The worksheet does not show a. net income or loss for the period. b. revenue and expense account balances. c. the ending balance in the owner's capital account. d. the trial balance before adjustments.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
53.
If the total debits exceed total credits in the balance sheet columns of the worksheet, owner's equity a. will increase because net income has occurred. b. will decrease because a net loss has occurred. c. is in error because a mistake has occurred. d. will not be affected.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
54.
The income statement and balance sheet columns of Iron and Wine Company's worksheet reflect the following totals:
Totals
Income Statement Dr. Cr. $72,000 $48,000
Balance Sheet Dr. Cr. $60,000 $84,000
The net income (or loss) for the period is a. $48,000 income. b. $24,000 income. c. $24,000 loss. d. not determinable. Ans: C, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 55.
4 - 11
The income statement and balance sheet columns of Iron and Wine Company's worksheet reflect the following totals:
Totals
Income Statement Dr. Cr. $72,000 $48,000
Balance Sheet Dr. Cr. $60,000 $84,000
To enter the net income (or loss) for the period into the above worksheet requires an entry to the a. income statement debit column and the balance sheet credit column. b. income statement credit column and the balance sheet debit column. c. income statement debit column and the income statement credit column. d. balance sheet debit column and the balance sheet credit column. Ans: B, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
56.
Closing entries are necessary for a. permanent accounts only. b. temporary accounts only. c. both permanent and temporary accounts. d. permanent or real accounts only.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Each of the following accounts is closed to Income Summary except a. Expenses. b. Owner's Drawings. c. Revenues. d. All of these are closed to Income Summary.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
58.
Closing entries are made a. in order to terminate the business as an operating entity. b. so that all assets, liabilities, and owner's capital accounts will have zero balances when the next accounting period starts. c. in order to transfer net income (or loss) and owner's drawings to the owner's capital account. d. so that financial statements can be prepared.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Closing entries are a. an optional step in the accounting cycle. b. posted to the ledger accounts from the worksheet. c. made to close permanent or real accounts. d. journalized in the general journal.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 12 60.
Test Bank for Accounting Principles, Tenth Edition The income summary account a. is a permanent account. b. appears on the balance sheet. c. appears on the income statement. d. is a temporary account.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a a. debit to the owner's capital account. b. debit to the owner's drawings account. c. credit to the owner's capital account. d. credit to the owner's drawings account.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62.
Closing entries are journalized and posted a. before the financial statements are prepared. b. after the financial statements are prepared. c. at management's discretion. d. at the end of each interim accounting period.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
63.
Closing entries a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
64.
Which of the following is a true statement about closing the books of a proprietorship? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the owner's drawings account are closed to the Income Summary account.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
Closing entries may be prepared from all but which one of the following sources? a. Adjusted balances in the ledger b. Income statement and balance sheet columns of the worksheet c. Balance sheet d. Income and owner's equity statements
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 66.
4 - 13
In order to close the owner's drawings account, the a. income summary account should be debited. b. income summary account should be credited. c. owner's capital account should be credited. d. owner's capital account should be debited.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
In preparing closing entries a. each revenue account will be credited. b. each expense account will be credited. c. the owner's capital account will be debited if there is net income for the period. d. the owner's drawings account will be debited.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
68.
The most efficient way to accomplish closing entries is to a. credit the income summary account for each revenue account balance. b. debit the income summary account for each expense account balance. c. credit the owner's drawings balance directly to the income summary account. d. credit the income summary account for total revenues and debit the income summary account for total expenses.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
69.
The closing entry process consists of closing a. all asset and liability accounts. b. out the owner's capital account. c. all permanent accounts. d. all temporary accounts.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
70.
The final closing entry to be journalized is typically the entry that closes the a. revenue accounts. b. owner's drawings account. c. owner's capital account. d. expense accounts.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
An error has occurred in the closing entry process if a. revenue and expense accounts have zero balances. b. the owner's capital account is credited for the amount of net income. c. the owner's drawings account is closed to the owner's capital account. d. the balance sheet accounts have zero balances.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 14 72.
Test Bank for Accounting Principles, Tenth Edition The Income Summary account is an important account that is used a. during interim periods. b. in preparing adjusting entries. c. annually in preparing closing entries. d. annually in preparing correcting entries.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
The balance in the income summary account before it is closed will be equal to a. the net income or loss on the income statement. b. the beginning balance in the owner's capital account. c. the ending balance in the owner's capital account. d. zero.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
After closing entries are posted, the balance in the owner's capital account in the ledger will be equal to a. the beginning owner's capital reported on the owner's equity statement. b. the amount of the owner's capital reported on the balance sheet. c. zero. d. the net income for the period.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
75.
The income statement for the month of June, 2012 of Camera Obscura Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Insurance Expense Total expenses Net income
$7,000 $3,000 1,000 800 300 100 5,200 $1,800
The entry to close the revenue account includes a a. debit to Income Summary for $1,800. b. credit to Income Summary for $1,800. c. debit to Income Summary for $7,000. d. credit to Income Summary for $7,000. Ans: D, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 76.
4 - 15
The income statement for the month of June, 2012 of Camera Obscura Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Insurance Expense Total expenses Net income
$7,000 $3,000 1,000 800 300 100 5,200 $1,800
The entry to close the expense accounts includes a a. debit to Income Summary for $1,800. b. credit to Rent Expense for $1,000. c. credit to Income Summary for $5,200. d. debit to Wages Expense for $3,000. Ans: B, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
77.
The income statement for the month of June, 2012 of Camera Obscura Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Insurance Expense Total expenses Net income
$7,000 $3,000 1,000 800 300 100 5,200 $1,800
After the revenue and expense accounts have been closed, the balance in Income Summary will be a. $0. b. a debit balance of $1,800. c. a credit balance of $1,800. d. a credit balance of $7,000. Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 16 78.
Test Bank for Accounting Principles, Tenth Edition The income statement for the month of June, 2012 of Camera Obscura Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Insurance Expense Total expenses Net income
$7,000 $3,000 1,000 800 300 100 5,200 $1,800
The entry to close Income Summary to Ramirez, Capital includes a. a debit to Revenues for $7,000. b. credits to Expenses totalling $5,200. c. a credit to Income Summary for $1,800 d. a credit to Owner's Capital for $1,800. Ans: D, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
79.
The income statement for the month of June, 2012 of Camera Obscura Enterprises contains the following information: Revenues Expenses: Salries and Wages Expense Rent Expense Advertising Expense Supplies Expense Insurance Expense Total expenses Net income
$7,000 $3,000 1,000 800 300 100 5,200 $1,800
At June 1, 2012, Camera Obscura reported owner’s equity of $35,000. The company had no owner drawings during June. At June 30, 2012, the company will report owner’s equity of a. $29,800. b. $35,000. c. $36,800. d. $42,000. Ans: C, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 80.
4 - 17
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
The entry to close the revenue account includes a a. debit to Income Summary for $5,500. b. credit to Income Summary for $5,500. c. debit to Revenues for $70,000. d. credit to Revenues for $70,000. Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
81.
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
The entry to close the expense accounts includes a a. debit to Income Summary for $5,500. b. credit to Income Summary for $5,500. c. debit to Income Summary for $75,500. d. debit to Wages Expense for $2,500. Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
82.
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss) FOR INSTRUCTOR USE ONLY
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
4 - 18
Test Bank for Accounting Principles, Tenth Edition
Multiple Choice 82.
(Cont.)
After the revenue and expense accounts have been closed, the balance in Income Summary will be a. $0. b. a debit balance of $5,500. c. a credit balance of $5,500. d. a credit balance of $70,000. Ans: B, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
83.
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
The entry to close Income Summary to Owner’s Capital includes a. a debit to Revenue for $70,000. b. credits to Expenses totalling $75,500. c. a credit to Income Summary for $5,500. d. a credit to Owner’s Capital for $5,500. Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
84.
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
At January 1, 2012, Fugazi reported owner’s equity of $50,000. Owner drawings for the year totalled $10,000. At December 31, 2012, the company will report owner’s equity of a. $15,500. b. $34,500. c. $40,000. d. $45,500. Ans: B, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 85.
4 - 19
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
After all closing entries have been posted, the Income Summary account will have a balance of a. $0. b. $5,500 debit. c. $5,500 credit. d. $34,500 credit. Ans: A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
86.
The income statement for the year 2012 of Fugazi Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$70,000 $45,000 12,000 8,000 6,000 2,500 2,000 75,500 $(5,500)
After all closing entries have been posted, the revenue account will have a balance of a. $0. b. $70,000 credit. c. $70,000 debit. d. $5,500 credit. Ans: A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
87.
A post-closing trial balance is prepared a. after closing entries have been journalized and posted. b. before closing entries have been journalized and posted. c. after closing entries have been journalized but before the entries are posted. d. before closing entries have been journalized but after the entries are posted.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 20 88.
Test Bank for Accounting Principles, Tenth Edition All of the following statements about the post-closing trial balance are correct except it a. shows that the accounting equation is in balance. b. provides evidence that the journalizing and posting of closing entries have been properly completed. c. contains only permanent accounts. d. proves that all transactions have been recorded.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
89.
A post-closing trial balance will show a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts. d. the amount of net income (or loss) for the period.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
90.
A post-closing trial balance should be prepared a. before closing entries are posted to the ledger accounts. b. after closing entries are posted to the ledger accounts. c. before adjusting entries are posted to the ledger accounts. d. only if an error in the accounts is detected.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
91.
A post-closing trial balance will show a. zero balances for all accounts. b. zero balances for balance sheet accounts. c. only balance sheet accounts. d. only income statement accounts.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
92.
The purpose of the post-closing trial balance is to a. prove that no mistakes were made. b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period. c. prove the equality of the income statement account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
93.
The balances that appear on the post-closing trial balance will match the a. income statement account balances after adjustments. b. balance sheet account balances after closing entries. c. income statement account balances after closing entries. d. balance sheet account balances after adjustments.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 94.
4 - 21
Which account listed below would be double ruled in the ledger as part of the closing process? a. Cash b. Owner's Capital c. Owner's Drawings d. Accumulated Depreciation—Equipment
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
95.
A double rule applied to accounts in the ledger during the closing process implies that a. the account is a temporary account. b. the account is a balance sheet account. c. the account balance is not zero. d. a mistake has been made, since double ruling is prescribed.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
96.
The heading for a post-closing trial balance has a date line that is similar to the one found on a. a balance sheet. b. an income statement. c. an owner's equity statement. d. the worksheet.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
97.
Which one of the following is usually prepared only at the end of a company's annual accounting period? a. Preparing financial statements b. Journalizing and posting adjusting entries c. Journalizing and posting closing entries d. Preparing an adjusted trial balance
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
98.
The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is a. analyzing transactions. b. journalizing and posting adjusting entries. c. preparing a post-closing trial balance. d. posting to ledger accounts.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
99.
Which one of the following is an optional step in the accounting cycle of a business enterprise? a. Analyze business transactions b. Prepare a worksheet c. Prepare a trial balance d. Post to the ledger accounts
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 22 100.
Test Bank for Accounting Principles, Tenth Edition The final step in the accounting cycle is to prepare a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
101.
Which of the following steps in the accounting cycle would not generally be performed daily? a. Journalize transactions b. Post to ledger accounts c. Prepare adjusting entries d. Analyze business transactions
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
102.
Which of the following steps in the accounting cycle may be performed most frequently? a. Prepare a post-closing trial balance b. Journalize closing entries c. Post closing entries d. Prepare a trial balance
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
Which of the following depicts the proper sequence of steps in the accounting cycle? a. Journalize the transactions, analyze business transactions, prepare a trial balance b. Prepare a trial balance, prepare financial statements, prepare adjusting entries c. Prepare a trial balance, prepare adjusting entries, prepare financial statements d. Prepare a trial balance, post to ledger accounts, post adjusting entries
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
104.
The two optional steps in the accounting cycle are preparing a. a post-closing trial balance and reversing entries. b. a worksheet and post-closing trial balances. c. reversing entries and a worksheet. d. an adjusted trial balance and a post-closing trial balance.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
105.
The first required step in the accounting cycle is a. reversing entries. b. journalizing transactions in the book of original entry. c. analyzing transactions. d. posting transactions.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 106.
4 - 23
Correcting entries a. always affect at least one balance sheet account and one income statement account. b. affect income statement accounts only. c. affect balance sheet accounts only. d. may involve any combination of accounts in need of correction.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
Merriweather Post Pavillion received a $840 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $480 and a credit to Service Revenue $480. The correcting entry is a. debit Cash, $840; credit Accounts Receivable, $840. b. debit Cash, $360 and Accounts Receivable, $480; credit Service Revenue, $840. c. debit Cash, $360 and Service Revenue, $480; credit Accounts Receivable, $840. d. debit Accounts Receivable, $840; credit Cash, $360 and Service Revenue, $480.
Ans: C, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
If errors occur in the recording process, they a. should be corrected as adjustments at the end of the period. b. should be corrected as soon as they are discovered. c. should be corrected when preparing closing entries. d. cannot be corrected until the next accounting period.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
109.
A correcting entry a. must involve one balance sheet account and one income statement account. b. is another name for a closing entry. c. may involve any combination of accounts. d. is a required step in the accounting cycle.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
An unacceptable way to make a correcting entry is to a. reverse the incorrect entry. b. erase the incorrect entry. c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts. d. correct it immediately upon discovery.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 24 111.
Test Bank for Accounting Principles, Tenth Edition Zen Arcade paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $47,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $27,000 had been accrued at year end on December 31. The correcting entry is a. Salaries and Wages Payable .............................................. 27,000 Cash ........................................................................ 27,000 b. Cash ................................................................................... 20,000 Salaries and Wages Expense .................................. 20,000 c. Salaries and Wages Payable .............................................. 27,000 Salaries and Wages Expense .................................. 27,000 d. Cash ................................................................................... 27,000 Salaries and Wages Expense .................................. 27,000
Ans: C, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
Jawbreaker Company paid $640 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $460 and a credit to Accounts Receivable, $460. The correcting entry is a. Accounts Payable ............................................................... 640 Cash ........................................................................ 640 b. Accounts Receivable........................................................... 460 Cash ........................................................................ 460 c. Accounts Receivable........................................................... 460 Accounts Payable .................................................... 460 d. Accounts Receivable........................................................... 460 Accounts Payable ............................................................... 640 Cash ........................................................................ 1,100
Ans: D, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
113.
A lawyer collected $720 of legal fees in advance. He erroneously debited Cash for $270 and credited Accounts Receivable for $270. The correcting entry is a. Cash ................................................................................... 270 Accounts Receivable........................................................... 450 Unearned Service Revenue..................................... 720 b. Cash ................................................................................... 720 Service Revenue ..................................................... 720 c. Cash ................................................................................... 450 Accounts Receivable........................................................... 270 Unearned Service Revenue..................................... 720 d. Cash ................................................................................... 450 Accounts Receivable ............................................... 450
Ans: C, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 114.
4 - 25
On May 25, Yellow House Company received a $650 check from Grizzly Bean for services to be performed in the future. The bookkeeper for Yellow House Company incorrectly debited Cash for $650 and credited Accounts Receivable for $650. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should: a. debit Cash $650 and credit Unearned Service Revenue $650. b. debit Accounts Receivable $650 and credit Service Revenue $650. c. debit Accounts Receivable $650 and credit Cash $650. d. debit Accounts Receivable $650 and credit Unearned Service Revenue $650.
Ans: D, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
115.
On March 8, Black Candy Company bought supplies on account from the Arcade Fire Company for $880. Black Candy Company incorrectly debited Equipment for $800 and credited Accounts Payable for $800. The entries have been posted to the ledger. the correcting entry should be: a. Supplies .............................................................................. 880 Accounts Payable ......................................................... 880 b. Supplies .............................................................................. 880 Accounts Payable ......................................................... 800 Equipment..................................................................... 80 c. Supplies .............................................................................. 880 Equipment..................................................................... 880 d. Supplies .............................................................................. 880 Equipment..................................................................... 800 Accounts Payable ......................................................... 80
Ans: D, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
116.
The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2012
Cash $ 25,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 85,000 Land 120,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000
Accounts Payable $ 60,000 Salaries and Wages Payable 15,000 Mortgage Payable 85,000 Total Liabilities $160,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$530,000
The total dollar amount of assets to be classified as current assets is a. $105,000. b. $175,000. c. $190,000. d. $260,000. Ans: B, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 26
Test Bank for Accounting Principles, Tenth Edition
117.
The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2012
Cash $ 25,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 85,000 Land 120,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000
Accounts Payable $ 60,000 Salaries and Wages Payable 15,000 Mortgage Payable 85,000 Total Liabilities $160,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$530,000
The total dollar amount of assets to be classified as property, plant, and equipment is a. $200,000. b. $220,000. c. $285,000. d. $305,000. Ans: A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2012
Cash $ 25,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 85,000 Land 120,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000
Accounts Payable $ 60,000 Salaries and Wages Payable 15,000 Mortgage Payable 85,000 Total Liabilities $160,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$530,000
The total dollar amount of assets to be classified as investments is a. $0. b. $70,000. c. $85,000. d. $155,000. Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 119.
4 - 27
The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2012
Cash $ 25,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 85,000 Land 120,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000
Accounts Payable $ 60,000 Salaries and Wages Payable 15,000 Mortgage Payable 85,000 Total Liabilities $160,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$530,000
The total dollar amount of liabilities to be classified as current liabilities is a. $15,000. b. $60,000. c. $75,000. d. $160,000. Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120.
The following information is for Bright Eyes Auto Supplies: Bright Eyes Auto Supplies Balance Sheet December 31, 2012
Cash $ 20,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 90,000 Land 125,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000
Accounts Payable $ 65,000 Salaries and Wages Payable 25,000 Mortgage Payable 75,000 Total Liabilities $165,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$535,000
The total dollar amount of assets to be classified as current assets is a. $70,000. b. $110,000. c. $180,000. d. $250,000. Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 28
Test Bank for Accounting Principles, Tenth Edition
121.
The following information is for Bright Eyes Auto Supplies: Bright Eyes Auto Supplies Balance Sheet December 31, 2012
Cash $ 20,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 90,000 Land 125,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000
Accounts Payable $ 65,000 Salaries and Wages Payable 25,000 Mortgage Payable 75,000 Total Liabilities $165,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$535,000
The total dollar amount of assets to be classified as property, plant, and equipment is a. $195,000. b. $225,000. c. $285,000. d. $315,000. Ans: A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
The following information is for Bright Eyes Auto Supplies: Bright Eyes Auto Supplies Balance Sheet December 31, 2012
Cash $ 20,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 90,000 Land 125,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000
Accounts Payable $ 65,000 Salaries and Wages Payable 25,000 Mortgage Payable 75,000 Total Liabilities $165,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$535,000
The total dollar amount of assets to be classified as investments is a. $0. b. $70,000. c. $90,000. d. $125,000. Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 123.
4 - 29
The following information is for Bright Eyes Auto Supplies: Bright Eyes Auto Supplies Balance Sheet December 31, 2012
Cash $ 20,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land Held for Investment 90,000 Land 125,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000
Accounts Payable $ 65,000 Salaries and Wages Payable 25,000 Mortgage Payable 75,000 Total Liabilities $165,000
Owner’s Capital Total Liabilities and Owner’s Equity
370,000
$535,000
The total dollar amount of liabilities to be classified as current liabilities is a. $25,000. b. $65,000. c. $90,000. d. $165,000. Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
All of the following are property, plant, and equipment except a. supplies. b. machinery. c. land. d. buildings.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
125.
The first item listed under current liabilities is usually a. accounts payable. b. notes payable. c. salaries and wages payable. d. taxes payable.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
126.
Office Equipment is classified in the balance sheet as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 30 127.
Test Bank for Accounting Principles, Tenth Edition A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. an asset that a company expects to convert to cash or use up within one year.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
128.
An intangible asset a. does not have physical substance, yet often is very valuable. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the balance sheet because it lacks physical substance.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
129.
Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and long-term liabilities.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
Which of the following would not be classified a long-term liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
Which of the following liabilities are not related to the operating cycle? a. Wages payable b. Accounts payable c. Utilities payable d. Bonds payable
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Intangible assets include each of the following except a. copyrights. b. goodwill. c. land improvements. d. patents.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 133.
4 - 31
It is not true that current assets are assets that a company expects to a. realize in cash within one year. b. sell within one year. c. use up within one year. d. acquire within one year.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
135.
On a classified balance sheet, current assets are customarily listed a. in alphabetical order. b. with the largest dollar amounts first. c. in the order of liquidity. d. in the order of acquisition.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
136.
Intangible assets are a. listed under current assets on the balance sheet. b. not listed on the balance sheet because they do not have physical substance. c. long-lived assets that are often very valuable. d. listed as a long-term investment on the balance sheet.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. accounting cycle.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
138.
The most important information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and long-term liabilities.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
4 - 32 139.
Test Bank for Accounting Principles, Tenth Edition The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
What is the company’s net income for the year ending December 31, 2012? a. $6,000 b. $20,000 c. $34,000 d. $125,000 Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
140.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
FOR INSTRUCTOR USE ONLY
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
Completing the Accounting Cycle Multiple Choice 140.
4 - 33
(Cont.)
What is the balance that would be reported for owner’s equity at December 31, 2012? a. $91,000 b. $105,000 c. $125,000 d. $139,000 Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
What are total current assets at December 31, 2012? a. $26,000 b. $28,000 c. $32,000 d. $38,000 Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 34 142.
Test Bank for Accounting Principles, Tenth Edition The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Equipment Insurance expense Note payable, due 6/30/13 Patents Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 190,000 3,000 70,000 20,000 6,000 17,000 32,000 125,000 4,000 6,000
What is the book value of the equipment at December 31, 2012? a. $150,000 b. $162,000 c. $178,000 d. $190,000 Ans: B, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
143.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
FOR INSTRUCTOR USE ONLY
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
Completing the Accounting Cycle
4 - 35
Multiple Choice 143. (Cont.) What are total current liabilities at December 31, 2012? a. $19,000 b. $70,000 c. $89,000 d. $106,000 Ans: C, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
144.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
What are total long-term liabilities at December 31, 2012? a. $0 b. $19,000 c. $70,000 d. $89,000 Ans: A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 36 145.
Test Bank for Accounting Principles, Tenth Edition The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Equipment Insurance expense Note payable, due 6/30/13 Patents Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 190,000 3,000 70,000 20,000 6,000 17,000 32,000 125,000 4,000 6,000
What is total liabilities and owner’s equity at December 31, 2012? a. $194,000 b. $214,000 c. $228,000 d. $231,000 Ans: B, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Equipment Insurance expense Note payable, due 6/30/13 Patent Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense
FOR INSTRUCTOR USE ONLY
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 190,000 3,000 70,000 20,000 6,000 17,000 32,000 125,000 4,000 6,000
Completing the Accounting Cycle Multiple Choice 146.
4 - 37
(Cont.)
The sub-classifications for assets on the company’s classified balance sheet would include all of the following except: a. Current Assets. b. Property, Plant, and Equipment. c. Intangible Assets. d. Long-term Assets. Ans: D, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
147.
The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Owner’s capital (1/1/12) Owner’s drawings Depreciation expense Insurance expense Note payable, due 6/30/13 Prepaid insurance (12-month policy) Rent expense Salaries and wages expense Service revenue Supplies Supplies expense Equipment
$ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 125,000 4,000 6,000 210,000
The current assets should be listed on Postal Service’s balance sheet in the following order: a. cash, accounts receivable, prepaid insurance, equipment. b. cash, prepaid insurance, supplies, accounts receivable. c. cash, accounts receivable, prepaid insurance, supplies. d. equipment, supplies, prepaid insurance, accounts receivable, cash. Ans: C, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
148.
Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in stock of other companies and land held for future use. d. They can never include cash accounts.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 38 149.
Test Bank for Accounting Principles, Tenth Edition What is the order in which assets are generally listed on a classified balance sheet? a. Current and long-term b. Current; property, plant, and equipment; long-term investments; intangible assets c. Current; property, plant, and equipment; intangible assets; long-term investments d. Current; long-term investments; property, plant, and equipment; intangible assets
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
150. These are selected account balances on December 31, 2012. Land (location of the corporation’s office building) $100,000 Land (held for future use) 150,000 Corporate Office Building 600,000 Inventory 200,000 Equipment 450,000 Office Furniture 150,000 Accumulated Depreciation 425,000 What is the total amount of property, plant, and equipment that will appear on the balance sheet? a. $875,000 b. $1,025,000 c. $1,075,000 d. $1,300,000 Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
151.
The following selected account balances appear on the December 31, 2012 balance sheet of Superchunk Co. Land (location of the corporation’s office building) Land (held for future use) Corporate Office Building Inventory Equipment Office Furniture Accumulated Depreciation
$150,000 225,000 900,000 300,000 675,000 225,000 640,000
What is the total amount of property, plant, and equipment that will be reported on the balance sheet? a. $1,310,000 b. $1,535,000 c. $1,610,000 d. $1,950,000 Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
152. A reversing entry a. reverses entries that were made in error. b. is the exact opposite of an adjusting entry made in a previous period. c. is made when a business disposes of an asset it previously purchased. d. is made when a company sustains a loss in one period and reverses the effect with a profit in the next period.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle
4 - 39
a
153. If a company utilizes reversing entries, they will a. be made at the beginning of the next accounting period. b. not actually be posted to the general ledger accounts. c. be made before the post-closing trial balance. d. be part of the adjusting entry process.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
154.
The steps in the preparation of a worksheet do not include a. analyzing documentary evidence. b. preparing a trial balance on the worksheet. c. entering the adjustments in the adjustment columns. d. entering adjusted balances in the adjusted trial balance columns.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
155.
Balance sheet accounts are considered to be a. temporary owner's equity accounts. b. permanent accounts. c. capital accounts. d. nominal accounts.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
156.
Income Summary has a credit balance of $17,000 in S. Sufjan Co. after closing revenues and expenses. The entry to close Income Summary is a. credit Income Summary $17,000, debit Owner’s Capital $17,000. b. credit Income Summary $17,000, debit Owner’s Drawing $17,000. c. debit Income Summary $17,000, credit Owner’s Drawing $17,000. d. debit Income Summary $17,000, credit Owner’s Capital $17,000.
Ans: D, SO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
The post-closing trial balance contains only a. income statement accounts. b. balance sheet accounts. c. balance sheet and income statement accounts. d. income statement, balance sheet, and owner's equity statement accounts.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
158.
Which of the following is an optional step in the accounting cycle? a. Adjusting entries b. Closing entries c. Correcting entries d. Reversing entries
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 40 159.
Test Bank for Accounting Principles, Tenth Edition Which one of the following statements concerning the accounting cycle is incorrect? a. The accounting cycle includes journalizing transactions and posting to ledger accounts. b. The accounting cycle includes only one optional step. c. The steps in the accounting cycle are performed in sequence. d. The steps in the accounting cycle are repeated in each accounting period.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
160.
Correcting entries are made a. at the beginning of an accounting period. b. at the end of an accounting period. c. whenever an error is discovered. d. after closing entries.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
161.
On September 23, Sebagoh Company received a $350 check from Surfer Rosa Inc. for services to be performed in the future. The bookkeeper for Sebadoh Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should a. debit Cash $350 and credit Unearned Service Revenue $350. b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350. c. debit Accounts Receivable $350 and credit Cash $350. d. debit Accounts Receivable $350 and credit Service Revenue $350.
Ans: B, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
162.
All of the following are owner's equity accounts except a. the Capital account. b. Capital Stock. c. Investment in Stock. d. Retained Earnings.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
163.
Current liabilities a. are obligations that the company is to pay within the forthcoming year. b. are listed in the balance sheet in order of their expected maturity. c. are listed in the balance sheet, starting with accounts payable. d. should not include long-term debt that is expected to be paid within the next year.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
164. The use of reversing entries a. is a required step in the accounting cycle. b. changes the amounts reported in the financial statements. c. simplifies the recording of subsequent transactions. d. is required for all adjusting entries.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 165.
4 - 41
The classified balance sheet is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with certain variations in format as compared to GAAP.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
166.
IFRS requires the use of a. the term balance sheet. b. the term statement of financial position. c. neither balance sheet nor statement of financial position, but recommends use of the term balance sheet. d. neither balance sheet nor statement of financial position, but recommends use of the term statement of financial position.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
167.
IFRS a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP. b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP. c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP. d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
168.
Most companies that follow IFRS present balance sheet (statement of financial position) information in this order: a. current assets; investments; property, plant and equipment; intangible assets; current liabilities; long term liabilities; owners' equity. b. intangible assets; property, plant and equipment; investments; current assets; current liabilities; owners' equity; long term liabilities. c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity. d. noncurrent assets; current asset; equity; noncurrent liabilities; current liabilities.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
169.
Under IFRS and under GAAP, current assets are listed in IFRS GAAP a. order of liquidity order of liquidity b. reverse order of liquidity order of liquidity. c. order of liquidity reverse order of liquidity d. reverse order of liquidity reverse order of liquidity
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 42 170.
Test Bank for Accounting Principles, Tenth Edition The subtotal net assets is used in a. both GAAP and IFRS. b. GAAP but not IFRS. c. IFRS but not GAAP. d. neither IFRS nor GAAP.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
171.
Both IFRS and GAAP require disclosure about a. accounting policies followed. b. judgements that management has made in the process of applying the entity's accounting policies. c. the key assumptions and estimation uncertainty. d. all of the above.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
Under IFRS a. comparative prior-period information must be presented, but financial statements need not be provided annually. b. comparative prior-period informaton must be presented, and financial statements must be provided annually. c. comparative prior-period information is not required, and financial statements need not be provided annually. d. comparative prior-period information is not required, but financial statements must be provided annually.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
173.
The use of fair value to report assets a. is not allowed under GAAP or IFRS. b. is required by GAAP and IFRS. c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly. d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
174.
Under IFRS a. companies can apply fair value to property, plant, and equipment and natural resources. b. companies can apply fair value to property, plant, and equipment but not to natural resources. c. companies can apply fair value to neither property, plant, and equipment nor natural resources. d. companies can apply fair value to natural resources but not to property, plant, and equipment.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle 175.
4 - 43
The IASB and FASB are working on a converged statement of financial position using the headings of a. assets, liabilities, and owner's equity. b. revenues and expenses. c. assets, liabilities, revenues, expenses and owner's equity. d. operating, investing, and financing.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.
d c b a c c d b d c c a b c c a c b b b
58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.
c d d c b c c c d b d d b d c a b d b c
78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.
d c c c b c b a a a d a b c b b c a a c
98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.
b b c c d c c c d c b c b c d c d d b a
118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
c c c a c c a b b d a d a d c d b c c b
138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. a 152. a 153. 154. 155. 156. 157.
c c c c b c a b d c d d a a b a a b d b
158. 159. 160. 161. 162. 163. a 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.
d b c b c a c d d d d b c d b d a d
BRIEF EXERCISES BE 176 Use the following income statement for the year 2012 for Belle Company to prepare entries to close the revenue and expense accounts for the company. Service revenue Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Total expenses Net income (loss)
$95,000 $40,000 12,500 8,700 61,200 $ 33,800
Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 44
Test Bank for Accounting Principles, Tenth Edition
Solution 176
(5 min.)
Service Revenue .................................................................................. Income Summary......................................................................
95,000
Income Summary ................................................................................. Salaries and Wages Expense ................................................... Rent Expense ........................................................................... Advertising Expense .................................................................
61,200
95,000 40,000 12,500 8,700
BE 177 Sebastien Company earned net income of $49,000 during 2012. The company had owner drawings totalling $20,000 during the period. Prepare the entries to close Income Summary and the Owner’s Drawings account. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 177
(3 min.)
Income Summary ................................................................................. Owner’s Capital ........................................................................
49,000
Owner’s Capital .................................................................................... Owner’s Drawings.....................................................................
20,000
49,000
20,000
BE 178 At April 1, 2012, Spiderland Company reported a balance of $20,000 in the Owner’s Capital account. SpiderlandCompany earned revenues of $47,000 and incurred expenses of $32,000 during April 2012. The company had owner drawings of $10,000 during the month. (a) Prepare the entries to close Income Summary and the Owner’s Drawings acccount at April 30, 2012. (b) What is the balance in Owner’s Capital on the April 30, 2012 post-closing trial balance? Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 178
(3 min.)
(a) Income Summary .......................................................................... Owner’s Capital ................................................................
15,000
Owner’s Capital............................................................................. Owner’s Drawings ............................................................
10,000
15,000
10,000
(b) $20,000 + $15,000 – $10,000 = $25,000 BE 179 Identify which of the following are temporary accounts of Sabrina Company. (1) Owner’s Capital (2) Owner’s Drawings (3) Equipment (4) Accumulated Depreciation (5) Depreciation Expense Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Solution 179
4 - 45
(3 min.)
(2) Owner’s, Drawings, (5) Depreciation Expense BE 180 Identify which of the following accounts would have balances on a post-closing trial balance. (1) Service Revenue (2) Income Summary (3) Notes Payable (4) Interest Expense (5) Cash Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(3 min.)
(3) Notes Payable, (5) Cash BE 181 Prepare the necessary correcting entry for each of the following. a. A payment on account of $540 was debited to Accounts Payable $450 and credited to Cash $450. b. The collection of Accounts Receivable of $680 was recorded as a debit to Cash $680 and a credit to Service Revenue $680. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181
(4 min.)
a. Accounts Payable .......................................................................... Cash ...................................................................................
90
b. Service Revenue ............................................................................ Accounts Receivable ..........................................................
680
90
680
BE 182 Prepare the necessary correcting entry for each of the following. a. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit to Cash. b. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a credit to Accounts Payable. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 182
(4 min.)
a. Salaries and Wages Expense ........................................................ Supplies Expense ..................................................................
5,000
b. Supplies ......................................................................................... Equipment .............................................................................
1,000
FOR INSTRUCTOR USE ONLY
5,000
1,000
4 - 46
Test Bank for Accounting Principles, Tenth Edition
BE 183 The following accounts were included on Aeroplane Consultants adjusted trial balance at December 31, 2012: Accounts payable Accounts receivable Cash Owner’s Capital Owner’s Drawings Interest expense Note payable, due 8/31/15 Supplies Service revenue Equipment
$ 7,200 12,000 3,500 40,000 10,000 3,000 60,000 1,000 39,000 5,000
(a) What are total current assets? (b) What are total current liabilities? Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(4 min.)
(a) $12,000 + $3,500 + $1,000 = $16,500 (b) $7,200 BE 184 The following items are taken from the adjusted trial balance of Westley Company for the month ending July 31, 2012: Accounts payable Accounts receivable Accumulated depreciation – equipment Cash Depreciation expense Equipment Owner’s capital 7/1/12 Service revenue Supplies
$ 2,000 3,300 8,000 2,100 2,000 54,000 52,000 33,000 1,200
Prepare the current assets section of Westley’s classified balance sheet. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(4 min.)
Current assets: Cash Accounts receivable Supplies Total current assets
$2,100 3,300 1,200 $6,600
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle
4 - 47
BE 185 The following information is available for Elwes Company for the year ended December 31, 2012: Accounts payable Accumulated depreciation, equipment Owner’s capital Intangible assets Notes payable (due in 5 years) Accounts receivable Cash Short-term investments Equipment Long-term investments
$ 2,300 4,000 9,300 2,300 5,000 1,500 1,300 1,000 8,800 5,700
Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2012. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 185
(10 min.) ELWES COMPANY Balance Sheet December 31, 2012
Assets Current assets Cash Short-term investments Accounts receivable Total current assets Investments Long-term investments Property, plant, and equipment Equipment Less Accumulated depreciation, equipment Intangible assets Total assets Liabilities and Owner’s Equity Current liabilities Accounts payable Long-term liabilities Notes payable Total liabilities Owner’s equity Owner’s capital Total liabilities and owner’s equity
FOR INSTRUCTOR USE ONLY
$1,300 1,000 1,500 $3,800 5,700 8,800 4,000
4,800 2,300 $16,600
$2,300 5,000 $7,300 9,300 $16,600
4 - 48
Test Bank for Accounting Principles, Tenth Edition
BE 186 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. Current assets B. Long-term investments C. Property, plant, and equipment D. Intangible assets
E. Current liabilities F. Long-term liabilities G. Owner’s equity H. Not on the balance sheet
_____ 1.
Accumulated Depreciation
_____ 6.
Inventory
_____ 2.
Owner’s Capital
_____ 7.
Patents
_____ 3.
Interest Expense
_____ 8.
Prepaid Rent
_____ 4.
Salaries and Wages Payable
_____ 9.
Mortgage Payable
_____ 5.
Owner’s, Drawings
_____ 10.
Land Held for Investment
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 186 1. 2. 3. 4. 5.
C G H E H
(5 min.) 6. 7. 8. 9. 10.
A D A F B
a
BE 187
Inigo Company prepared the following adjusting entries at year end on December 31, 2012: (a) Interest Expense.......................................................................... 300 Interest Payable .................................................................. 300 (b)
(c)
Interest Receivable ...................................................................... Interest Revenue.................................................................
450
Salaries and Waes Expense ........................................................ Salaries and Wages Payable ..............................................
3,500
450
3,500
In an effort to minimize errors in recording transactions, Inigo Company utilizes reversing entries. Prepare reversing entries on January 1, 2013. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle a
Solution 187
(a)
(b)
(c)
4 - 49
(5 min.)
Reverse the entry to accrue interest expense. Interest Payable .......................................................................... Interest Expense .................................................................
300
Reverse the entry to accrue interest revenue. Interest Revenue ......................................................................... Interest Receivable .............................................................
450
Reverse the entry to accrue salaries expense. Salary Payable ............................................................................ Salary Expense ..................................................................
3,500
FOR INSTRUCTOR USE ONLY
300
450
3,500
4 - 50
Test Bank for Accounting Principles, Tenth Edition
EXERCISES Ex. 188 The worksheet for Montoya Company has been completed through the adjusted trial balance. You are ready to extend each amount to the appropriate financial statement column. Indicate for each account, the financial statement column to which the account should be extended by placing a check mark () in the appropriate column. ——————————————————————————————————————————— Income Statement Balance Sheet Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash ——————————————————————————————————————————— (2) Owner’s Capital ——————————————————————————————————————————— (3) Mortgage Payable ——————————————————————————————————————————— (4) Interest Receivable ——————————————————————————————————————————— (5) Supplies ——————————————————————————————————————————— (6) Accounts Payable ——————————————————————————————————————————— (7) Short-term Investments ——————————————————————————————————————————— (8) Maintenance and Repairs Expense ——————————————————————————————————————————— (9) Unearned Service Revenue ——————————————————————————————————————————— (10) Equipment ——————————————————————————————————————————— (11) Depreciation Expense ——————————————————————————————————————————— (12) Interest Revenue ——————————————————————————————————————————— (13) Salaries and Wages Expense ——————————————————————————————————————————— (14) Owner’s Drawings ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment ——————————————————————————————————————————— (16) Utilities Expense ——————————————————————————————————————————— (17) Salaries and Wages Payable ——————————————————————————————————————————— (18) Accounts Receivable ——————————————————————————————————————————— (19) Notes Payable ——————————————————————————————————————————— (20) Service Revenue ——————————————————————————————————————————— Ans: N/A, SO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Solution 188
4 - 51
(10 min.)
Income Statement Balance Sheet Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash ——————————————————————————————————————————— (2) Owner’s Capital ——————————————————————————————————————————— (3) Mortgage Payable ——————————————————————————————————————————— (4) Interest Receivable ——————————————————————————————————————————— (5) Supplies ——————————————————————————————————————————— (6) Accounts Payable ——————————————————————————————————————————— (7) Short-term Investments ——————————————————————————————————————————— (8) Maintenance and Repairs Expense ——————————————————————————————————————————— (9) Unearned Service Revenue ——————————————————————————————————————————— (10) Equipment ——————————————————————————————————————————— (11) Depreciation Expense ——————————————————————————————————————————— (12) Interest Revenue ——————————————————————————————————————————— (13) Salaries and Wages Expense ——————————————————————————————————————————— (14) Owner’s Drawings ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment ——————————————————————————————————————————— (16) Utilities Expense ——————————————————————————————————————————— (17) Salaries and Wages Payable ——————————————————————————————————————————— (18) Accounts Receivable ——————————————————————————————————————————— (19) Notes Payable ——————————————————————————————————————————— (20) Service Revenue ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
4 - 52
Test Bank for Accounting Principles, Tenth Edition
Ex. 189 Indicate the worksheet column (income statement Dr., balance sheet Cr., etc.) to which each of the following accounts would be extended. Account
Worksheet Column
a.
Accounts Receivable
________________
b.
Accumulated Depreciation—Equip.
________________
c.
Service Revenue
________________
d.
Interest Expense
________________
e.
Owner’s Drawings
________________
f.
Unearned Service Revenue
________________
Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 189 a. b. c. d. e. f.
(5 min.)
Balance sheet Balance sheet Income statement Income statement Balance sheet Balance sheet
Dr. Cr. Cr. Dr. Dr. Cr.
Ex. 190 The worksheet for Gibler Rental Company appears below. Using the adjustment data below, complete the worksheet. Add any accounts that are necessary. Adjustment data: (a) (b) (c) (d)
Prepaid rent expired during August, $2. Depreciation expense on equipment for the month of August, $8. Supplies on hand on August 31 amounted to $6. Salaries and wages expense incurred at August 31 but not yet paid amounted to $10.
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Ex. 190
(Cont.)
Account Titles Cash Accounts Receivable Prepaid Rent Supplies Equipment Accum. Depreciation— Equipment Accounts Payable Owner’s Capital Owner’s Drawings Rent Revenue Depreciation Expense Rent Expense Salaries and Wages Expense Totals Supplies Expense Salaries Payable Totals Net Income Totals
4 - 53
GIBLER RENTAL COMPANY Worksheet For the Month Ended August 31, 2012 Trial Balance
Adjustments
Adjusted Trial Balance
Debit Credit 20 12 8 10 50
Debit
Debit
Credit
Credit
Income Statement Debit
Credit
Balance Sheet Debit
Credit
10 20 25 2 77 6 4 20 132
132
Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 54
Test Bank for Accounting Principles, Tenth Edition
Solution 190
(15 min.) GIBLER RENTAL COMPANY Worksheet For the Month Ended August 31, 2012
Account Titles Cash Accounts Receivable Prepaid Rent Supplies Office Equipment Accum. Depreciation— Equipment Accounts Payable Owner’s Capital Owner’s Drawings Rent Revenue Depreciation Expense Rent Expense Salaries and Wages Expense Totals Supplies Expense Salaries and Wages Payable Totals Net Income Totals
Trial Balance
Adjustments
Debit Credit 20 12 8 10 50
Debit
Credit
(a) 2 (c) 4
10 20 25
Adjusted Trial Balance Debit Credit 20 12 6 6 50
(b) 8
2
Income Statement Debit
Balance Sheet
Credit
Debit Credit 20 12 6 6 50
18 20 25
18 20 25
2 77
2 77
77
6 4
(b) 8 (a) 2
14 6
14 6
20 132
(d) 10
30
30
(c) 4
4
4
132
(d) 10 24 24
150
10 150
FOR INSTRUCTOR USE ONLY
54 23 77
77
96
77
96
10 73 23 96
Completing the Accounting Cycle
4 - 55
Ex. 191 The account balances appearing on the trial balance (below) were taken from the general ledger of Irick's Copy Shop at September 30. Additional information for the month of September which has not yet been recorded in the accounts is as follows: (a) A physical count of supplies indicates $300 on hand at September 30. (b) The amount of insurance that expired in the month of September was $200. (c) Depreciation on equipment for September was $400. (d) Rent owed on the copy shop for the month of September was $600 but will not be paid until October. Instructions Using the above information, complete the worksheet on the following page for Irick's Copy Shop for the month of September. IRICK’S COPY SHOP Worksheet For the Month Ended September 30, 2012
Account Titles Cash Supplies Prepaid Insurance Equipment Accum. Depreciation— Equipment Accounts Payable Notes Payable Owner’s Capital Owner’s Drawings Service Revenue Utilities Expense Totals Supplies Expense Insurance Expense Depreciation Expense Rent Expense Rent Payable Totals Net Income
Trial Balance
Adjustments
Adjusted Trial Balance
Debit 1,000 1,100 2,200 24,000
Debit
Debit
Credit
Credit
Credit
Income Statement Debit
Credit
Balance Sheet Debit
Credit
4,500 2,400 4,000 15,300 2,400 4,900 400 31,100 31,100
Totals Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 56
Test Bank for Accounting Principles, Tenth Edition
Solution 191 (15 min.)
IRICK’S COPY SHOP Worksheet For the Month Ended September 30, 2012
Trial Balance
Adjustments
Account Titles
Debit
Debit
Cash Supplies Prepaid Insurance Equipment Accum. Depreciation— Equipment Accounts Payable Notes Payable Owner’s Capital Owner’s Drawings Service Revenue Utilities Expense Totals Supplies Expense Insurance Expense Depreciation Expense Rent Expense Rent Payable Totals Net Income Totals
1,000 1,100 2,200 24,000
Credit
Credit
Adjusted Trial Balance Debit Credit
Income Statement Debit
Credit
1,000 (a) 800 300 (b) 200 2,000 24,000 4,500
2,400
4,900
2,400 4,000 15,300
2,400 4,000 15,300
4,900
2,400 4,900
(a) 800 (b) 200 (c) 400 (d) 600
4,900
400
400
800 200 400 600
800 200 400 600
(d) 600
2,000
600 2,000 32,100 32,100
2,400 2,500 4,900
600 4,900 29,700 27,200 2,500 4,900 29,700 29,700
Ex. 192 The adjustments columns of the worksheet for Mandy Company are shown below. Adjustments Debit Credit
Account Titles Accounts Receivable Prepaid Insurance Accumulated Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense
900 650 770 1,200 900 1,200 650 770 3,520
Credit
4,900
2,400
400 31,100 31,100
Debit 1,000 300 2,000 24,000
(c) 400
2,400 4,000 15,300
Balance Sheet
3,520
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Ex. 192
4 - 57
(Cont.)
Instructions (a) Prepare the adjusting entries. (b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 192
(10 min.)
(a) Accounts Receivable ................................................................ Service Revenue ................................................................
900
Insurance Expense ................................................................... Prepaid Insurance...............................................................
650
Depreciation Expense .............................................................. Accumulated Depreciation ..................................................
770
Salaries and Wages Expense ................................................... Salaries and Wages Payable ..............................................
1,200
900 650 770
(b) Income Statement Dr. Cr. Accounts Receivable Prepaid Insurance Accum. Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense
Balance Sheet Dr. Cr. X X X X
X X X X
Ex. 193 Selected worksheet data for Patinkin Company are presented below.
Account Titles Accounts Receivable Prepaid Insurance Supplies Accumulated Depreciation Salaries and Wages Payable Service Revenue Insurance Expense Depreciation Expense Supplies Expense Salaries and Wages Expense
Trial Balance Dr. Cr. ? 24,000 7,000 12,000 ? 88,000
?
Adjusted Trial Balance Dr. Cr. 31,000 18,000 ? ? 7,600 100,000 ? 8,000 5,200 49,000
FOR INSTRUCTOR USE ONLY
1,200
4 - 58
Test Bank for Accounting Principles, Tenth Edition
Ex. 193
(Cont.)
Instructions (a) Fill in the missing amounts. (b) Prepare the adjusting entries that were made. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193 (a)
(10 min.)
Accounts Receivable—$19,000 ($31,000 – $12,000). Supplies—$1,800 ($7,000 – $5,200). Accumulated Depreciation—$20,000 ($12,000 + $8,000). Salaries and Wages Payable—$0 No liability recorded until adjustments are made. Insurance Expense—$6,000 ($24,000 – $18,000). Salaries and Wages Expense—$41,400 ($49,000 – $7,600).
(b) Accounts Receivable ................................................................ Service Revenue.................................................................
12,000
Insurance Expense ................................................................... Prepaid Insurance ...............................................................
6,000
Supplies Expense ..................................................................... Supplies ..............................................................................
5,200
Depreciation Expense ............................................................... Accumulated Depreciation ..................................................
8,000
Salaries and Wages Expense ................................................... Salaries and Wages Payable ..............................................
7,600
12,000 6,000 5,200 8,000 7,600
Ex. 194 These financial statement items are for Rugen Company at year-end, July 31, 2012. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue
$ 2,980 45,700 19,100 38,000 4,100 57,200 6,500
Notes payable (long-term) $ 3,000 Cash 7,200 Accounts receivable 9,780 Accumulated depreciation 6,000 Owner’s Drawings 4,000 Depreciation expense 4,000 Owner’s capital (beginning 48,000 of the year)
Instructions (a) Prepare an income statement and an owner's equity statement for the year. The owner did not make any new investments during the year. (b) Prepare a classified balance sheet at July 31. Ans: N/A, SO: 1,6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Solution 194
4 - 59
(15 min.)
(a)
RUGEN COMPANY Income Statement For the Year Ended July 31, 2012 ——————————————————————————————————————————— Revenues Service revenue .......................................................................... $57,200 Rent revenue............................................................................... 6,500 Total revenues ..................................................................... $63,700 Expenses Salaries and wages expense ....................................................... 45,700 Utilities expense .......................................................................... 19,100 Depreciation expense .................................................................. 4,000 Total expense ...................................................................... 68,800 Net loss ................................................................................................ $ (5,100) RUGEN COMPANY Owner's Equity Statement For the Year Ended July 31, 2012 ——————————————————————————————————————————— Owner’s Capital, August 1, 2011 .......................................................... $48,000 Less: Net loss ..................................................................................... $5,100 Drawings ..................................................................................... 4,000 9,100 Owner’s Capital, July 31, 2012............................................................. $38,900
(b)
RUGEN COMPANY Balance Sheet July 31, 2012 ——————————————————————————————————————————— Assets Current assets Cash ........................................................................................... $7,200 Accounts receivable .................................................................... 9,780 Total current assets .............................................................. $16,980 Property, plant, and equipment Equipment ................................................................................... 38,000 Less: Accumulated depreciation .................................................. 6,000 32,000 Total assets .......................................................................... $48,980 Liabilities and Owner's Equity Current liabilities Accounts payable ........................................................................ Salaries and wages payable ........................................................ Total current liabilities ............................................................. Long-term liabilities Notes payable ............................................................................. Total liabilities ......................................................................... Owner's equity Owner’s capital ............................................................................ Total liabilities and owner's equity........................................... FOR INSTRUCTOR USE ONLY
$4,100 2,980 $ 7,080 3,000 10,080 38,900 $48,980
4 - 60
Test Bank for Accounting Principles, Tenth Edition
Ex. 195 Prepare the necessary closing entries based on the following selected accounts. Accumulated Depreciation Depreciation Expense Owner’s Capital Owner’s Drawings Salaries and Wages Expense Service Revenue
$10,000 7,000 20,000 12,000 18,000 31,000
Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 195
(8–10 min.)
Service Revenue .................................................................................. Income Summary......................................................................
31,000
Income Summary ................................................................................. Depreciation Expense ............................................................... Salaries and Wages Expense ...................................................
25,000
Income Summary ................................................................................. Owner’s Capital ........................................................................
6,000
Owner’s Capital .................................................................................... Owner’s Drawings.....................................................................
12,000
31,000
7,000 18,000
6,000
12,000
Ex. 196 All revenue and expense accounts have been closed at the end of the calendar year for Patton Company. The Income Summary account has total debits of $520,000 and total credits of $600,000. As of the same date, Owner’s Capital has a balance of $115,000, and Owner’s Drawings has a balance of $48,000. Instructions (a) Journalize the entries required to complete the closing of the accounts. (b) Prepare an owner's equity statement for the year ended December 31, 2012. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196 (a)
(10 min.)
Income Summary ........................................................................ Owner’s Capital................................................................... (To close net income to capital)
80,000
Owner’s Capital ........................................................................... Owner’s Drawings ............................................................... (To close drawings to capital)
48,000
FOR INSTRUCTOR USE ONLY
80,000
48,000
Completing the Accounting Cycle Solution 196
4 - 61
(cont.)
(b)
PATTON COMPANY Owner's Equity Statement For the Year Ended December 31, 2012 Owner’s Capital, January 1 Add: Net income
$115,000 80,000 195,000 48,000 $147,000
Less: Drawings Owner’s Capital, December 31 Ex. 197
At March 31, account balances after adjustments for Vizzini Cinema are as follows: Accounts Cash Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Owner’s, Capital Owner’s, Drawings Admission Ticket Revenues Popcorn Revenues Candy Revenues Advertising Expense Supplies Expense Depreciation Expense Rent Expense Salaries and Wages Expense Utilities Expense
Account Balances (After Adjustment) $ 6,000 4,000 50,000 12,000 5,000 20,000 12,000 60,000 32,000 21,000 18,000 19,000 4,000 28,000 24,000 5,000
Instructions Prepare the closing journal entries for Vizzini Cinema. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197
(10 min.)
Mar. 31 Admission Ticket Revenues ................................................. Popcorn Revenues............................................................... Candy Revenues.................................................................. Income Summary ....................................................... (To close revenue accounts)
FOR INSTRUCTOR USE ONLY
60,000 32,000 21,000 113,000
4 - 62
Test Bank for Accounting Principles, Tenth Edition
Solution 197
(cont.)
31 Income Summary ................................................................. Advertising Expense................................................... Supplies Expense....................................................... Depreciation Expense ................................................ Rent Expense............................................................. Salaries and Wages Expense..................................... Utilities Expense ......................................................... (To close expense accounts)
98,000
31 Income Summary ................................................................. Owner’s Capital .......................................................... (To transfer net income to capital)
15,000
31 Owner’s Capital .................................................................... Owner’s Drawings ...................................................... (To close drawings to capital)
12,000
18,000 19,000 4,000 28,000 24,000 5,000
15,000
12,000
Ex. 198 Presented below is an adjusted trial balance for Shawn Company, at December 31, 2012. Cash Accounts receivable Prepaid insurance Equipment Depreciation expense Owner’s Drawings Advertising expense Rent expense Salaries and wages expense Insurance expense
$5,700 20,000 15,000 35,000 7,000 1,500 1,400 800 12,000 1,600 $100,000
Accounts payable Notes payable Accumulated depreciation— Equipment Service revenue Owner’s capital Unearned service revenue
$10,000 9,000 14,000 27,000 24,000 16,000
$100,000
Instructions (a) Prepare closing entries for December 31, 2012. (b) Determine the balance in the Owner’s Capital account after the entries have been posted. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 198 (a)
(10 min.)
Computation of Net Income: Service revenue Depreciation expense Salaries and wages expense Insurance expense Advertising expense Rent expense Net Income
$27,000 $7,000 12,000 1,600 1,400 800
FOR INSTRUCTOR USE ONLY
22,800 $4,200
Completing the Accounting Cycle Solution 198
(cont.)
Dec. 31 Service Revenue ................................................................ Income Summary ....................................................... (To close revenue account)
27,000
31 Income Summary................................................................ Depreciation Expense ................................................ Advertising Expense .................................................. Rent Expense ............................................................ Salaries and Wages Expense .................................... Insurance Expense .................................................... (To close expense accounts)
22,800
31 Income Summary................................................................ Owner’s Capital.......................................................... (To close net income to capital)
4,200
31 Owner’s Capital .................................................................. Owner’s Drawings ...................................................... (To close drawings to capital)
1,500
(b)
4 - 63
27,000
7,000 1,400 800 12,000 1,600
4,200
1,500
Owner’s Capital 1,500 Bal.
24,000 4,200 26,700
Ex. 199 The adjusted account balances of the Fitness Center at July 31 are as follows: Accounts Account Balances Cash $11,000 Accounts Receivable 15,000 Supplies 4,000 Prepaid Insurance 8,000 Buildings 300,000 Accumulated Depreciation— Buildings 120,000 Accounts Payable 19,000 Owner’s Capital 195,000 Owner’s Drawings 15,000
Accounts Account Balances Service Revenue $100,000 Interest Revenue 8,000 Depreciation Expense 27,000 Insurance Expense 6,000 Salaries and Wages Expense 35,000 Supplies Expense 9,000 Utilities Expense 12,000
Instructions Prepare the end of the period closing entries for the Fitness Center. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
4 - 64
Test Bank for Accounting Principles, Tenth Edition
Solution 199 July 31
31
31
31
(10 min.)
Service Revenue................................................................. Interest Revenue................................................................. Income Summary ....................................................... (To close revenue accounts)
100,000 8,000
Income Summary ................................................................ Depreciation Expense ................................................ Insurance Expense..................................................... Salaries and Wages Expense..................................... Supplies Expense....................................................... Utilities Expense ......................................................... (To close expense accounts)
89,000
Income Summary ................................................................ Owner’s Capital .......................................................... (To close net income to capital)
19,000
Owner’s Capital................................................................... Owner’s Drawings ...................................................... (To close drawings to capital)
15,000
108,000
27,000 6,000 35,000 9,000 12,000
19,000
15,000
Ex. 200 The income statement of Fezzik's Shoe Repair is as follows: FEZZIK’S SHOE REPAIR Income Statement For the Month Ended April 30, 2012 Revenue Service Revenue ......................................................................... Expenses Salaries and Wages Expense ...................................................... Depreciation Expense.................................................................. Utilities Expense .......................................................................... Rent Expense .............................................................................. Supplies Expense ........................................................................ Total Expenses..................................................................... Net Income ...........................................................................................
$8,500 $4,200 350 400 600 1,050 6,600 $1,900
On April 1, the Owner’s Capital account had a balance of $12,900. During April, Fezzik withdrew $3,000 cash for personal use. Instructions (a) Prepare closing entries at April 30. (b) Prepare an owner's equity statement for the month of April. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Solution 200
4 - 65
(10 min.)
(a) Service Revenue .......................................................................... Income Summary .................................................................
8,500
Income Summary.......................................................................... Salaries and Wages Expense .............................................. Supplies Expense................................................................ Rent Expense ..................................................................... Utilities Expense.................................................................. Depreciation Expense .........................................................
6,600
Income Summary.......................................................................... Owner’s Capital ....................................................................
1,900
Owner’s Capital ............................................................................ Owner’s Drawings ................................................................
3,000
(b)
8,500
4,200 1,050 600 400 350
1,900
3,000
FEZZIK'S SHOE REPAIR Owner's Equity Statement For the Month Ended April 30, 2012 Owner’s Capital, April 1 Add: Net Income
$12,900 1,900 14,800 3,000 $11,800
Less: Drawings Owner’s Capital, April 30 Ex. 201
Identify which of the following accounts would appear in a post-closing trial balance. Accumulated Depreciation—Equipment Depreciation Expense Interest Payable
Owner’s Drawings Service Revenue Equipment
Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 201
(3 min.)
The following accounts would appear in a post-closing trial balance: Accumulated Depreciation—Equipment Interest Payable Equipment
FOR INSTRUCTOR USE ONLY
4 - 66
Test Bank for Accounting Principles, Tenth Edition
Ex. 202 The trial balances of Orton Company follow with the accounts arranged in alphabetic order. Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Orton Company. Trial Balances Unadjusted Adjusted Post-Closing Accounts Payable $10,000 $10,000 $10,000 Accounts Receivable 2,200 3,200 3,200 Accumulated Depreciation—Equipment 13,000 17,000 17,000 Advertising Expense 0 16,300 0 Cash 60,000 60,000 60,000 Depreciation Expense 0 4,000 0 Equipment 75,000 75,000 75,000 Owner’s Capital 82,200 82,200 102,400 Owner’s Drawings 11,000 11,000 0 Prepaid Advertising 17,800 1,500 1,500 Prepaid Rent 15,000 11,000 11,000 Rent Expense 0 4,000 0 Service Revenue 96,000 105,000 0 Supplies 3,200 700 700 Supplies Expense 2,000 4,500 0 Unearned Service Revenue 23,000 15,000 15,000 Salaries and Wages Expense 38,000 45,000 0 Salaries and Wages Payable 0 7,000 7,000 Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 202 (a)
(20 min.)
Adjusting Entries Depreciation Expense.................................................................. Accumulated Depreciation—Equipment ..............................
4,000 4,000
Advertising Expense .................................................................... Prepaid Advertising .............................................................
16,300
Unearned Service Revenue ......................................................... Service Revenue.................................................................
8,000
Accounts Receivable ................................................................... Service Revenue.................................................................
1,000
Rent Expense .............................................................................. Prepaid Rent .......................................................................
4,000
Supplies Expense ........................................................................ Supplies ..............................................................................
2,500
Salaries and Wages Expense ...................................................... Salaries and Wages Payable ..............................................
7,000
FOR INSTRUCTOR USE ONLY
16,300 8,000 1,000 4,000 2,500 7,000
Completing the Accounting Cycle Solution 202 (b)
4 - 67
(cont.)
Closing Entries Service Revenue ......................................................................... Income Summary................................................................
105,000 105,000
Income Summary ........................................................................ Advertising Expense ........................................................... Depreciation Expense......................................................... Rent Expense ..................................................................... Supplies Expense ............................................................... Salaries and Wages Expense .............................................
73,800
Income Summary ........................................................................ Owner’s Capital ..................................................................
31,200
Owner’s Capital ........................................................................... Owner’s Drawings...............................................................
11,000
16,300 4,000 4,000 4,500 45,000 31,200 11,000
Ex. 203 Indicate the proper sequence of the steps in the accounting cycle by placing numbers 1-8 in the blank spaces. ____
a.
Analyze business transactions.
____
b.
Journalize and post adjusting entries.
____
c.
Journalize and post closing entries.
____
d.
Journalize the transactions.
____
e.
Prepare a post-closing trial balance.
____
f.
Prepare a trial balance.
____
g.
Prepare financial statements.
____
h.
Post to ledger accounts.
Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203 a. b. c. d.
1 6 7 2
(4 min.) e. f. g. h.
8 4 5 3
FOR INSTRUCTOR USE ONLY
4 - 68
Test Bank for Accounting Principles, Tenth Edition
Ex. 204 Prepare the necessary correcting entry for each of the following. a. A collection on account of $380 from a customer was credited to Accounts Receivable $830 and debited to Cash $830. b. The purchase of supplies on account for $310 was recorded as a debit to Equipment $310 and a credit to Accounts Payable $310. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204
(5 min.)
a. Accounts Receivable ...................................................................... Cash ......................................................................................
450
b. Supplies ......................................................................................... Equipment .............................................................................
310
450
310
Ex. 205 An examination of the accounts of Savage Company for the month of June revealed the following errors after the transactions were journalized and posted. 1. A check for $800 from R. Wright, a customer on account, was debited to Cash $800 and credited to Service Revenue, $800. 2. A payment for Advertising Expense costing $430 was debited to Utilities Expense, $340 and credited to Cash $340. 3. A bill for $850 for Supplies purchased on account was debited to Equipment, $580 and credited to Accounts Payable $580. Instructions Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. Explain how the transaction as originally recorded affected net income for the month of June. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 205
(10 min.)
1. Service Revenue .................................................................................. Accounts Receivable ................................................................... (To correct error in recording collection of accounts receivable)
800 800
The transaction as originally recorded overstated net income by $800. 2. Advertising Expense ............................................................................. Utilities Expense .......................................................................... Cash ............................................................................................ (To correct errors in recording advertising expense) The transaction as originally recorded overstated net income by $90.
FOR INSTRUCTOR USE ONLY
430 340 90
Completing the Accounting Cycle Solution 205
4 - 69
(cont.)
3. Supplies ............................................................................................... Equipment ................................................................................... Accounts Payable ........................................................................ (To correct error in recording office supplies)
850 580 270
The transaction as originally recorded had no effect on net income. Ex. 206 As Mel Smith was doing his year-end accounting, he noticed that the bookkeeper had made errors in recording several transactions. The erroneous transactions are as follows: (a)
A check for $700 was issued for goods previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $700.
(b)
A check for $380 was received as payment on account. The bookkeeper debited Accounts Payable for $830 and credited Accounts Receivable for $830.
(c)
When making the entry to record the year's depreciation expense, the bookkeeper debited Accumulated Depreciation—Equipment for $1,000 and credited Cash for $1,000.
(d)
When accruing interest on a note payable, the bookkeeper debited Interest Receivable for $200 and credited Interest Payable for $200.
Instructions Prepare the appropriate correcting entries. (Do not reverse the original entries.) Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206 (a) (b)
(c)
(d)
(5 min.)
Accounts Payable........................................................................ Accounts Receivable ..........................................................
700
Cash ........................................................................................... Accounts Receivable ................................................................... Accounts Payable ...............................................................
380 450
Cash ........................................................................................... Depreciation Expense ................................................................. Accumulated Depreciation—Equipment..............................
1,000 1,000
Interest Expense ......................................................................... Interest Receivable .............................................................
200
700
830
2,000 200
Ex. 207 Peter Cook, CPA, was asked by Carol Kane to review the accounting records and prepare the financial statements for her upholstering shop. Peter reviewed the records and found three errors. 1. Cash paid on accounts payable for $830 was recorded as a debit to Accounts Payable $380 and a credit to Cash $380. 2. The purchase of supplies on account for $600 was debited to Equipment $600 and credited to Accounts Payable $600. 3. Carol withdrew $1,300 of cash and the bookkeeper debited Accounts Receivable for $130 and credited Cash $130.
FOR INSTRUCTOR USE ONLY
4 - 70
Test Bank for Accounting Principles, Tenth Edition
Ex. 207
(Cont.)
Instructions Prepare an analysis of each error showing the (a) incorrect entry. (b) correct entry. (c) correcting entry. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 207 1. (a)
(b)
(c)
2. (a)
(b)
(c)
3. (a)
(b)
(c)
(15 min.)
Incorrect Entry Accounts Payable ............................................................ Cash ........................................................................
380
Correct Entry Accounts Payable ............................................................ Cash ........................................................................
830
Correcting Entry Accounts Payable ............................................................ Cash ........................................................................
450
Incorrect Entry Equipment ........................................................................ Accounts Payable ....................................................
600
Correct Entry Supplies ........................................................................... Accounts Payable ....................................................
600
Correcting Entry Supplies ........................................................................... Equipment ...............................................................
600
Incorrect Entry Accounts Receivable........................................................ Cash ........................................................................
130
Correct Entry Owner’s Drawings ............................................................ Cash ........................................................................
1,300
Correcting Entry Owner’s Drawings ............................................................ Accounts Receivable ............................................... Cash ........................................................................
FOR INSTRUCTOR USE ONLY
380
830
450
600
600
600
130
1,300 1,300 130 1,170
Completing the Accounting Cycle
4 - 71
Ex. 208 Wakefield Company discovered the following errors made in January 2012. 1. A payment of salaries expense of $800 was debited to Equipment and credited to Cash, both for $800. 2. A collection of $2,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. 3. The purchase of equipment on account for $680 was debited to Equipment $860 and credited to Accounts Payable $860. Instructions Correct the errors by reversing the incorrect entry and preparing the correct entry. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208 1.
2.
3.
(10 min.)
Cash ...................................................................................... Equipment.........................................................................
800
Salaries and Wages Expense ............................................... Cash .................................................................................
800
Service Revenue ................................................................... Cash .................................................................................
200
Cash ..................................................................................... Accounts Receivable ........................................................
2,000
Accounts Payable .................................................................. Equipment ........................................................................
860
Equipment ............................................................................. Accounts Payable .............................................................
680
800 800 200 2,000 860 680
Ex. 209 The following items were taken from the financial statements of Buttercup Company. (All dollars are in thousands.) Mortgage payable Prepaid expenses Property, plant, and equipment Long-term investments Short-term investments Notes payable in 2013 Cash
$ 1,443 880 11,000 1,100 3,690 1,000 2,100
Accumulated depreciation Accounts payable Notes payable after 2013 Owner’s capital Accounts receivable Inventories
FOR INSTRUCTOR USE ONLY
3,655 1,444 1,200 13,480 1,696 1,756
4 - 72 Ex. 209
Test Bank for Accounting Principles, Tenth Edition (Cont.)
Instructions Prepare a classified balance sheet in good form as of December 31, 2012. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 209
(10 min.)
BUTTERCUP COMPANY Balance Sheet December 31, 2012 (in thousands) ——————————————————————————————————————————— Assets Current assets Cash ............................................................................................ $ 2,100 Short-term investments................................................................ 3,690 Accounts receivable..................................................................... 1,696 Inventories ................................................................................... 1,756 Prepaid expenses ........................................................................ 880 Total current assets .............................................................. $10,122 Long-term investments ......................................................................... 1,100 Property, plant, and equipment Property, plant, and equipment .................................................... 11,000 Less: Accumulated depreciation .................................................. 3,655 7,345 Total assets .......................................................................... $18,567 Liabilities and Owner's Equity Current liabilities Notes payable in 2013 ................................................................. $ 1,000 Accounts payable ........................................................................ 1,444 Total current liabilities ........................................................... $ 2,444 Long-term liabilities Mortgage payable ........................................................................ 1,443 Notes payable (after 2013) .......................................................... 1,200 Total long-term liabilities ........................................................ 2,643 Total liabilities ...................................................................................... 5,087 Owner's equity Owner’s capital ............................................................................ 13,480 Total liabilities and owner's equity ......................................... $18,567 Ex. 210 Compute the dollar amount of current assets based on the following account balances. Accounts Receivable Accumulated Depreciation—Equipment Cash Equipment Prepaid Rent Short-term Investments
$19,000 27,000 8,400 93,000 7,000 15,000
Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle Solution 210
4 - 73
(4 min.)
Current assets amount = $49,400 ($19,000 + $8,400 + $7,000 + $15,000) Ex. 211 The financial statement columns of the worksheet for Miracle Max at December 31, 2012, are as follows: MIRACLE MAX Worksheet For the Year Ended December 31, 2012 Income Statement Debit Credit
Accounts Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment Accounts Payable Notes Payable Salaries Payable Owner’s Capital Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Insurance Expense Rent Expense Salaries and Wages Expense Supplies Expense Totals Net Income
Balance Sheet Debit Credit 15,000 7,000 4,000 6,000 209,000 29,000 19,000 70,000 3,000 112,000 14,000
123,000 21,000 12,000 3,000 17,000 42,000 6,000 101,000 22,000 123,000
123,000
255,000
123,000
255,000
233,000 22,000 255,000
Instructions (a) Calculate the balance of Owner’s Capital that would appear on a balance sheet at December 31, 2012. (b) Prepare a classified balance sheet for Miracle Max at December 31, 2012 assuming the note payable is a long-term liability. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 211 (a)
(15 min.)
Owner’s Capital, January 1 Add: Net Income Less: Drawings Owner’s Capital, December 31
$112,000 22,000 134,000 14,000 $120,000
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 211
(Cont.)
(b)
MIRACLE MAX Balance Sheet December 31, 2012 ——————————————————————————————————————————— Assets Current assets Cash..................................................................................... Accounts receivable ............................................................. Supplies ............................................................................... Prepaid insurance ................................................................ Total current assets ....................................................... Property, plant, and equipment Equipment ............................................................................ $209,000 Less: Accumulated depreciation—Equipment....................... 29,000 Total assets ................................................................... Liabilities and Owner's Equity Current liabilities Accounts payable ................................................................. Salaries and wages payable ................................................. Total current liabilities.................................................... Long-term liabilities Notes payable ...................................................................... Total liabilities................................................................ Owner's equity Owner’s capital ..................................................................... Total liabilities and owner's equity .................................
FOR INSTRUCTOR USE ONLY
$ 15,000 7,000 4,000 6,000 32,000
180,000 $212,000
$ 19,000 3,000 22,000 70,000 92,000 120,000 $212,000
Completing the Accounting Cycle
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Ex. 212 The financial statement columns of the worksheet for Booer Company as of December 31, 2012 are as follows: BOOER COMPANY Worksheet For the Year Ended December 31, 2012 Income Statement Debit Credit
Accounts Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment Patents Accounts Payable Notes Payable (due 2016) Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Depreciation Expense Insurance Expense Interest Expense Totals Net Income
Balance Sheet Debit Credit 10,000 26,000 4,500 7,000 41,000 4,800 7,500 22,200 20,000 45,300 4,200
26,400 5,200 4,800 5,000 3,500 18,500 7,900 26,400
26,400
100,200
26,400
100,200
92,300 7,900 100,200
Instructions Prepare a classified balance sheet for Booer Company. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 212
(15 min.) BOOER COMPANY Balance Sheet December 31, 2012
Assets Current assets Cash ............................................................................................ Accounts receivable..................................................................... Supplies....................................................................................... Prepaid insurance........................................................................ Total current assets ............................................................ Property, Plant, and Equipment Equipment ................................................................................... Less: Accumulated depreciation—equipment .............................. Intangible assets Patents ........................................................................................ Total assets ........................................................................ Liabilities and Owner's Equity Current liabilities Accounts payable ........................................................................ Long-term liabilities Notes payable.............................................................................. Total liabilities .....................................................................
$10,000 26,000 4,500 7,000 47,500 $41,000 4,800
36,200 7,500 $91,200
$22,200 20,000 42,200
Owner's Equity Owner’s capital ............................................................................ Total liabilities and owner's equity .......................................
49,000* $91,200
* Owner’s capital = $49,000 ($45,300 + $7,900 – $4,200). a
Ex. 213
Reisner Company prepared the following adjusting entries at year end on December 31, 2012: (a) Interest Expense.......................................................................... 200 Interest Payable .................................................................. 200 (b) (c) (d) (e) (f)
Unearned Revenue...................................................................... Service Revenue.................................................................
1,500
Insurance Expense ...................................................................... Prepaid Insurance ...............................................................
1,200
Interest Receivable ...................................................................... Interest Revenue.................................................................
100
Supplies Expense ........................................................................ Supplies ..............................................................................
250
Salaries and Wages Expense ...................................................... Salaries and Wages Payable ..............................................
3,000
FOR INSTRUCTOR USE ONLY
1,500 1,200 100 250 3,000
Completing the Accounting Cycle
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Ex. 213 (Cont.) In an effort to minimize errors in recording transactions, Reisner Company utilizes reversing entries. Instructions Prepare reversing entries on January 1, 2013, for the adjusting entries given where appropriate. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 213
(15 min.)
Reversing entries are appropriate for adjusting entries related to accrued revenues and accrued expenses. Three of the entries given are accruals and need to be reversed. (a)
(d)
(f)
Reverse the entry to accrue interest expense. Interest Payable .......................................................................... Interest Expense .................................................................
200
Reverse the entry to accrue interest revenue. Interest Revenue ......................................................................... Interest Receivable .............................................................
100
Reverse the entry to accrue salaries and wages expense. Salaries and Wages Payable....................................................... Salaries and Wages Expense .............................................
3,000
200
100
3,000
a
Ex. 214
On December 31, 2012 the adjusted trial balance of the Yellin Personnel Agency shows the following selected data: Accounts Receivable, $8,000 Service Revenue, $70,000 Interest Expense, $10,500 Interest Payable, $2,500 Utilities Expense, $4,800 Accounts Payable, $2,400 Analysis indicates that adjusting entries were made for (a) $8,000 of employment commission revenue earned but not billed, (b) $3,500 of accrued but unpaid interest, and (c) $2,700 of utilities expense accrued but not paid. Instructions (a) Prepare the closing entries at December 31, 2012. (b) Prepare the reversing entries on January 1, 2013. (c) Enter the adjusted trial balance data in T-accounts. Post the entries in (a) and (b) and rule and balance the accounts. (d) Prepare the entries to record (1) the collection of the accrued commission on January 8, (2) payment of the utility bill on January 10, and (3) payment of all the interest due ($4,200) on January 15. (e) Post the entries in (d) to the temporary accounts. (f) What is the interest expense for the month of January 2013? Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
a
Solution 214
(25 min.)
(a) (1) Service Revenue ................................................................... Income Summary ..........................................................
70,000
(2) Income Summary ................................................................... Interest Expense ........................................................... Utilities Expense............................................................
15,300
(3) Income Summary ................................................................... Owner’s Capital .............................................................
54,700
(b) (1) Service Revenue ................................................................... Accounts Receivable .....................................................
8,000
(2) Interest Payable ..................................................................... Interest Expense ...........................................................
3,500
(3) Accounts Payable .................................................................. Utilities Expense............................................................
2,700
70,000 10,500 4,800 54,700
8,000 3,500 2,700
(c) and (e) Accounts Receivable (A)
8,000
(R)
Service Revenue 8,000
(C) (R)
Interest Expense (A) (D)
10,500 4,200
(C) (R)
4,800 2,700
(C) (R)
(A) (D)
70,000 8,000
Interest Payable 10,500 3,500
(R)
Utilities Expense (A) (D)
70,000 8,000
3,500
(A)
3,500
Accounts Payable 4,800 2,700
(R)
2,700
(A)
2,700
Legend A = Adjusted trial balance amount C = Closing R = Reversing D = January Transaction entries (d)
(1) Jan. 8
(2) Jan. 10
(3) Jan. 15
(f)
Cash ..................................................................... Service Revenue..........................................
8,000
Utilities Expense ................................................... Cash ............................................................
2,700
Interest Expense................................................... Cash ............................................................
4,200
Interest expense for January is $700 ($4,200 – $3,500).
FOR INSTRUCTOR USE ONLY
8,000
2,700
4,200
Completing the Accounting Cycle
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a
Ex. 215
Transaction and adjustment data for Doty Company for the calendar year end is as follows: 1. December 24 (initial salary entry): $12,000 of salaries earned between December 1 and December 24 are paid. 2. December 31 (adjusting entry): Salaries earned between December 25 and December 31 are $2,000. These will be paid in the January 8 payroll. 3. January 8 (subsequent salary entry): Total salary payroll amounting to $7,000 was paid. Instructions Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversing entries are utilized by the company. Assume no reversing entries (a)
Assume reversing entries
Initial Salary Entry
Dec. 24
(b)
Adjusting Entry
Dec. 31
(c)
Closing Entry
Dec. 31
(d)
Reversing Entry
Jan. 1
(e)
Subsequent Salary Entry
Jan. 8 Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
a
Solution 215
(20 min.)
Assume no reversing entries (a)
Assume reversing entries
Initial Salary Entry
Dec. 24 Salaries and Wages Expense Cash (b)
12,000 Salaries and Wages Expense 12,000 Cash
12,000 12,000
Adjusting Entry
Dec. 31 Salaries and Wages Expense 2,000 Salaries and Wages Expense 2,000 Salaries and Wages Payable 2,000 Salaries and Wages Payable 2,000 (c)
Closing Entry
Dec. 31 Income Summary 14,000 Salaries and Wages Expense 14,000 (d)
Reversing Entry
Jan. 1 None
(e)
Income Summary 14,000 Salaries and Wages Expense 14,000
Salaries and Wages Payable 2,000 Salaries and Wages Expense 2,000
Subsequent Salary Entry
Jan. 8 Salaries and Wages Payable Salaries and Wages Expense Cash
2,000 Salaries and Wages Expense 5,000 Cash 7,000
FOR INSTRUCTOR USE ONLY
7,000 7,000
Completing the Accounting Cycle
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COMPLETION STATEMENTS 216.
The first step in preparing a worksheet is to prepare a ______________ from the general ledger accounts.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
217.
The account balances appearing in the adjusted trial balance columns are extended to the ______________ columns and the ______________ columns.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
218.
The process of transferring net income (or loss) for the period to Owner's Capital is accomplished by making ______________ entries.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
219.
At the end of an accounting period, all revenue and expense accounts are closed to a temporary account called ______________.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
220.
The Owner's Drawings account is closed to the ______________ account at the end of the accounting period.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
221.
After all closing entries have been journalized and posted, the final step in the accounting cycle is to prepare a ______________ trial balance.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
222.
The preparation of a ______________ and ______________ entries are two optional steps in the accounting cycle.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
223.
Two permanent accounts that are part of the stockholders' equity in a corporation are ______________ and ______________.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
224.
The four major classifications of assets in a classified balance sheet are: ________________, ________________, ________________ and ________________.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
225.
The ______________ of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
226.
Assets that do not have a physical substance yet often are very valuable are called ______________ assets.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
4 - 82 227.
Test Bank for Accounting Principles, Tenth Edition Liabilities are generally classified as either ______________ or ______________ on a classified balance sheet.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Completion Statements 216. 217. 218. 219. 220. 221. 222.
trial balance income statement, balance sheet closing Income Summary Owner's Capital post-closing worksheet, reversing
223. Common Stock, Retained Earnings 224. Current Assets; Long-Term Investments; Property, Plant, and Equipment; Intangible Assets 225. operating cycle 226. intangible 227. current, long-term
FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle
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MATCHING 228. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Worksheet Permanent accounts Closing entries Income Summary Reversing entry
F. G. H. I. J.
Common Stock Current assets Operating cycle Long-term liabilities Correcting entries
____
1. Obligations that a company expects to pay after one year.
____
2. A part of owners' equity in a corporation.
____
3. An optional tool which facilitates the preparation of financial statements.
____
4. A temporary account used in the closing process.
____
5. Balance sheet accounts whose balances are carried forward to the next period.
____
6. The average time that it takes to go from cash to cash in producing revenues.
____
7. Entries to correct errors made in recording transactions.
____
8. The exact opposite of an adjusting entry made in a previous period.
____
9. Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent owner's equity account.
____ 10. Assets that a company expects to pay or convert to cash or use up within one year. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
I F A D B
6. 7. 8. 9. 10.
H J E C G
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 229 A worksheet is an optional working tool used by accountants to facilitate the preparation of financial statements. Consider the steps followed in preparing a worksheet. How does the use of a worksheet assist the accountant. Could financial statements be prepared without a worksheet? Evaluate how the process would differ. Consider factors such as timeliness, accuracy, and efficiency in your evaluation. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 229 The worksheet organizes the accountant's work in preparing the income statement and the balance sheet. The worksheet contains the general ledger trial balance, the adjusting entries, and an adjusted trial balance (if 10-column). The columns for these trial balances and entries allow the accountant to prove the equality of the debits and credits at each step of the process. From the adjusted trial balance the balance sheet and income statement amounts are obtained and entered in the appropriate columns. Preparing financial statements without the use of a worksheet would be less organized and probably more prone to errors. And, if errors are made, they will probably be less easy to detect and locate, and, therefore, less efficient and more time consuming. S-A E 230 Journalizing and posting closing entries is a required step in the accounting cycle. Discuss why it is necessary to close the books at the end of an accounting period. If closing entries were not made, how would the preparation of financial statements be affected? Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 230 Closing entries are prepared to close the income statement accounts (the temporary accounts) of the current year in order to start the next year. Income statement (temporary) accounts are cumulative in nature but only for a year. The closing entries are what separate the accounting periods. The next year's accumulation of income statement data can begin once the accounts are cleared and the balances transferred through the closing entries to owner's equity. S-A E 231 Give the definition of current assets and current liabilities and provide two examples of each. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 231 Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Examples of current assets include short-term investments, accounts receivable, and inventory. Current liabilities are obligations that the company is to pay within the current year. Examples of current liabilities are accounts payable, wages payable, and taxes payable. FOR INSTRUCTOR USE ONLY
Completing the Accounting Cycle
4 - 85
S-A E 232 (a) What is the term used to describe the owner's equity section of a corporation? (b) Identify the two owners' equity accounts in a corporation and indicate the purpose of each. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 232 (a) The owner's equity section for a corporation is called stockholders' equity. (b) The two accounts and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. S-A E 233 Distinguish between a reversing entry and an adjusting entry. Are reversing entries required? Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 233 A reversing entry is the exact opposite of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle. S-A E 234 (Ethics) Under Protection provides underground storage facilities for companies desiring off-site storage of sensitive documents, computer records, and other items. They have developed a sophisticated surveillance and security system which they initially used in their own facilities, and have recently started to market elsewhere as well. The underground storage facilities are made from natural caves in some instances (reinforced and modified as appropriate) and from excavations of natural rock formations in others. The land was purchased over ten years ago for a total of $2.5 million. The modifications have cost approximately $15 million more. The company has never depreciated its storage facilities because the market value of the property has continued to rise. Presently, the market price is between $30 and $40 million. Betsy Brantley, a new accounting manager, questioned this depreciation policy. Will Gray, the controller, has told him that he needn't worry about it. For one thing, he says, this is really a special form of Land account, which should not be depreciated at all. For another, this is a privately held company, and so they don't need to worry about misleading investors. All the owners know about and approve the depreciation policy. Required: What are the ethical issues in this situation? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 234 The ethical issue is one of integrity. Even though the storage facilities are underground, that does not mean that they can be accounted for simply as land. The structural improvements and surveillance mechanisms will not last forever, and therefore their cost should be allocated over the periods that are benefited. Net income is being overstated because the depreciation expense, at zero, is being understated. A second issue is the harm that may be incurred by outside parties because of the misrepresentation in the financial statements. Even though the owners know about the (lack of) depreciation, they may still use their financial statements to obtain loans. Private investors and bankers should be able to rely on the financial statements. A third issue is that of the integrity of the accountants themselves. If they are being asked to ignore a basic principle of accounting so openly now, they should certainly ask themselves what lies ahead. S-A E 235 (Communication) You have recently started to work for Storry Malcom, manufacturers of cemetery markers and monuments. During your first month at work, you inadvertently recorded as revenue, about $4,000 of prepayments from Budger Company. The financial statements had been released within the company when you discovered your error. The month-end closing had not been completed, however, and you were able to correct the accounts without incident. Required: Prepare a short note to accompany the re-released financial statements explaining the mistake. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 235 MEMO TO:
Department Managers
FROM: Lisa Cross, Accounting RE:
Month-End Reports
****ATTACHED FINANCIAL STATEMENTS REPLACE THOSE ISSUED JULY 5**** *****DESTROY ALL EARLIER COPIES OF JUNE 30 FINANCIAL STATEMENTS**** An error was made in the recording of Budger Company's prepayment. The entire $4,000 was recorded as revenue. Since Budger's order had not been completed or shipped, it should have been recorded as unearned revenue, which is a liability. Note that net income is reduced to only $xxxxx as a result of this change. If you have sent any of your summary reports to corporate headquarters, please contact the Accounting Department immediately for correction codes. I am sincerely sorry for any inconvenience or delays caused by this error.
FOR INSTRUCTOR USE ONLY
CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
6 6 7 7 7 7 8 1 1
K K K K K K K K K
sg
37. 38. sg 39. sg 40. sg 41. sg 42.
2 3 3 4 5 6
K K K C K K
6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C K K K AP AP K C C K K C
a
8 8 1 2 2 2 3 4 6 5 6 7 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8
K K AP K K K K K AP K K K K K K K K K K K K K K K K K K
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.
1 1 1 2 2 2 2 3 3
C C K K K K K C C
10. 11. 12. 13. 14. 15. 16. 17. 18.
3 3 3 4 4 4 5 5 5
43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
1 1 1 1 1 1 1 1 1 1 2 2 2 3 3 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K C K K C K K C K C C C K C K K C K C C C AP AP C K AP AP K AP
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102.
2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
C C K C K K K K K
19. 20. 21. 22. 23. 24. 25. 26. 27.
5 5 5 5 5 5 5 6 6
K K C C C K K AP K
28. 29. 30. 31. a 32. a 33. a 34. sg 35. sg 36.
sg
Multiple Choice Questions
sg st a
AP AP AP AP C C AP AP C C C K K C C K K C K AP C C C C C C AP AP AP K
103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.
3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6
K C C K K C C K C C AP K C C C AP K C K K K AP AP K C K K AP AP AP
133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. a 146. a 147. a 148. 149. 150. 151. a 152. a 153. a 154. a 155. a 156. a 157. a 158. a 159. a 160. a 161. a 162.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
163. 164. sg 165. sg 166. sg 167. st 168. sg 169. st 170. sg 171. st 172. sg 173. a,st 174 175.. 176. 177. 178. 179. 180. 181 182 183. 184. 185. 186. 187. 188. 189. a
5-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Brief Exercises 190. 191. 192.
1 2 2,3
AP AP AP
193. 194. 195.
3 3 4
AP AP AP
196. 197. 198.
5 6 7
AP AP AP
199. 200. a 201.
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AP AP AP
217. 218. 219. 220. a 221.
5,6 5,6 5,6 5,6 7
AP C AP AP AP
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Exercises 202. 203. 204. 205. 206.
1 2,3 2,3 2 2,3
C AP AP E AP
207. 208. 209. 210. 211.
2,3 2 3 3 4
AN AP AP AP AP
212. 213. 214. 215. 216.
4 4 5 5,6 5,6
AP AP AN AP AP
a
222. 223. a 224. a 225. a 226.
7 7 7 8 7
AP AP AP AP AP
235. 236.
6 6
K K
a
Completion Statements 227. 228.
1 1
K K
237.
1
K
238. 239.
3 1
K K
229. 230.
240. 241.
1 2
K K
231. 2 K 233. 232. 3 K 234. Matching Statements
3 5
Short-Answer Essay K 242. 1 K 244. K 243. 5 K 245.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 35.
TF TF TF TF
36. 43. 44. 45.
TF MC MC MC
46. 47. 48. 49.
4. 5. 6. 7. 37. 53.
TF TF TF TF TF MC
54. 55. 58. 59. 60. 61.
MC MC MC MC MC MC
62. 63. 64. 65. 66. 67.
8. 9. 10. 11. 12. 38. 39. 56.
TF TF TF TF TF TF TF MC
57. 74. 75. 76. 77. 78. 79. 80.
MC MC MC MC MC MC MC MC
81. 82. 83. 84. 85. 86. 87. 88.
Type
Item
Type
Item
Study Objective 1 MC 50. MC 190. MC 51. MC 202. MC 52. MC 227. MC 165. MC 228. Study Objective 2 MC 68. MC 156. MC 69. MC 157. MC 70. MC 158. MC 71. MC 166. MC 72. MC 167. MC 73. MC 203. Study Objective 3 MC 89. MC 97. MC 90. MC 98. MC 91. MC 99. MC 92. MC 100. MC 93. MC 101. MC 94. MC 102. MC 95. MC 103. MC 96. MC 104.
Type
Item
Type
Item
Type
BE Ex C C
229. 237. 239. 242.
C MA SA SA
244. 245.
SA SA
MC MC MC BE BE Ex
204. 205. 206. 207. 208. 230.
Ex Ex Ex Ex Ex C
231.
C
MC MC MC MC MC MC MC MC
105. 106. 107. 169. 192. 193. 194. 203.
MC MC MC MC BE BE BE Ex
204. 206. 209. 210. 232. 233. 234. 240.
Ex Ex Ex Ex C C C SA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
13. 14. 16. 17. 18. 19. 20.
TF TF
TF TF
108. 109.
TF TF TF TF TF
21. 22. 23. 24. 25.
TF TF TF TF TF
41. 113. 114. 115. 116.
26. TF 27. TF 28. TF 29. TF 42. TF 124. MC
125. 126. 127. 128. 129. 130.
MC MC MC MC MC MC
131. 132. 133. 134. 135. 136.
147. 148. a 149. a 150. a 151.
MC MC MC MC MC
a
a
a
a
30. TF 31. TF a 32. TF a 33. TF a 146. MC a
34. TF 163. MC a 164. MC a
15. 40.
175. 176. 177.
MC MC
a
152. 153. a 154. a 155. a 156. a
178. 179. 180.
Note: TF = True-False MC = Multiple Choice MA = Matching
Study Objective 4 MC 110. MC 112. MC 111. MC 170. Study Objective 5 TF 117. MC 122. MC 118. MC 123. MC 119. MC 172. MC 120. MC 196. MC 121. MC 215. Study Objective 6 MC 137. MC 143. MC 138. MC 144. MC 139. MC 145. MC 140. MC 171. MC 141. MC 173. MC 142. MC 197. a Study Objective 7 MC a157. MC a162. MC a158. MC a174. MC a159. MC a198. MC a160. MC a199. MC a161. MC a200. Study Objective a8 181. MC 184. MC 182. MC 185. MC 183. MC 186.
MC MC
195. 211.
BE Ex
212. 213.
Ex Ex
MC MC MC BE Ex
216. 217. 218. 219. 220.
Ex Ex Ex Ex Ex
241. 243.
SA SA
MC MC MC MC MC BE
215. 216. 217. 218. 219. 220.
Ex Ex Ex Ex Ex Ex
235. 236.
C C
201. 221. a 222. a 223. a 224.
BE Ex Ex Ex Ex
a
226.
Ex
187. 188. 189.
MC MC MC
a
Ex
MC MC BE BE BE MC MC MC
BE = Brief Exercise Ex = Exercise
FOR INSTRUCTOR USE ONLY
a a
225.
C = Completion SA = Short-Answer
5-4
Test Bank for Accounting Principles, Tenth Edition
CHAPTER STUDY OBJECTIVES 1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system. 2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, freight-in, and other costs, and credits it for purchase discounts and purchase returns and allowances. 3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. 4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count. 5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step. 6. Explain the computation and importance of gross profit. Merchandising companies compute gross profit by subtracting cost of goods sold from net sales. Gross profit represents the merchandising profit of a company. Managers and other interested parties closely watch the amount and trend of gross profit and of the gross profit rate. a
7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.
a
8. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandising company are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5-5
TRUE-FALSE STATEMENTS 1.
Retailers and wholesalers are both considered merchandisers.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
The steps in the accounting cycle are different for a merchandising company than for a service company.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
Sales minus operating expenses equals gross profit.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
5.
A periodic inventory system requires a detailed inventory record of inventory items.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
6.
Freight terms of FOB Destination means that the seller pays the freight costs.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7.
Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8.
Sales revenues are earned during the period cash is collected from the buyer.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11.
Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
12.
To grant a customer a sales return, the seller credits Sales Returns and Allowances.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13.
A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
5-6 14.
Test Bank for Accounting Principles, Tenth Edition For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
A merchandising company has different types of adjusting entries than a service company.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
Operating expenses are different for merchandising and service enterprises.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
18.
Net sales appears on both the multiple-step and single-step forms of an income statement.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
A multiple-step income statement provides users with more information about a company’s income performance.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
The multiple-step form of income statement is easier to read than the single-step form.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Inventory is classified as a current asset in a classified balance sheet.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
Ans: T, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
Gross profit represents the merchandising profit of a company.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 28.
5-7
Gross profit is a measure of the overall profitability of a company.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
30.
Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
31.
Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
32.
Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
33.
Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
34.
In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
35.
Inventory is reported as a long-term asset on the balance sheet.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
37.
The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
38.
Sales revenue should be recorded in accordance with the matching principle.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
39.
Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5-8 41.
Test Bank for Accounting Principles, Tenth Edition If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
The major difference between the balance sheets of a service company and a merchandising company is inventory.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
T F F T F T
Item
7. 8. 9. 10. 11. 12.
Ans.
T F F T F F
Item
13. 14. 15. 16. 17. 18.
Ans.
T T F F F T
Item
Ans.
19. 20. 21. 22. 23. 24.
T F T F F T
Item
Ans.
25. 26. 27. 28. 29. 30.
Item
T T T F F T
a
31. 32. a 33. a 34. 35. 36. a
Ans.
Item
Ans.
F T F T F T
37. 38. 39. 40. 41. 42.
F F T T F T
MULTIPLE CHOICE QUESTIONS 43.
Income from operations is gross profit less a. financing expenses. b. operating expenses. c. other expenses and losses. d. other expenses.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
An enterprise which sells goods to customers is known as a a. proprietorship. b. corporation. c. retailer. d. service firm.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
Which of the following would not be considered a merchandising company? a. Retailer b. Wholesaler c. Service firm d. Dot Com firm
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46.
A merchandising company that sells directly to consumers is a a. retailer. b. wholesaler. c. broker. d. service company.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 47.
5-9
Two categories of expenses for merchandising companies are a. cost of goods sold and financing expenses. b. operating expenses and financing expenses. c. cost of goods sold and operating expenses. d. sales and cost of goods sold.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
The primary source of revenue for a wholesaler is a. investment income. b. service fees. c. the sale of merchandise. d. the sale of fixed assets the company owns.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
49.
Sales revenue less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
After gross profit is calculated, operating expenses are deducted to determine a. gross margin. b. net income. c. gross profit on sales. d. net margin.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Cost of goods sold is determined only at the end of the accounting period in a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Which of the following expressions is incorrect? a. Gross profit – operating expenses = net income b. Sales revenue – cost of goods sold – operating expenses = net income c. Net income + operating expenses = gross profit d. Operating expenses – cost of goods sold = gross profit
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
Detailed records of goods held for resale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double entry accounting system. d. single entry accounting system.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
5 - 10
Test Bank for Accounting Principles, Tenth Edition
54.
A perpetual inventory system would likely be used by a(n) a. automobile dealership. b. hardware store. c. drugstore. d. convenience store.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55.
Which of the following is a true statement about inventory systems? a. Periodic inventory systems require more detailed inventory records. b. Perpetual inventory systems require more detailed inventory records. c. A periodic system requires cost of goods sold be determined after each sale. d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
56.
In a perpetual inventory system, cost of goods sold is recorded a. on a daily basis. b. on a monthly basis. c. on an annual basis. d. with each sale.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
57.
If a company determines cost of goods sold each time a sale occurs, it a. must have a computer accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58.
Under a perpetual inventory system, acquisition of merchandise for resale is debited to the a. Inventory account. b. Purchases account. c. Supplies account. d. Cost of Goods Sold account.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
59.
The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales Revenue. d. Inventory.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 60.
5 - 11
The Inventory account is used in each of the following except the entry to record a. goods purchased on account. b. the return of goods purchased. c. payment of freight on goods sold. d. payment within the discount period.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
A buyer would record a payment within the discount period under a perpetual inventory system by crediting a. Accounts Payable. b. Inventory. c. Purchase Discounts. d. Sales Discounts.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
62.
If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the a. Inventory account will be increased. b. Inventory account will not be affected. c. seller will bear the freight cost. d. carrier will bear the freight cost.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
63.
Freight costs paid by a seller on merchandise sold to customers will cause an increase a. in the selling expense of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
64.
Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the a. seller. b. buyer. c. transportation company. d. buyer and the seller.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
65.
Glenn Company purchased merchandise inventory with an invoice price of $7,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period? a. $6,300 b. $6,440 c. $6,860 d. $7,000
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 12 66.
Test Bank for Accounting Principles, Tenth Edition Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 20% b. 24% c. 36% d. 72%
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
If a company is given credit terms of 2/10, n/30, it should a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time. b. pay within the discount period and recognize a savings. c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill. d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Ans: B, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
68.
In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to a. Inventory. b. Purchase Discounts. c. Purchase Allowance. d. Sales Discounts.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
69.
Jake’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $50,000, terms 2/10, n/30. Returned $1,000 of the shipment for credit. Paid $250 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory increased by a. $48,020. b. $48,265. c. $48,270. d. $49,250.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 70.
5 - 13
Costner’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $20,000, terms 2/10, n/30. Returned $400 of the shipment for credit. Paid $100 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $19,208. b. increased by $19,306. c. increased by $19,308. d. increased by $19,700.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in a. Freight Expense b. Freight - In c. Inventory d Freight - Out
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72.
Glover Co. returned defective goods costing $4,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is: a. Accounts Payable ............................................................... Inventory ....................................................................
4,000
b. Accounts Payable ............................................................... Inventory............................................................................. Cash ..........................................................................
4,000 120
c. Accounts Payable ............................................................... Purchase Discounts ................................................... Inventory ....................................................................
4,000
d. Accounts Payable ............................................................... Inventory .................................................................... Cash ..........................................................................
4,000
4,000
4,120 120 3,880 120 3,880
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 14 73.
Test Bank for Accounting Principles, Tenth Edition McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $8,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is: a. Accounts Payable ............................................................... Cash...........................................................................
8,000
b. Accounts Payable ............................................................... Cash...........................................................................
7,760
c. Accounts Payable ............................................................... Purchase Returns and Allowances ............................. Cash...........................................................................
8,000
d. Accounts Payable ............................................................... Inventory .................................................................... Cash...........................................................................
8,000
8,000 7,760 240 7,760 240 7,760
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
On July 9, Sheb Company sells goods on credit to Wooley Company for $3,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is: a. Cash ................................................................................... Accounts Receivable ..................................................
3,000
b. Cash ................................................................................... Sales Discounts.......................................................... Accounts Receivable ..................................................
3,000
c. Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable ..................................................
2,970 30
d. Cash ................................................................................... Sales Discounts.......................................................... Accounts Receivable ..................................................
3,030
3,000 30 2,970
3,000 30 3,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
On November 2, 2012, Kasdan Company has cash sales of $4,500 from merchandise having a cost of $2,700. The entries to record the day's cash sales will include: a. a $2,700 credit to Cost of Goods Sold. b. a $4,500 credit to Cash. c. a $2,700 credit to Inventory. d a $4,500 debit to Accounts Receivable.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
76.
A credit sale of $2,000 is made on April 25, terms 2/10, n/30, on which a return of $125 is granted on April 28. What amount is received as payment in full on May 4? a. $1,837.50 b. $1,875.00 c. $1,960.00 d $2,000.00
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 77.
5 - 15
The entry to record the receipt of payment within the discount period on a sale of $1,000 with terms of 2/10, n/30 will include a credit to a. Sales Discounts for $20. b. Cash for $980. c. Accounts Receivable for $1,000. d. Sales Revenue for $1,000.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78.
The collection of a $4,000 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $80. b. debit to Accounts Receivable for $3,920. c. credit to Cash for $3,920. d. credit to Accounts Receivable for $3,920.
Ans: A, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
79.
Company X sells $600 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check? a. $420 b. $480 c. $540 d. $588
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
80.
Cleese Company sells merchandise on account for $3,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $2,352 b. $2,400 c. $2,940 d. $2,952
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
The collection of a $1,200 account after the 2 percent discount period will result in a a. debit to Cash for $1,176. b. debit to Accounts Receivable for $1,200. c. debit to Cash for $1,200. d. debit to Sales Discounts for $24.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
82.
The collection of a $800 account after the 2 percent discount period will result in a a. debit to Cash for $784. b. credit to Accounts Receivable for $800. c. credit to Cash for $800. d. debit to Sales Discounts for $16.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 16 83.
Test Bank for Accounting Principles, Tenth Edition In a perpetual inventory system, the Cost of Goods Sold account is used a. only when a cash sale of merchandise occurs. b. only when a credit sale of merchandise occurs. c. only when a sale of merchandise occurs. d. whenever there is a sale of merchandise or a return of merchandise sold.
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84.
Sales revenues are usually considered earned when a. cash is received from credit sales. b. an order is received. c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
85.
A sales invoice is a source document that a. provides support for goods purchased for resale. b. provides evidence of incurred operating expenses. c. provides evidence of credit sales. d. serves only as a customer receipt.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
86.
Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
The journal entry to record a credit sale is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Service Revenue d. Accounts Receivable Sales Revenue
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88.
A credit memorandum is prepared when a. an employee does a good job. b. goods are sold on credit. c. goods that were sold on credit are returned. d. customers refuse to pay their accounts.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 89.
5 - 17
The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra asset account. c. expense account. d. contra revenue account.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
A credit memorandum is used as documentation for a journal entry that requires a debit to a. Sales Revenue and a credit to Cash. b. Sales Returns and Allowances and a credit to Accounts Receivable. c. Accounts Receivable and a credit to a contra-revenue account. d. Cash and a credit to Sales Returns and Allowances.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales a. discount. b. return. c. contra asset. d. allowance.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
92.
A credit sale of $2,700 is made on July 15, terms 2/10, n/30, on which a return of $150 is granted on July 18. What amount is received as payment in full on July 24? a. $2,499 b. $2,550 c. $2,646 d $2,700
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
93.
When goods are returned that relate to a prior cash sale, a. the Sales Returns and Allowances account should not be used. b. the cash account will be credited. c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
The Sales Returns and Allowances account does not provide information to management about a. possible inferior merchandise. b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders. d. errors in overbilling customers.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
95.
A Sales Returns and Allowances account is not debited if a customer a. returns defective merchandise. b. receives a credit for merchandise of inferior quality. c. utilizes a prompt payment incentive. d. returns goods that are not in accordance with specifications.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 18 96.
Test Bank for Accounting Principles, Tenth Edition As an incentive for customers to pay their accounts promptly, a business may offer its customers a. a sales discount. b. free delivery. c. a sales allowance. d. a sales return.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97.
The credit terms offered to a customer by a business firm are 2/10, n/30, which means that a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
A sales discount does not a. provide the purchaser with a cash saving. b. reduce the amount of cash received from a credit sale. c. increase a contra-revenue account. d. increase an operating expense account.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
99.
Company A sells $1,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check? a. $1,050 b. $1,200 c. $1,350 d. $1,470
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
100.
Kern Company sells merchandise on account for $6,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,200 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $4,704 b. $4,800 c. $5,880 d. $5,904
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 101.
5 - 19
Carter Company sells merchandise on account for $3,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $450 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check? a. Cash ................................................................................... 2,550 Accounts Receivable.................................................. 2,550 b. Cash ................................................................................... Sales Returns and Allowances ........................................... Accounts Receivable..................................................
2,499 501
c. Cash ................................................................................... Sales Returns and Allowances ........................................... Sales Discounts .................................................................. Accounts Receivable..................................................
2,499 450 51
d. Cash ................................................................................... Sales Discounts .................................................................. Sales Returns and Allowances ................................... Accounts Receivable..................................................
2,940 60
3,000
3,000
450 2,550
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
102.
Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales Revenue d. Selling Expense
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
With respect to the income statement, a. contra-revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales. c. contra-revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
When a seller grants credit for returned goods, the account that is credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 20 106.
Test Bank for Accounting Principles, Tenth Edition The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
107.
All of the following are contra revenue accounts except a. sales revenue. b. sales allowances. c. sales discounts. d. sales returns.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
108.
A merchandising company using a perpetual system will make a. the same number of adjusting entries as a service company does. b. one more adjusting entry than a service company does. c. one less adjusting entry than a service company does. d. different types of adjusting entries compared to a service company.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
109.
In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of a. sales revenue. b. inventory. c. sales discounts. d. freight-out.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
110.
A merchandising company using a perpetual system may record an adjusting entry by a. debiting Income Summary. b. crediting Income Summary. c. debiting Cost of Goods Sold. d. debiting Sales Revenue.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
111.
The operating cycle of a merchandiser is a. always one year in length. b. generally longer than it is for a service company. c. about the same as for a service company. d. generally shorter than it is for a service company.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 112.
5 - 21
When the physical count of Rosanna Company inventory had a cost of $4,300 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry: a. Cost of Goods Sold............................................................. Inventory ....................................................................
200
b. Inventory............................................................................. Cost of Goods Sold ....................................................
200
c. Income Summary................................................................ Inventory ....................................................................
200
d. Cost of Goods Sold............................................................. Inventory ....................................................................
4,500
200 200 200 4,500
Ans: A, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
113.
Arquette Company's financial information is presented below. Sales Sales Returns and Allowances Net Sales
$
???? 20,000 450,000
Cost of Goods Sold Gross Profit
270,000 ????
The missing amounts above are: Sales Gross Profit a. $470,000 $180,000 b. $430,000 $180,000 c. $470,000 $210,000 d. $430,000 $210,000 Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
114.
The sales revenue section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Cost of goods sold.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115.
The operating expense section of an income statement for a wholesaler would not include a. freight-out. b. utilities expense. c. cost of goods sold. d. insurance expense.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
Income from operations will always result if a. the cost of goods sold exceeds operating expenses. b. revenues exceed cost of goods sold. c. revenues exceed operating expenses. d. gross profit exceeds operating expenses.
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
5 - 22 117.
Test Bank for Accounting Principles, Tenth Edition Indicate which one of the following would appear on the income statement of both a merchandising company and a service company. a. Gross profit b. Operating expenses c. Sales revenues d. Cost of goods sold
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118.
Conrad Company reported the following balances at June 30, 2012: Sales Sales Returns and Allowances Sales Discounts Cost of Goods Sold
$10,800 400 200 5,000
Net sales for the month is a. $5,200. b. $10,200. c. $10,400. d. $10,800. Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
Income from operations appears on a. both a multiple-step and a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a single-step income statement. d. a multiple-step income statement.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
Gross profit does not appear a. on a multiple-step income statement. b. on a single-step income statement. c. to be relevant in analyzing the operation of a merchandiser. d. on the income statement if the periodic inventory system is used because it cannot be calculated.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
Which of the following is not a true statement about a multiple-step income statement? a. Operating expenses are similar for merchandising and service enterprises. b. There may be a section for nonoperating activities. c. There may be a section for operating assets. d. There is a section for cost of goods sold.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
Which one of the following is shown on a multiple-step but not on a single-step income statement? a. Net sales b. Net income c. Gross profit d. Cost of goods sold
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 123.
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All of the following items would be reported as other expenses and losses except a. freight-out. b. casualty losses. c. interest expense. d. loss from employees' strikes.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
124.
If a company has net sales of $700,000 and cost of goods sold of $490,000, the gross profit percentage is a. 15%. b. 30%. c. 70%. d. 100%.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
125.
A company shows the following balances: Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold
$2,000,000 360,000 40,000 1,120,000
What is the gross profit percentage? a. 30% b. 44% c. 56% d. 70% Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
126.
The gross profit rate is computed by dividing gross profit by a. cost of goods sold. b. net income. c. net sales. d. sales revenue.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
127.
In terms of liquidity, inventory is a. more liquid than cash. b. more liquid than accounts receivable. c. more liquid than prepaid expenses. d. less liquid than store equipment.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
128.
On a classified balance sheet, inventory is classified as a. an intangible asset. b. property, plant, and equipment. c. a current asset. d. a long-term investment.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 24 129.
Test Bank for Accounting Principles, Tenth Edition Gross profit for a merchandiser is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130.
During 2012, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000. Parker’s gross profit is a. $16,000. b. $18,000. c. $30,000. d. $60,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
131.
During 2012, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000. Yoder’s income from operations is a. $12,000. b. $18,000. c. $30,000. d. $60,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
During 2012, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000. Yoder’s net income is a. $16,000. b. $18,000. c. $30,000. d. $60,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 133.
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Financial information is presented below: Operating Expenses $ 40,000 Sales Revenue 150,000 Cost of Goods Sold 90,000 Gross profit would be a. $20,000. b. $60,000. c. $110,000. d. $150,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
Financial information is presented below: Operating Expenses $ 40,000 Sales Revenue 150,000 Cost of Goods Sold 90,000 The gross profit rate would be a. .133. b. .400. c. .600. d. .733.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
135.
Financial information is presented below: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Cost of Goods Sold
$ 45,000 13,000 6,000 150,000 79,000
Gross profit would be a. $52,000. b. $58,000. c. $65,000. d. $71,000. Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 26 136.
Test Bank for Accounting Principles, Tenth Edition Financial information is presented below: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 45,000 13,000 6,000 150,000 79,000
The gross profit rate would be a. .347. b. .397. c. .473. d. .542. Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
Financial information is presented below: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 45,000 9,000 6,000 160,000 87,000
The amount of net sales on the income statement would be a. $145,000. b. $151,000. c. $154,000. d. $160,000. Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
138.
Financial information is presented below: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 45,000 9,000 6,000 160,000 87,000
Gross profit would be a. $13,000. b. $58,000. c. $64,000. d. $67,000. Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 139.
Financial information is presented below: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
5 - 27
$ 45,000 9,000 6,000 160,000 87,000
The gross profit rate would be a. .363. b. .400. c. .456. d. .503. Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
140.
If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $378,000, the gross profit rate is a. 37%. b. 40% c. 60%. d. 63%.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of a. $39,000 and $23,400. b. $39,000 and $24,000. c. $40,000 and $23,400. d. $40,000 and $24,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142.
During August, 2012, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000. Baxter’s gross profit for August, 2012 is a. $10,000. b. $10,500. c. $11,500. d. $12,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 28 143.
Test Bank for Accounting Principles, Tenth Edition During August, 2012, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000. Baxter’s nonoperating income (loss) for the month of August, 2012 is a. $0. b. $500. c. $1,000. d. $1,500.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
144.
During August, 2012, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000. Baxter’s operating income for the month of August, 2012 is a. $10,000. b. $10,500. c. $11,500. d. $12,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
145.
During August, 2012, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000. Baxter’s net income for August, 2012 is a. $10,000. b. $10,500. c. $11,500. d. $12,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
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a
146. Cobb Company's accounting records show the following at the year ending on December 31, 2012: Purchase Discounts Freight - in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
5,600 7,800 201,000 23,500 28,800 6,400
Using the periodic system, the cost of goods purchased is a. $189,000. b. $191,500. c. $196,800. d. $202,100. Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
147. Cobb Company's accounting records show the following at the year ending on December 31, 2012: Purchase Discounts Freight - in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
5,600 7,800 201,000 23,500 28,800 6,400
Using the periodic system, the cost of goods sold is a. $189,000. b. $191,500. c. $196,800. d. $202,100. Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
148. The following information is available for Dennehy Company: Sales Ending Inventory Purchases
$260,000 25,000 180,000
Freight-in $20,000 Purchase Returns and Allowances 10,000 Beginning Inventory 30,000
Dennehy's cost of goods sold is a. $175,000. b. $190,000. c. $195,000. d. $230,000. Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 30
Test Bank for Accounting Principles, Tenth Edition
a
149. At the beginning of September, 2012, Stella Company reported Inventory of $4,000. During the month, the company made purchases of $17,800. At September 31, 2012, a physical count of inventory reported $4,200 on hand. Cost of goods sold for the month is a. $17,600. b. $17,800. c. $18,000. d. $21,800.
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
150. At the beginning of the year, Hunt Company had an inventory of $500,000. During the year, the company purchased goods costing $1,600,000. If Hunt Company reported ending inventory of $600,000 and sales of $2,500,000, the company’s cost of goods sold and gross profit rate must be a. $1,000,000 and 66.7%. b. $1,500,000 and 40%. c. $1,000,000 and 40%. d. $1,500,000 and 60%.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
151. During the year, Slick’s Pet Shop’s inventory decreased by $20,000. If the company’s cost of goods sold for the year was $400,000, purchases must have been a. $380,000. b. $400,000. c. $420,000. d. Unable to determine.
a
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
152. Cost of goods available for sale is computed by adding a. beginning inventory to net purchases. b. beginning inventory to the cost of goods purchased. c. net purchases and freight-in. d. purchases to beginning inventory.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
153. The Freight-in account a. increases the cost of merchandise purchased. b. is contra to the Purchases account. c. is a permanent account. d. has a normal credit balance.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
154. Net purchases plus freight-in determines a. cost of goods sold. b. cost of goods available for sale. c. cost of goods purchased. d. total goods available for sale.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 31
a
155. Goldblum Company has the following account balances: Purchases $48,000 Sales Returns and Allowances 6,400 Purchase Discounts 4,000 Freight-in 3,000 Delivery Expense 5,000 The cost of goods purchased for the period is a. $40,400. b. $44,000. c. $47,000. d. $52,000.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
156. McKendrick Shoe Store has a beginning inventory of $30,000. During the period, purchases were $130,000; purchase returns, $4,000; and freight-in $10,000. A physical count of inventory at the end of the period revealed that $20,000 was still on hand. The cost of goods available for sale was a. $126,000. b. $136,000. c. $146,000. d. $166,000.
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting a. Accounts Payable. b. Inventory. c. Purchases. d. Purchase Returns and Allowances.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
158. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system? a. Cash received on account with a discount b. Payment of freight costs on a purchase c. Return of merchandise sold d. Sale of merchandise on credit
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 32
Test Bank for Accounting Principles, Tenth Edition
a
159. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be a. Accounts Payable Purchase Returns and Allowances b. Purchase Returns and Allowances Accounts Payable c. Accounts Payable Inventory d. Inventory Accounts Payable
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
160. Under a periodic inventory system, acquisition of merchandise is debited to the a. Inventory account. b. Cost of Goods Sold account. c. Purchases account. d. Accounts Payable account.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
161. Which of the following accounts has a normal credit balance? a. Purchases b. Sales Returns and Allowances c. Freight-in d. Purchase Discounts
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
162. The respective normal account balances of Purchases, Purchase Discounts, and Freightin are a. credit, credit, debit. b. debit, credit, credit. c. debit, credit, debit. d. debit, debit, debit.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
163. In a worksheet for a merchandising company, Inventory would appear in the a. trial balance and adjusted trial balance columns only. b. trial balance and balance sheet columns only. c. trial balance, adjusted trial balance, and balance sheet columns. d. trial balance, adjusted trial balance, and income statement columns.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
164. The Inventory account balance appearing in a worksheet represents the a. ending inventory. b. beginning inventory. c. cost of merchandise purchased. d. cost of merchandise sold.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 165.
5 - 33
Ezra Company has sales revenue of $40,000, cost of goods sold of $24,000 and operating expenses of $9,000 for the year ended December 31. Ezra's gross profit is a. $0. b. $7,000. c. $16,000. d. $31,000.
Ans: C, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
Rae Company made a purchase of merchandise on credit from Tyree Corporation on August 3, for $7,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is a. Accounts Payable ............................................................... 7,000 Cash ............................................................................ 7,000 b. Accounts Payable ............................................................... 6,860 Cash ............................................................................ 6,860 c. Accounts Payable ............................................................... 7,000 Purchase Returns and Allowances .............................. 140 Cash ............................................................................ 6,860 d. Accounts Payable ............................................................... 7,000 Inventory ..................................................................... 140 Cash ............................................................................ 6,860
Ans: D, SO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
167.
Kate Company purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges: a. There is no entry on Kate's books for this transaction. b. Freight Expense ................................................................. 500 Cash .......................................................................... 500 c. Freight-out .......................................................................... 500 Cash .......................................................................... 500 d. Inventory............................................................................. 500 Cash .......................................................................... 500
Ans: D, SO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
168.
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting a. Purchases. b. Purchase Returns. c. Purchase Allowance. d. Inventory.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 34 169.
Test Bank for Accounting Principles, Tenth Edition On October 4, 2012, JT Corporation had credit sales transactions of $3,200 from merchandise having cost $1,900. The entries to record the day's credit transactions include a a. debit of $3,200 to Inventory. b. credit of $3,200 to Sales Revenue. c. debit of $1,900 to Inventory. d. credit of $1,900 to Cost of Goods Sold.
Ans: B, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
170.
Which of the following accounts is not closed to Income Summary? a. Cost of Goods Sold b. Inventory c. Sales Revenue d. Sales Discounts
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
171.
In the Augie Company, sales were $500,000, sales returns and allowances were $20,000, and cost of goods sold was $300,000. The gross profit rate was a. 36%. b. 37.5%. c. 40%. d. 41.7%.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
Net sales is sales less a. sales discounts. b. sales returns. c. sales returns and allowances. d. sales discounts and sales returns and allowances.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173.
In the balance sheet, ending inventory is reported a. in current assets immediately following accounts receivable. b. in current assets immediately following prepaid expenses. c. in current assets immediately following cash. d. under property, plant, and equipment.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
174. Cost of goods available for sale is computed by adding a. freight-in to net purchases. b. beginning inventory to net purchases. c. beginning inventory to purchases and freight-in. d. beginning inventory to cost of goods purchased.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
175.
The Income statement is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations 176.
5 - 35
The basic accounting entries for merchandising are a. the same under GAAP and under IFRS. b. required under GAAP but not under IFRS. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
177.
Under GAAP, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178.
Under IFRS, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179.
Companies cannot use the a. periodic inventory system under GAAP. b. periodic inventory system under IFRS. c. perpetual system under IFRS. d. none of the above; both periodic and perpetual can be used under GAAP and IFRS.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
180.
Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. all of the above.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
181.
Under GAAP, companies generally classify income statement items by a. function. b. nature. c. nature or function d. date incurred.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182.
Under IFRS, companies must classify income statement items by a. function. b. nature. c. nature or function d. date incurred.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 36 183.
Test Bank for Accounting Principles, Tenth Edition Under GAPP, income statement items are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
184.
Under IFRS, income statement items are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
185.
For the income statement, IFRS requires a. single-step approach. b. multiple-step approach. c. single-step approach or multiple-step approach. d. no specific income statement approach.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
186.
Under IFRS, companies can apply revaluation to a. land, buildings, and intangible assets. b. land, buildings, but not intangible assets. c. intangible assets, but not land or beer. d. no assets.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
187.
The use of IFRS results in more transactions affecting a. net income but not other comprehensive income. b. other comprehensive income, but not net income. c. but net income and other comprehensive income. d. neither net income nor other comprehensive income.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
188.
Comprehensive income under IFRS a. includes unrealized gains and losses included in net income, in contrast to GAAP. b. includes unrealized gains and losses included in net income, similar to GAAP. c. excludes unrealized gains and losses included in net income, in contrast to GAAP. d. excludes unrealized gains and losses included in net income, similar to GAAP.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
189.
The number of years of income statement information to be presented is a. 2 years under both GAAP and IFRS. b. 3 years under both GAAP and IFRS. c. 2 years under GAAP and 3 years under IFRS. d. 3 years under GAAP and 2 years under IFRS.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 37
Answers to Multiple Choice Questions Item
43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.
Ans.
b c c a c c a b b d b a b d d a d c b a b
Item
64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.
Ans.
b c c b a c c c a d c c a c a d a c b d c
Item
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.
Ans.
c a d c d b d a b b c a c d d a c a c d d
Item
106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.
Ans.
c a b a c b a a d c d b b d b c c a b a c
Item
Ans.
127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. a 146 a 147. .
c c b c b a b b a b a b b a a d d a c c b
Item a
148. 149. a 150. a 151. a 152. a 153. a 154. a 155. a 156. a 157. a 158. a 159. a 160. a 161. a 162. a 163. a 164. 165. 166. 167. 168. a
Ans.
Item
Ans.
c a b a b a c c d d a a c d c c a c d d d
169. 170. 171. 172. 173. a 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189.
b b b d a d d a b b d d a c a b d a b b d
BRIEF EXERCISES BE 190 Presented here are the components in Bradley Company’s income statement. Determine the missing amounts. Cost of _Sales Revenue_Goods Sold $75,000 (a) (c) $86,000
Gross _Profit $30,000 $64,000
Operating Expenses (b) $48,000
Net Income $17,000 (d)
Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 190 a. b. c. d.
(5 min.)
$45,000 $13,000 $150,000 $16,000
BE 191 Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations): (a) Kelly purchased $40,000 of merchandise on account, terms 2/10, n/30. (b) Returned $3,000 of damaged merchandise for credit.
FOR INSTRUCTOR USE ONLY
5 - 38 (c)
Test Bank for Accounting Principles, Tenth Edition
Paid for the merchandise purchased within 10 days.
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 191 (5 min.) (a) Inventory...................................................................................... Accounts Payable ............................................................
40,000
(b)
Accounts Payable ........................................................................ Inventory ..........................................................................
3,000
Accounts Payable ($40,000 – $3,000) ......................................... Inventory ($37,000 × .02) ................................................. Cash ($37,000 – $740) ....................................................
37,000
(c)
40,000
3,000
740 36,260
BE 192 Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,000. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 192
(3 min.)
Journal entry on Garth’s books: Accounts Receivable.... ................................................................. Sales. ...................................................................................
1,000
Cost of Goods Sold….................................................................... Inventory………… ................................................................
600
1,000 600
Journal entry on Kyle’s books: Inventory……………... ................................................................. Accounts Payable .................................................................
1,000 1,000
BE 193 Richter Company sells merchandise on account for $2,000 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193
(3 min.)
Sales Returns and Allowances ...................................................... Sales Discounts ($1,800 × .03) .................................................... Cash ($2,000 – $200 – $54) .......................................................... Accounts Receivable ...........................................................
FOR INSTRUCTOR USE ONLY
200 54 1,746 2,000
Accounting for Merchandising Operations
5 - 39
BE 194 Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred. May
13
Sold 6 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.
May
16
One defective motor was returned to Charlie.
May
23
Received payment in full from Scruffy Brothers.
Instructions Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 194 May
May
May
13
16
23
(8 min.)
Accounts Receivable ....................................................... Sales Revenue ........................................................
270
Cost of Goods Sold .......................................................... Inventory .................................................................
156
Sales Returns and Allowances ........................................ Accounts Receivable ...............................................
45
Inventory .......................................................................... Cost of Goods Sold .................................................
26
Cash ................................................................................ Sales Discounts ($225 × .04) ........................................... Accounts Receivable ($270 – $45) ..........................
216 9
270 156 45 26
225
BE 195 The income statement for Pepe Serna Company for the year ended December 31, 2012 is as follows: PEPE SERNA COMPANY Income Statement For the Year Ended December 31, 2012 Revenues Sales ........................................................................................ Interest revenue ....................................................................... Total revenues .................................................................... Expenses Cost of goods sold .................................................................... Salaries and wages expense .................................................... Interest expense ....................................................................... Total expenses ................................................................... Net income........................................................................................... FOR INSTRUCTOR USE ONLY
$55,000 3,000 58,000 $33,000 13,000 1,000 47,000 $ 11,000
5 - 40
Test Bank for Accounting Principles, Tenth Edition
BE 195
(Cont.)
Prepare the entries to close the revenue and expense accounts at December 31, 2012. You may omit explanations for the transactions. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 195 Dec. 31
31
(5 min.)
Sales Revenue.................................................................... Interest Revenue................................................................. Income Summary .......................................................
55,000 3,000
Income Summary ................................................................ Cost of Goods Sold .................................................... Salaries and Wages Expense..................................... Interest Expense ........................................................
47,000
58,000
33,000 13,000 1,000
BE 196 Hoyt Company provides this information for the month of November, 2012: sales on credit $150,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 196
(3 min.) HOYT COMPANY Income Statement (Partial) For the Month Ended November 30, 2012
Sales .................................................................................. Less: Sales Returns and Allowances ................................ Sales Discounts ...................................................... Net Sales ............................................................................
$220,000 $9,000 2,000
11,000 $209,000
BE 197 During October, 2012, Red’s Catering Company generated revenues of $13,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000. Calculate (1) gross profit and (2) income from operations for the month. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations Solution 197
5 - 41
(4 min.)
(1) Gross profit: $5,100 ($13,000 - $200 - $7,700) (2) Income from operations: $3,100 ($5,100 - $2,000) a
BE 198
For each of the following, determine the missing amounts.
1. 2.
Beginning Inventory
Purchases
Goods Available for Sale
Cost of Goods Sold
Ending Inventory
$10,000 ______
________ $220,000
$ 40,000 $245,000
$25,000 _______
_______ $40,000
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 198
(4 min.)
1.
Purchases $30,000 ($40,000 – $10,000), Ending inventory $15,000 ($40,000 – $25,000)
2.
Beginning inventory $25,000 ($245,000 – $220,000), Cost of Goods Sold $205,000 ($245,000 – $40,000)
a
BE 199
Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $500,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-in $15,000. Determine net purchases and cost of goods purchased. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 199
(4 min.)
Calculation of Net Purchases and Cost of Goods Purchased Purchases ........................................................................... Less: Purchase returns and Allowances ........................... Purchase discounts ................................................ Net Purchases .................................................................... Add: Freight-in .................................................................... Cost of Goods Purchased ...................................................
$500,000 $14,000 9,000
23,000 477,000 15,000 $492,000
a
BE 200 Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-in $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 42
Test Bank for Accounting Principles, Tenth Edition
Solution 200
(6 min.)
Inventory, beginning ............................................................ Purchases ........................................................................... Less: Purchase returns and allowances ............................ Purchase discounts ................................................. Net purchases ..................................................................... Add: Freight-in..................................................................... Cost of goods purchased..................................................... Cost of goods available for sale........................................... Inventory, ending ................................................................. Cost of goods sold...............................................................
$ 45,000 $600,000 $25,000 11,000
36,000 564,000 19,000 583,000 628,000 55,000 $573,000
a
BE 201 Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred. May
13
Purchased 6 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.
May
16
Returned 1 defective motor to Charlie.
May
23
Paid Charlie Company in full.
Instructions Journalize the May transactions for Scruffy Brothers. You may omit explanations. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 201
May May May
13 16 23
(6 min.)
Purchases ........................................................................ Accounts Payable ....................................................
270
Accounts Payable ............................................................ Purchase Returns and Allowances ..........................
45
Accounts Payable ($270 – $45) ....................................... Purchase Discounts ($225 × .04) ............................ Cash ........................................................................
225
FOR INSTRUCTOR USE ONLY
270 45 9 216
Accounting for Merchandising Operations
5 - 43
EXERCISES Ex. 202 For each of the following, determine the missing amounts.
1.
Cost of Sales Revenue Net Income $100,000 ________
2.
________
$135,000
Operating Goods Sold Gross Profit
Expenses
_______
$25,000
$12,000
$120,000
_______
$80,000
Ans: N/A, SO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 202
(5 min.)
1. Gross Profit = $37,000 ($25,000 + $12,000) Cost of Goods Sold = $63,000 ($100,000 – $37,000) 2. Sales = $255,000 ($135,000 + $120,000) Operating Expenses = $40,000 ($120,000 – $80,000) Ex. 203 On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred. Oct. 4
Purchased 30 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.
6
Sold 18 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.
7
Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.
13
Issued a credit memo to Team Wisconsin for the return of a defective bicycle.
14
Paid Monroe Bicycle Company in full, less discount.
Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203 Oct. 4
6
(20 min.)
Inventory............................................................................. Accounts Payable ......................................................
6,000
Accounts Receivable .......................................................... Sales Revenue...........................................................
5,940
Cost of Goods Sold............................................................. Inventory ....................................................................
3,600
FOR INSTRUCTOR USE ONLY
6,000
5,940
3,600
5 - 44
Test Bank for Accounting Principles, Tenth Edition
Solution 203 (Cont.) 7 Accounts Payable ............................................................... Inventory .................................................................... 13
14
400 400
Sales Returns and Allowances............................................ Accounts Receivable ..................................................
330
Inventory ............................................................................. Cost of Goods Sold ....................................................
200
Accounts Payable ($6,000 – $400) ..................................... Cash ($5,600 × .99) ................................................... Inventory ($5,600 × .01) .............................................
5,600
330
200
5,544 56
Ex. 204 On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred. Sept.
4 Purchased 70 backpacks at $25 each from Hunter, terms 2/10, n/30.
Sept.
6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 4 that were defective.
Sept.
9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.
Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30. Sept. 14 Paid Hunter in full, less discount. Instructions Journalize the September transactions for Reid Supply. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204 Sept.
Sept.
Sept.
4
6
9
(20 min.)
Inventory .......................................................................... Accounts Payable ....................................................
1,750
Accounts Payable ............................................................ Inventory .................................................................
150
Accounts Receivable........................................................ Sales Revenue ........................................................
1,400
Cost of Goods Sold .......................................................... Inventory .................................................................
1,000
FOR INSTRUCTOR USE ONLY
1,750
150
1,400 1,000
Accounting for Merchandising Operations Solution 204 (Cont.) Sept. 13 Accounts Receivable ....................................................... Sales Revenue ........................................................
Sept. 14
5 - 45
525 525
Cost of Goods Sold .......................................................... Inventory .................................................................
375
Accounts Payable ($1,750 – $150) .................................. Cash ($1,600 × .98) ................................................ Inventory ($1,600 × .02) ..........................................
1,600
375
1,568 32
Ex. 205 Sam Wainwright is a new accountant with Ground floor Company. Ground floor purchased merchandise on account for $11,250. The credit terms are 2/10, n/30. Sam has talked with the company's banker and knows that he could earn 8% on any money invested in the company's savings account. Instructions (a) Should Sam pay the invoice within the discount period or should he keep the $11,250 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best. (b)
If Sam forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $11,250 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ans: N/A, SO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 205
(10 min.)
Dan should pay the invoice within the discount period to save $140: (a)
(b)
Discount of 2% on $11,250 Interest received on $11,250 (for 20 days at 8%) Savings by taking the discount
$225 50 $175
($11,250 × 8% × 20 ÷ 360)
The equivalent annual interest rate is: 2% × 360 ÷ 20 = 36%.
Ex. 206 (a)
Karns Company purchased merchandise on account from Bailey Office Suppliers for $87,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $78,400 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record: (1) the purchase of merchandise. (2) the return of merchandise. (3) the payment on account.
(b)
Hinds Company sold merchandise to Peter Company on account for $73,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $43,070. During the discount period, Peter Company returned $3,000 of merchandise and paid its account in full (minus the discount) by remitting $68,600 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record: FOR INSTRUCTOR USE ONLY
5 - 46 Ex. 206 (1) (2) (3)
Test Bank for Accounting Principles, Tenth Edition (Cont.) the sale of merchandise. the return of merchandise. the collection on account.
Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206 (a)
To compute the amount due after returns but before the discount, divide $78,400 by .98 (100% – 2%). $78,400 ÷ .98 = $80,000. Subtract $80,000 from $87,000 to determine that $7,000 of merchandise was returned. (1)
(2)
(3)
(b)
(20 min.)
Inventory ............................................................................. Accounts Payable.......................................................
87,000
Accounts Payable ............................................................... Inventory ....................................................................
7,000
Accounts Payable ............................................................... Inventory .................................................................... Cash...........................................................................
80,000
87,000
7,000
1,600 78,400
Peter Company returns $3,000 of merchandise and owes $70,000 to Hinds Company. $68,600 ÷ $70,000 = .98 100% – 98% = 2% The missing discount percentage is 2%. $70,000 × 2% = $1,400 sales discount. $70,000 – $1,400 = $68,600 cash received on account. (1)
(2)
(3)
Accounts Receivable........................................................... Sales Revenue ...........................................................
73,000
Cost of Goods Sold ............................................................. Inventory ....................................................................
43,070
Sales Returns and Allowances............................................ Accounts Receivable ..................................................
3,000
Inventory [$3,000 × ($43,070 ÷ $73,000)] ........................... Cost of Goods Sold ....................................................
1,770
Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable ..................................................
68,600 1,400
FOR INSTRUCTOR USE ONLY
73,000 43,070
3,000 1,770
70,000
Accounting for Merchandising Operations
5 - 47
Ex. 207 An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions. 1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270. 2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310. 3. A $190 sales return was debited to Sales Revenue. 4. A cash payment of $30 for freight on merchandise purchases was debited to Freight-out $300 and credited to Cash $300. Instructions Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.) Ans: N/A, SO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 207 1. 2.
3.
4.
(6-8 min.)
Sales Returns and Allowances .................................................... Sales Revenue ...................................................................
270
Supplies ..................................................................................... Cash ........................................................................................... Accounts Payable ............................................................... Inventory.............................................................................
310 310
Sales Returns and Allowances .................................................... Sales Revenue ...................................................................
190
Inventory .................................................................................. Cash ........................................................................................... Freight-out ..........................................................................
30 270
270
310 310
190
300
Ex. 208 Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system. (a) Purchased $30,000 of merchandise on account, terms 2/10, n/30. (b) Returned $700 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208 (a)
(b)
(6-8 min.)
Inventory ............................................................. Accounts Payable ..........................................
30,000
Accounts Payable ................................................ Inventory........................................................
700
30,000
FOR INSTRUCTOR USE ONLY
700
5 - 48
Test Bank for Accounting Principles, Tenth Edition
Solution 208 (c)
(Cont.)
Accounts Payable ($30,000 – $700) Inventory ($29,300 × .02) Cash ($29,300 – $586)
29,300 586 28,714
Ex. 209 Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system. (a) Eustace sells $50,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000. (b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400. (c) Eustace received the balance due within the discount period. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 209 (a)
(b)
(c)
(7-9 min.)
Accounts Receivable ................................................................... Sales Revenue....................................................................
50,000
Cost of Goods Sold...................................................................... Inventory .............................................................................
30,000
Sales Returns and Allowances .................................................... Accounts Receivable...........................................................
4,000
Inventory...................................................................................... Cost of Goods Sold .............................................................
2,400
Cash ($46,000 – $460) ................................................................ Sales Discounts ($46,000 × .01) .................................................. Accounts Receivable...........................................................
45,540 460
50,000 30,000 4,000 2,400
46,000
Ex. 210 Newell Company completed the following transactions in October: Credit Sales Date Amount Oct. 3 $ 600 Oct. 11 1,200 Oct. 17 5,000 Oct. 21 1,400 Oct. 23 1,800
Terms 2/10, n/30 3/10, n/30 1/10, n/30 2/10, n/60 2/10, n/30
Sales Returns Date Amount Oct. 14 Oct. 20 Oct. 23 Oct. 27
FOR INSTRUCTOR USE ONLY
$ 400 1,000 200 400
Date of Collection Oct. 8 Oct. 16 Oct. 29 Oct. 27 Oct. 28
Accounting for Merchandising Operations
5 - 49
Ex. 210 (Cont.) Instructions (a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the (1) Oct. 17 sale. The merchandise sold had a cost of $3,500. (2) Oct. 23 sales return. The merchandise returned had a cost of $140. (3) Oct. 28 collection. Newell uses a perpetual inventory system. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 210
(20 min.)
(a) Oct. 8
$588
[Sales $600 – Sales discount $12 ($600 × .02)]
Oct. 16
$776
[Sales $1,200 – Sales return $400 = $800; $800 – Sales discount $24 ($800 × .03)]
Oct. 29
$4,000
[Sales $5,000 – Sales return $1,000 = $4,000; (Discount lapsed)]
Oct. 27
$1,176
[Sales $1,400 – Sales return $200 = $1,200; $1,200 – Sales discount $24 ($1,200 × .02)]
Oct. 28
$1,372
[Sales $1,800 – Sales return $400 = $1,400; $1,400 – Sales discount $28 ($1,400 × .02)]
(b) (1)
(2)
(3)
Oct. 17
Oct. 23
Oct. 28
Accounts Receivable ......................................... Sales Revenue .........................................
5,000
Cost of Goods Sold ........................................... Inventory ...................................................
3,500
Sales Returns and Allowances .......................... Accounts Receivable ................................
200
Inventory ........................................................... Cost of Goods Sold...................................
140
Cash.................................................................. Sales Discounts................................................. Accounts Receivable ................................
1,372 28
FOR INSTRUCTOR USE ONLY
5,000
3,500
200
140
1,400
5 - 50
Test Bank for Accounting Principles, Tenth Edition
Ex. 211 The following information is available for Moiz Company: Debit Owner’s Capital Owner’s Drawings $ 35,000 Sales Revenue Sales Returns and Allowances 20,000 Sales Discounts 7,000 Cost of Goods Sold 290,000 Freight-out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Salaries and Wages Expense 55,000 Utilities Expense 18,000 Depreciation Expense 7,000 Interest Revenue
Credit $ 50,000 510,000
23,000
Instructions Using the above information, prepare the closing entries for Moiz Company. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 211
(10 min.)
Dec. 31 Interest Revenue................................................................. Sales Revenue.................................................................... Income Summary .......................................................
23,000 510,000
31 Income Summary ................................................................ Sales Returns and Allowances ................................... Sales Discounts.......................................................... Cost of Goods Sold .................................................... Freight-out .................................................................. Advertising Expense................................................... Interest Expense ........................................................ Salaries and Wages Expense..................................... Utilities Expense ......................................................... Depreciation Expense ................................................
433,000
31 Income Summary ................................................................ Owner’s Capital ..........................................................
100,000
31 Owner’s Capital .................................................................. Owner’s Drawings .....................................................
35,000
FOR INSTRUCTOR USE ONLY
533,000
20,000 7,000 290,000 2,000 15,000 19,000 55,000 18,000 7,000
100,000
35,000
Accounting for Merchandising Operations
5 - 51
Ex. 212 The adjusted trial balance of J. W. Hatch Company appears below. J. W. HATCH Adjusted Trial Balance December 31, 2012 Cash Accounts Receivable Inventory Building Accumulated Depreciation— Building Accounts Payable Owner’s Capital Owner’s Drawings Sales Revenue Sales Discounts Sales Returns & Allowances Cost of Goods Sold Operating Expenses
Debit 12,000 25,000 35,000 150,000
Credit
20,000 12,000 144,000 30,000 310,000 6,000 8,000 178,000 42,000 486,000
486,000
Instructions Using the information given, prepare the year-end closing entries. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 212 Dec. 31
31
31
31
(10 min.)
Sales .................................................................................. Income Summary ....................................................... (To close credit balance accounts)
310,000
Income Summary................................................................ Sales Discounts ......................................................... Sales Returns and Allowances ................................... Cost of Goods Sold .................................................... Operating Expense .................................................... (To close accounts with debit balances)
234,000
Income Summary................................................................ Owner’s Capital.......................................................... (To transfer net income to capital)
76,000
Owner’s Capital .................................................................. Owner’s Drawings ...................................................... (To close drawings account to capital)
30,000
FOR INSTRUCTOR USE ONLY
310,000
6,000 8,000 178,000 42,000
76,000
30,000
5 - 52
Test Bank for Accounting Principles, Tenth Edition
Ex. 213 Kennedy Company had the following account balances at year-end: cost of goods sold $80,000; merchandise inventory $15,000; operating expenses $39,000; sales $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that merchandise inventory on hand is $14,400. Instructions (a) Prepare the adjusting entry necessary as a result of the physical count. (b) Prepare closing entries. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213 (a) (b)
(10 min.)
Cost of Goods Sold...................................................................... Inventory .............................................................................
600
Sales Revenue ............................................................................ Income Summary ...............................................................
144,000
Income Summary ........................................................................ Cost of Goods Sold ............................................................. Operating Expenses ........................................................... Sales Returns and Allowances............................................ Sales Discounts ..................................................................
123,500
Income Summary ($144,000 – $123,500) .................................... Kennedy, Capital.................................................................
20,500
600 144,000 80,600 39,000 2,300 1,600 20,500
Ex. 214 Financial information is presented below for two different companies. Gower Drugs Sales Revenue Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other expenses and losses Net income
$90,000 (a) 88,000 56,000 (b) 22,000 (c) 4,000 (d)
Martini Food and Liquor $
(e) 3,000 97,000 (f) 36,000 (g) (h) 7,000 13,000
Instructions Determine the missing amounts. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations Solution 214
5 - 53
(15 min.)
(*Missing amount) (a)
Sales ........................................................................................... Sales returns and allowances ...................................................... Net Sales.....................................................................................
$ 90,000 2,000* $ 88,000
(b)
Net Sales..................................................................................... Cost of goods sold....................................................................... Gross profit..................................................................................
$ 88,000 56,000 $ 32,000*
(c) and (d) Gross profit.................................................................................. Operating expenses .................................................................... Income from operations (c) .......................................................... Other expenses and losses ......................................................... Net income (d) .............................................................................
$ 32,000 22,000 $ 10,000* 4,000 $ 6,000*
(e)
Sales ........................................................................................... Sales returns and allowances ...................................................... Net sales .....................................................................................
$ 100,000* 3,000 $ 97,000
(f)
Net sales ..................................................................................... Cost of goods sold....................................................................... Gross profit..................................................................................
$ 97,000 61,000* $ 36,000
(g) and (h) Gross profit.................................................................................. Operating expenses (g) ............................................................... Income from operations (h) ......................................................... Other expenses and losses ......................................................... Net income .................................................................................
$ 36,000 16,000* $ 20,000* 7,000 $ 13,000
Ex. 215 Presented below is information for Annie Company for the month of March 2012. Cost of goods sold Freight-out Insurance expense Salary expense
$235,000 7,000 5,000 63,000
Rent expense $ 30,000 Sales discounts 8,000 Sales returns and allowances 11,000 Sales 410,000
Instructions (a) Prepare a multiple -step income statement. (b) Compute the gross profit rate. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 54
Test Bank for Accounting Principles, Tenth Edition
Solution 215
(10 min.)
(a) ANNIE COMPANY Income Statement For the Month Ended March 31, 2012 ____________________________________________________________________________________________________________
Sales revenues Sales .................................................................................. Less: Sales returns and allowances.................................. Sales discounts ....................................................... Net sales............................................................................. Cost of goods sold .............................................................. Gross profit ......................................................................... Operating expenses Salary expense ........................................................ Rent expense ........................................................... Insurance expense ................................................... Freight-out............................................................... Total operating expenses ......................................... Net income ......................................................................... (b)
$410,000 $11,000 8,000
19,000 391,000 235,000 156,000
63,000 30,000 5,000 7,000 105,000 $ 51,000
Gross profit rate = $156,000 $391,000 = 39.9%.
Ex. 216 In 2012, Brunetti Company had net sales of $650,000 and cost of goods sold of $390,000. Operating expenses were $150,000, and interest expense was $10,000. Brunetti prepares a multiple-step income statement. Instructions (a) Compute Brunetti's gross profit. (b) Compute the gross profit rate. (c) What is Brunetti's income from operations and net income? (d) If Brunetti’s prepared a single-step income statement, what amount would it report for net income? Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216 (a) (b) (c) (d)
(10 min.)
$650,000 – $390,000 = $260,000. $260,000/$650,000 = 40%. Income from operations is $110,000 ($260,000 – $150,000), and net income is $100,000 ($110,000 – $10,000). The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Therefore, net income in Brunetti's single-step income statement is also $100,000.
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 55
Ex. 217 Argentina Company gathered the following condensed data for the year ended December 31, 2012: Cost of goods sold Net sales Operating expenses Interest expense Dividend revenue Loss from employee strike
$ 750,000 1,250,000 275,000 48,000 38,000 185,000
Instructions 1. Prepare a single-step income statement for the year ended December 31, 2012. 2. Prepare a multiple-step income statement for the year ended December 31, 2012. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217 1.
(25 min.) ARGENTINA COMPANY Income Statement For the Year Ended December 31, 2012
Revenues Net sales .................................................................................. Dividend revenue ..................................................................... Total revenues.................................................................... Expenses Cost of goods sold ................................................................... Operating expenses ................................................................. Loss from employee strike........................................................ Interest expense....................................................................... Total expenses ...................................................................
$1,250,000 38,000 1,288,000 $750,000 275,000 185,000 48,000 1,258,000
Net income .................................................................................... 2.
$
30,000
ARGENTINA COMPANY Income Statement For the Year Ended December 31, 2012
Net sales ................................................................... Cost of goods sold .................................................... Gross profit ............................................................... Operating expenses .................................................. Income from operations ............................................ Other revenues and gains Dividend revenue ............................................. Other expenses and losses Loss from employee strike ................................ Interest expense ............................................... Net income................................................................
$1,250,000 750,000 500,000 275,000 225,000 38,000 $185,000 48,000
FOR INSTRUCTOR USE ONLY
233,000
195,000 $ 30,000
5 - 56
Test Bank for Accounting Principles, Tenth Edition
Ex. 218 Instructions State the missing items identified by ?. 1. Gross profit – Operating expenses = ? 2. Cost of goods sold + Gross profit on sales = ? 3. Sales Revenue – (? + ?) = Net sales 4. Income from operations + ? – ? = Net income 5. Net sales – Cost of goods sold = ? Ans: N/A, SO: 5,6, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 218
(5 min.)
1. Income from operations (or Net income) 2. Net sales 3. Sales discounts, Sales returns and allowances 4. Other revenues and gains, Other expenses and losses 5. Gross profit Ex. 219 The adjusted trial balance of Nick Company contained the following information: Debit Credit Sales Revenue $560,000 Sales Returns and Allowances $ 15,000 Sales Discounts 7,000 Cost of Goods Sold 323,000 Freight-out 2,000 Advertising Expense 15,000 Interest Expense 18,000 Salaries and Wages Expense 65,000 Utilities Expense 28,000 Depreciation Expense 7,000 Interest Revenue 27,000 Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2012. 2. Prepare a single-step income statement for the year ended December 31, 2012. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations Solution 219 1.
5 - 57
(20 min.) NICK COMPANY Income Statement For the Year Ended December 31, 2012
Sales revenues Sales Revenue ........................................................ Less: Sales returns and allowances ...................... Sales discounts ............................................ Net sales ................................................................. Cost of goods sold ................................................... Gross profit .............................................................. Operating expenses Salaries and wages expense ....................... Utilities expense ........................................... Advertising expense..................................... Depreciation expense .................................. Freight-out ................................................... Total operating expenses ................. Income from operations ........................................... Other revenues and gains Interest revenue ................................................. Other expenses and losses Interest expense ................................................ Net income .............................................................
2.
$560,000 $ 15,000 7,000
22,000 538,000 323,000 215,000
$65,000 28,000 15,000 7,000 2,000 117,000 98,000 27,000 18,000
9,000 $ 107,000
NICK COMPANY Income Statement For the Year Ended December 31, 2012
Revenues Net sales .................................................................................. Interest revenue ....................................................................... Total revenues .................................................................... Expenses Cost of goods sold .................................................................... Salaries and wages expense ................................... …………… Utilities expense ...................................................... …………… Advertising expense ................................................ …………… Depreciation expense .............................................. …………… Freight-out ............................................................... …………… Interest expense ....................................................................... Total expenses ................................................................... Net income........................................................................................... Ex. 220 The following information is available for Sheldon Leonard Company: Administrative expenses Cost of goods sold Sales
$ 30,000 200,000 350,000 FOR INSTRUCTOR USE ONLY
$538,000 27,000 565,000 $323,000 $65,000 28,000 15,000 7,000 2,000 18,000 458,000 $ 107,000
5 - 58
Test Bank for Accounting Principles, Tenth Edition
Ex. 220
(Cont.)
Sales returns and allowances Selling expenses
16,000 55,000
Instructions Compute each of the following: (a) Net sales (b) Gross profit (c) Income from operations Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220 (a) (b) (c)
(6 min.)
Net sales = $334,000 ($350,000 – $16,000) Gross profit = $134,000 ($334,000 – $200,000) Income from operations = $49,000 ($134,000 – $30,000 – $55,000)
Ex. 221 The income statement of Jue’s Luggage. includes the items listed below: Net sales Gross profit Beginning inventory Purchase discounts Purchase returns and allowances Freight-in Operating expenses Purchases
$900,000 320,000 80,000 15,000 8,000 10,000 300,000 540,000
Instructions Use the appropriate items listed above as a basis for determining: (a) Cost of goods sold. (b) Cost of goods available for sale. (c) Ending inventory. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 221 (a)
(15 min.)
Net sales – Cost of goods sold = Gross profit $900,000 – Cost of goods sold = $320,000 Cost of goods sold = $580,000
(b) Beginning inventory Purchases Less: Purchase discounts Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale
$ 80,000 $540,000 $15,000 8,000
FOR INSTRUCTOR USE ONLY
23,000 517,000 10,000 527,000 $607,000
Accounting for Merchandising Operations Solution 221
5 - 59
(cont.)
Cost of goods available for sale – Ending inventory = Cost of goods sold $607,000 – Ending inventory = $580,000 Ending inventory = $27,000
(c)
a
Ex. 222
Three items are missing in each of the following columns and are identified by letter. Sales Revenue Sales returns and allowances Sales discounts Net sales Beginning inventory Cost of goods purchased Ending inventory Cost of goods sold Gross profit
$
(a) 15,000 10,000 420,000 (b) 220,000 170,000 252,000 (c)
$840,000 22,000 15,000 (d) 300,000 (e) 303,000 555,000 (f)
Instructions Calculate the missing amounts and identify them by letter. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 222
(a) (b) (c)
(15 min.)
$445,000 $202,000 $168,000
(d) (e) (f)
$803,000 $558,000 $248,000
a
Ex. 223
Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred. Sept.
3
Purchased 80 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.
Sept.
6
Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.
Sept.
9
Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.
Sept. 13
Paid Zuzu Company in full.
Instructions Journalize the September transactions for Reineman Supply Company. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 60
Test Bank for Accounting Principles, Tenth Edition
a
Solution 223
Sept. Sept. Sept.
3 6 9
Sept. 13
(12 min.)
Purchases ........................................................................ Accounts Payable ....................................................
2,000
Accounts Payable ............................................................ Purchase Returns and Allowances ..........................
150
Accounts Receivable........................................................ Sales Revenue ........................................................
630
Accounts Payable ($2,000 – $150) .................................. Purchase Discounts ($1,500 × .02).......................... Cash ........................................................................
1,850
2,000 150 630 37 1,813
a
Ex. 224
The following information is available for Hopkins Company: Beginning inventory Ending inventory Freight-in Purchases Purchase returns and allowances
$ 45,000 70,000 10,000 270,000 8,000
Instructions Compute each of the following: (a) Net purchases (b) Cost of goods purchased (c) Cost of goods sold Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 224
(6 min.)
(a) Net purchases = $262,000 ($270,000 – $8,000) (b) Cost of goods purchased = $272,000 ($262,000 + $10,000) (c) Cost of goods sold = $247,000 ($45,000 + $272,000 – $70,000)
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 61
a
Ex. 225
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method. Instructions Complete the worksheet below. DAILEY MUSIC COMPANY Worksheet For the Month Ended April 30, 2012
Cash Inventory Supplies Equipment Accum. Depreciation— Equipment Accounts Payable Owner’s Capital Owner’s Drawings Sales Revenue Sales Discounts Cost of Goods Sold Advertising Expense Supplies Expense Depreciation Expense Rent Expense Utilities Expense
Adjusted Trial Balance Debit Credit 11,000 21,000 3,500 80,000
Income Statement Debit Credit
Balance Sheet Debit Credit
15,000 20,000 92,000 8,000 39,000 2,000 23,000 7,000 6,000 1,000 2,500 1,000 166,000
166,000
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 62 a
Test Bank for Accounting Principles, Tenth Edition
Solution 225
(15 min.) DAILEY MUSIC COMPANY Worksheet For the Month Ended April 30, 2012
Cash Inventory Supplies Equipment Accum. Depreciation— Equipment Accounts Payable Owner’s Capital Owner’s Drawings Sales Sales Discounts Cost of Goods Sold Advertising Expense Supplies Expense Depreciation Expense Rent Expense Utilities Expense
Adjusted Trial Balance Debit Credit 11,000 21,000 3,500 80,000
Income Statement Debit Credit
Balance Sheet Debit Credit 11,000 21,000 3,500 80,000
15,000 20,000 92,000
15,000 20,000 92,000
8,000
8,000 39,000
2,000 23,000 7,000 6,000 1,000 2,500 1,000 166,000
166,000
39,000 2,000 23,000 7,000 6,000 1,000 2,500 1,000 42,500
Net Loss 42,500
39,000 3,500 42,500
123,500 3,500 127,000
127,000 127,000
a
Ex. 226
Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system: (a) Purchased $400,000 of merchandise on account, terms 2/10, n/30. (b) Returned $30,000 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations a
Solution 226
(a)
(b)
(c)
5 - 63
(6 min.)
Purchases ................................................................................... Accounts Payable ............................................................
400,000
Accounts Payable........................................................................ Purchase Returns and Allowances ..................................
30,000
Accounts Payable ($400,000 – $30,000) ..................................... Purchase Discounts ($370,000 × .02) .............................. Cash ($370,000 – $7,400) ...............................................
370,000
400,000
30,000
7,400 362,600
COMPLETION STATEMENTS 227.
A ________________ buys and sells goods rather than performing services to earn a profit.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
228.
Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting , AICPA PC: None,
IMA: Business Economics 229.
Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
230.
The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
231.
The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
232.
When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
233.
Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 64 234.
Test Bank for Accounting Principles, Tenth Edition Every sales transaction should be supported by a ________________ that provides written evidence of the sale.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
235.
Gross profit is obtained by subtracting ________________ from ________________.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
236.
Income from operations is determined by subtracting total operating expenses from ________________.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 227. 228. 229. 230. 231. 232.
merchandising company gross profit perpetual Inventory freight-out Sales Returns and Allowances, Accounts Receivable
233. 234. 235. 236.
contra revenue, debit business document cost of goods sold, net sales gross profit
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 65
MATCHING 237. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Net Sales Sales discounts Purchase invoice Periodic inventory system FOB destination
F. G. H. I. J.
FOB shipping point Freight-out Gross profit Operating expenses Income from operations
____
1. An incentive to encourage customers to pay their accounts early.
____
2. Expenses incurred in the process of earning sales revenue.
____
3. Freight terms that require the seller to pay the freight cost.
____
4. Sales revenue less sales returns and allowances and sales discounts.
____
5. A document that supports each credit purchase.
____
6. Net sales less cost of goods sold.
____
7. Freight cost to deliver goods to customers reported as a selling expense.
____
8. Requires a physical count of goods on hand to compute cost of goods sold.
____
9. Gross profit less total operating expenses.
____ 10. Freight terms that require the buyer to pay the freight cost. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to Matching 1. 2. 3. 4. 5.
B I E A C
6. 7. 8. 9. 10.
H G D J F
SHORT-ANSWER ESSAY QUESTIONS S-A E 238 A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
5 - 66
Test Bank for Accounting Principles, Tenth Edition
Solution 238 The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue. S-A E 239 Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 239 The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer's place of business. Thus the seller pays the freight and debits Freight-out. S-A E 240 Adrland Caselotti believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 240 Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales. S-A E 240 In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 241 The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed operating expenses, income from operations, and other revenues and gains, and other expenses and losses. S-A E 242 You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Merchandising Operations
5 - 67
Solution 242 You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated. S-A E 243 The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 243 The items reported for a merchandising company that are not reported for a service company are sales, revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold. S-A E 244 (Ethics) Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods. Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not. Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation "FOB shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes's dock. She did not record the purchase until after month end. Required: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
5 - 68
Test Bank for Accounting Principles, Tenth Edition
Solution 244 1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed. 2. The only ethical principle that may be involved is one of competence. Monya does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Buzz as soon as they left the shipper's dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Monya compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents. S-A E 245 (Communication) Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen's sale was FOB shipping point, and Bryn's was FOB destination. The company "counts" sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Jill is quite upset. She has asked you to just include it, or to take Ellen's off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method. Write a memo to Bryn. Explain your position. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 245 MEMO TO:
Bryn Davi’s
FROM: Helen Dictison, Accounting RE:
Sales Bonuses
DATE:
June 15, 200x
As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $110,000. This total does not include the $19,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else's sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing. I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help.
FOR INSTRUCTOR USE ONLY
CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
7 7 8 8 1 2 2
C K K K C K K
sg
29. 30. sg 31. sg,a 32. sg,a 33.
3 4 5 7 8
C K K K K
5 5 5 5 5 5 6 6 6 6 6 6 7 7 7 7 7 7 7 7 8 8 8 8 8 8 1 1 2 2
C C AN AN AN C K K AP AP AP AP AP AP AP AP AP C C AP C C C AP AP AP K K K AP
st
3 3 4 5 6 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8
K C K AN K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7.
1 1 1 1 1 2 2
C C K K K K K
8. 9. 10. 11. 12. 13. 14.
2 2 2 2 3 3 3
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K K K K K C C C K C C K K C AP AP AP K C C AP K AP AP AP AP AP C K
64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.
2 2 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 3 2 2 2 2 3 3 2 2 2 2 2 2
C C C K K K K
15. 16. 17. 18. 19. 20. 21.
3 3 4 4 5 5 6
K C K K C K C
a
22. 23. a 24. a 25. sg 26. sg 27. sg 28. a
sg
Multiple Choice Questions
sg st a
K AP C K K K K C C K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
2 2 2 3 3 3 3 3 3 3 3 3 2 2 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4
AP AP AP AP AP AP AP K C C C C K K C K K C AP AN AN K K K K K K AP AP AP
124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145. a 146. a 147. a 148. a 149. st 150. sg 151. st 152. sg 153.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter. FOR INSTRUCTOR USE ONLY
154. 155. st 156. sg 157. st 158. sg,a 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. sg
6-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises 180. 181.
1 2
C AP
182. 183.
2 2
AP AP
184. 185.
2 2
AP AP
186. 187.
2 4
K AP
208. 209. a 210. a 211. a 212. a 213.
6 6 7 7 8 8
AP AP AP AP AP AP
3 4
K K
5 5
K K
188. 189.
5 6
C AP
Exercises 190. 191. 192. 193. 194. 195.
2 2 2 2 2 2
AP AP AN AP AP AP
196. 197. 198. 199. 200. 201.
2,3 3 3 4 4 4
AP AP E AN AP AP
202. 203. 3. 204. 9. 205. 206. 207.
4 5 5 5 5 5
AP AN AP AN AN AN
a a
214. 215.
8 8
AP AP
a
224. 225.
6 8
K K
Completion Statements 216. 217.
1 1
K K
218. 219.
2 2
K K
220. 221.
2 3
K K
222. 223.
Matching Statements 226.
6
K
227. 228.
2 3
K K
Short-Answer Essay 229. 230.
5 3
K K
231. 232.
3 4
233. 234.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4.
TF TF TF TF
5. 26. 34. 35.
TF TF MC MC
36. 37. 38. 39.
6. 7. 8. 9. 10. 11. 27. 28. 49. 50. 51.
TF TF TF TF TF TF TF TF MC MC MC
52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
MC MC MC MC MC MC MC MC MC MC MC
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
12. 13. 14. 15. 16. 29.
TF TF TF TF TF TF
77. 81. 86. 87. 97. 98.
MC MC MC MC MC MC
99. 100. 101. 102. 103. 104.
Type
Item
Type
Item
Study Objective 1 MC 40. MC 44. MC 41. MC 45. MC 42. MC 46. MC 43. MC 47. Study Objective 2 MC 74. MC 89. MC 75. MC 90. MC 76. MC 91. MC 78. MC 92. MC 79. MC 93. MC 80. MC 94. MC 82. MC 95. MC 83. MC 96. MC 84. MC 106. MC 85. MC 107. MC 88. MC 152. Study Objective 3 MC 105. MC 113. MC 108. MC 114. MC 109. MC 115. MC 110. MC 154. MC 111. MC 155. MC 112. MC 196.
Type
Item
Type
Item
Type
MC MC MC MC
48. 150. 151. 180.
MC MC MC BE
216. 217.
C C
MC MC MC MC MC MC MC MC MC MC MC
153. 181. 182. 183. 184. 185. 186. 190. 191. 192. 193.
MC BE BE BE BE BE BE Ex Ex Ex Ex
194. 195. 196. 218. 219. 220. 227.
Ex Ex Ex C C C SA
MC MC MC MC MC Ex
197. 198. 221. 222. 228. 230.
Ex MC C C SA SA
231.
SA
FOR INSTRUCTOR USE ONLY
Inventories
6-3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
17. 18. 30.
TF TF TF
116. 117. 118.
MC MC MC
119. 120. 121.
19. 20. 31.
TF TF TF
124. 125. 126.
MC MC MC
127. 128. 129.
21. 130.
TF MC
131. 132.
MC MC
133. 134.
a
22. 23.
TF TF
a
32. 136.
TF MC
a
TF TF TF MC MC
a
MC MC MC MC MC
a
24. a 25. a 33. a 144. a 145.
a
146. a 147. a 148. a 149. a 159.
a
137. 138.
a
160. 161. 162. 163. 164.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 4 MC 122. MC 187. MC 123. MC 199. MC 156. MC 200. Study Objective 5 MC 157. MC 204. MC 188. BE 205. MC 203. Ex 206. Study Objective 6 MC 135. MC 189. MC 158. MC 208. a Study Objective 7 a MC 139. MC a141. a MC 140. MC a142. Study Objective a8 MC 165. MC 170. MC 166. MC 171. MC 167. MC 172. MC 168. MC 173. MC 169. MC 174.
BE Ex Ex
201. 202. 223.
Ex Ex C
232.
SA
Ex Ex Ex
207. 229. 233.
Ex SA SA
234.
SA
BE Ex
209. 224.
Ex C
143. 210.
MC Ex
a
211.
Ex
175. 176. 177. 178. 179.
MC MC MC MC MC
a
Ex Ex Ex Ex C
MC MC MC MC MC MC MC
BE = Brief Exercise Ex = Exercise
a a
212. 213. a 214. a 215. a 225. a
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Describe the steps in determining inventory quantities. The steps are (1) taking a physical inventory of goods on hand and (2) determining the ownership of goods in transit or on consignment. 2. Explain the accounting for inventories, and apply the inventory cost flow methods. The primary basis of accounting for inventories is cost. Cost of goods available for sale includes (a) cost of beginning inventory and (b) the cost of goods purchased. The inventory cost flow methods are: specific identification, and three assumed cost flow methods—FIFO, LIFO, and average-cost. 3. Explain the financial effects of the inventory cost flow assumptions. Companies may allocate the cost of goods available for sale to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current value. LIFO results in the lowest income taxes. FOR INSTRUCTOR USE ONLY
6-4
Test Bank for Accounting Principles, Tenth Edition
4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies may use the lower-of-cost-or-market (LCM) basis when the current replacement cost (market) is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs. 5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (a) An error in beginning inventory will have a reverse effect on net income. (b) An error in ending inventory will have a similar effect on net income. In the following period, its effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet, ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities. 6. Compute and interpret the inventory turnover ratio. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover ratio. a
7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO and a perpetual inventory system, companies charge to cost of goods sold the cost of the earliest goods on hand prior to each sale. Under LIFO and a perpetual system, companies charge to cost of goods sold the cost of the most recent purchase prior to sale. Under the movingaverage (average cost) method and a perpetual system, companies compute a new average cost after each purchase.
a
8. Describe the two methods of estimating inventories. The two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, companies apply a gross profit rate to net sales to determine estimated cost of goods sold. They then subtract estimated cost of goods sold from cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, companies compute a cost-to-retail ratio by dividing the cost of goods available for sale by the retail value of the goods available for sale. They then apply this ratio to the ending inventory at retail to determine the estimated cost of the ending inventory.
FOR INSTRUCTOR USE ONLY
Inventories
6-5
TRUE-FALSE STATEMENTS 1.
Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
The more inventory a company has in stock, the greater the company's profit.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic
3.
Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
4.
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Goods out on consignment should be included in the inventory of the consignor.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
7.
Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
8.
The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
10.
The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
11.
If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6-6 12.
Test Bank for Accounting Principles, Tenth Edition If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
13.
If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
14.
A company may use more than one inventory costing method concurrently.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
19.
An error that overstates the ending inventory will also cause net income for the period to be overstated.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
20.
If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Inventory turnover is calculated as cost of goods sold divided by ending inventory.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
22.
If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
FOR INSTRUCTOR USE ONLY
Inventories a
23.
6-7
In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
24.
Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
25.
The retail inventory method requires a company to value its inventory on the balance sheet at retail prices.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
28.
The cost of goods available for sale consists of the beginning inventory plus the cost of goods purchased.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
29.
In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
30.
The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
Inventories are reported in the current assets section of the balance sheet immediately below receivables.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
32.
In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
33.
The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6-8
Test Bank for Accounting Principles, Tenth Edition
Answers to True-False Statements Item
1. 2. 3. 4. 5.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T F F T T
6. 7. 8. 9. 10.
T F T F F
11. 12. 13. 14. 15.
T T T T F
16. 17. 18. 19. 20.
T T F T F
Item
Ans.
Item
Ans.
21. 22. a 23. a 24. a 25.
F T T F F
26. 27. 28. 29. 30.
T T T T T
a
Item
Ans.
31. 32. a 33.
T F T
a
MULTIPLE CHOICE QUESTIONS 34.
Inventories affect a. only the balance sheet. b. only the income statement. c. both the balance sheet and the income statement. d. neither the balance sheet nor the income statement.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
Inventory is a. reported under the classification of Property, Plant, and Equipment on the balance sheet. b. often reported as a miscellaneous expense on the income statement. c. reported as a current asset on the balance sheet. d. generally valued at the price for which the goods can be sold.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
Items waiting to be used in production are considered to be a. raw materials. b. work in progress. c. finished goods. d. merchandise inventory.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
In a manufacturing business, inventory that is ready for sale is called a. raw materials inventory. b. work in process inventory. c. finished goods inventory. d. store supplies inventory.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 39.
6-9
If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
Which of the following should be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit to another company shipped FOB shipping point. c. Goods in transit from another company shipped FOB shipping point. d. Both b and c above.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
42.
Manufacturers usually classify inventory into all the following general categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials
Ans: C, SO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
43.
Freight terms of FOB shipping point mean that the a. seller must debit freight out. b. buyer must bear the freight costs. c. goods are placed free on board at the buyer's place of business. d. seller must beat the freight costs.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
44.
For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except: a. to check the accuracy of the records. b. to determine the amount of wasted raw materials. c. to determine losses due to employee theft. d. to determine ownership of the goods.
Ans: D, SO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem solving, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
6 - 10 45.
Test Bank for Accounting Principles, Tenth Edition Fetherston Company's goods in transit at December 31 include: sales made (1) FOB destination (2) FOB shipping point
purchases made (3) FOB destination (4) FOB shipping point
Which items should be included in Fetherston's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4) Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
47.
Under a consignment arrangement, the a. consignor has ownership until goods are sold to a customer. b. consignor has ownership until goods are shipped to the consignee. c. consignee has ownership when the goods are in the consignee's possession. d. consigned goods are included in the inventory of the consignee.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
48.
As a result of a thorough physical inventory, Horace Company determined that it had inventory worth $270,000 at December 31, 2012. This count did not take into consideration the following facts: Herschel Consignment currently has goods worth $47,000 on its sales floor that belong to Horace but are being sold on consignment by Herschel. The selling price of these goods is $75,000. Horace purchased $22,000 of goods that were shipped on December 27. FOB destination, that will be received by Horace on January 3. Determine the correct amount of inventory that Horace should report. a. $270,000. b. $290,000. c. $317,000. d. $337,000.
Ans: C, SO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 49.
6 - 11
Partridge Bookstore had 500 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 375 @ $28 17 250 @ $20 25 250 @ $22 29 260 @ $32 Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the FIFO method is: a. $6,570. b. $7,300. c. $7,800. d. $8,030.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
50.
Partridge Bookstore had 500 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 375 @ $28 17 250 @ $20 25 250 @ $22 29 260 @ $32 Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is: a. $6,570. b. $7,300. c. $7,800. d. $8,030.
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
51.
Nick's Place recorded the following data: Units Date Received Sold On Hand 1/1 Inventory 600 1/8 Purchased 1,000 1,600 1/12 Sold 1,200 300
Unit Cost $2.00 2.40
The weighted average unit cost of the inventory at January 31 is: a. $2.00. b. $2.20. c. $2.25. d. $2.40. Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
6 - 12
Test Bank for Accounting Principles, Tenth Edition
52.
Inventoriable costs include all of the following except the a. freight costs incurred when buying inventory. b. costs of the purchasing and warehousing departments. c. cost of the beginning inventory. d. cost of goods purchased.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
53.
Beginning inventory plus the cost of goods purchased equals a. cost of goods sold. b. cost of goods available for sale. c. net purchases. d. total goods purchased.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
54.
Cost of goods sold is computed from the following equation: a. beginning inventory – cost of goods purchased + ending inventory. b. sales – cost of goods purchased + beginning inventory – ending inventory. c. sales + gross profit – ending inventory + beginning inventory. d. beginning inventory + cost of goods purchased – ending inventory.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
55.
A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $250 and used FIFO costing, the gross profit for the period would be a. $70. b. $75. c. $77. d. $85.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
56.
The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 57.
6 - 13
A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $536. b. $668. c. $1,447. d. $1,564.
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
58.
A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is a. $536. b. $668. c. $1,447. d. $1,564.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
59.
A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $536. b. $604. c. $668. d. $1,511.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 14 60.
Test Bank for Accounting Principles, Tenth Edition A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the weighted average unit cost method. d. not determinable.
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
61.
A company purchased inventory as follows: 150 units at $10 350 units at $12 The average unit cost for inventory is a. $10.00. b. $11.00. c. $11.40. d. $12.00.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62.
Which of the following items will increase inventoriable costs for the buyer of goods? a. Purchase returns and allowances granted by the seller b. Purchase discounts taken by the purchaser c. Freight charges paid by the seller d. Freight charges paid by the purchaser
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Inventoriable costs may be thought of as a pool of costs consisting of which two elements? a. The cost of beginning inventory and the cost of ending inventory b. The cost of ending inventory and the cost of goods purchased during the year c. The cost of beginning inventory and the cost of goods purchased during the year d. The difference between the costs of goods purchased and the cost of goods sold during the year
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
The cost of goods available for sale is allocated between a. beginning inventory and ending inventory. b. beginning inventory and cost of goods on hand. c. ending inventory and cost of goods sold. d. beginning inventory and cost of goods purchased.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 65.
6 - 15
Indrisano's Used Cars uses the specific identification method of costing inventory. During March, Indrisano purchased three cars for $6,000, $7,200, and $9,600, respectively. During March, two cars are sold for a total of $17,300. Indrisano determines that at March 31, the $7,200 car is still on hand. What is Indrisano’s gross profit for March? a. $500. b. $1,700. c. $2,100. d. $4,100.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
66.
Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower-of-cost-or-market basis cannot be applied.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic
68.
The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
69.
Which one of the following inventory methods is often impractical to use? a. Specific identification b. LIFO c. FIFO d. Average cost
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
70.
Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 16 71.
Test Bank for Accounting Principles, Tenth Edition The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the expense recognition principle. b. called the consistency principle. c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
72.
Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
74.
The cost of goods available for sale is allocated to the cost of goods sold and the a. beginning inventory. b. ending inventory. c. cost of goods purchased. d. gross profit.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
75.
At May 1, 2012, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 300 units at $8 The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. The average cost per unit for May is a. $7.000. b. $7.375. c. $7.500. d. $8.000.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 76.
6 - 17
At May 1, 2012, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 300 units at $8 The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. The value of Kibbee’s inventory at May 31, 2012 is a. $1,500.00. b. $2,212.50. c. $2,250.00. d. $3,750.00.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
77.
At May 1, 2012, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows: 200 units at $7 300 units at $8 The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. Kibbee’s gross profit for the month of May is a. $2,250.00. b. $3,750.00. c. $3,787.50. d. $4,500.00.
Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
78.
Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2012 are as follows: Balance, 1/1/12 Purchase, 1/15/12 Purchase, 1/28/12
Units 200 100 100
Per unit price $5.00 5.30 5.50
Total $1,000 530 550
An end of the month (1/31/12) inventory showed that 140 units were on hand. How many units did the company sell during January, 2012? a. 60 b. 140 c. 200 d. 260 Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 18 79.
Test Bank for Accounting Principles, Tenth Edition Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2012 are as follows:
Balance, 1/1/12 Purchase, 1/15/12 Purchase, 1/28/12
Units 200 100 100
Per unit price $5.00 5.30 5.50
Total $1,000 530 550
An end of the month (1/31/12) inventory showed that 140 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $700 b. $728 c. $742 d. $762 Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
80.
Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2012 are as follows: Balance, 1/1/12 Purchase, 1/15/12 Purchase, 1/28/12
Units 200 100 100
Per unit price $5.00 5.30 5.50
Total $1,000 530 550
An end of the month (1/31/12) inventory showed that 140 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $700 b. $728 c. $742 d. $762 Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
81.
Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2012 are as follows: Balance, 1/1/12 Purchase, 1/15/12 Purchase, 1/28/12
Units 200 100 100
Per unit price $5.00 5.30 5.50
Total $1,000 530 550
An end of the month (1/31/12) inventory showed that 140 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,220 b. $1,282 c. $1,838 d. $1,900 Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 82.
6 - 19
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the FIFO method, the December 31 inventory is valued at a. $14,000. b. $16,133. c. $16,480. d. $18,400. Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
83.
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the cost of goods available for sale? a. $84,600 b. $89,000 c. $103,000 d. $162,500 Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
84.
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the LIFO method, cost of goods sold is a. $14,000. b. $84,600. c. $86,520. d. $89,000. Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 20
Test Bank for Accounting Principles, Tenth Edition
85.
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. The weighted-average cost per unit is a. $8.00. b. $8.01. c. $8.24. d. $9.30. Ans: C, SO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
86.
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. If the company uses FIFO, what is the gross profit for the period? a. $47,500 b. $49,633 c. $49,980 d. $51,900 Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
87.
Eneri Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.20 8.00 7.00
A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used? a. $880 additional taxes b. $496 additional taxes c. $384 additional taxes d. $496 tax savings Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 88.
Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $23
6 - 21
$ 380 1,400 230 $2,010
A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the average-cost method, the value of ending inventory is a. $580. b. $603. c. $620. d. $630. Ans: B, SO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
89.
Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $23
$ 380 1,400 230 $2,010
A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,380. b. $1,390. c. $1,407. d. $1,430. Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
90.
Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $23
$ 380 1,400 230 $2,010
A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,380. b. $1,390. c. $1,407. d. $1,430. Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 22
Test Bank for Accounting Principles, Tenth Edition
91.
Moroni Industries has the following inventory information. July 1 Beginning Inventory 10 units at $120 5 Purchases 60 units at $112 14 Sale 40 units 21 Purchases 30 units at $115 30 Sale 35 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $2,875 b. $2,880 c. $8,490 d. $8,495
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
92.
Moroni Industries has the following inventory information. July 1 Beginning Inventory 10 units at $120 5 Purchases 60 units at $112 14 Sale 40 units 21 Purchases 30 units at $115 30 Sale 35 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $2,875 b. $2,880 c. $8,490 d. $8,495
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
93.
Netta Shutters has the following inventory information. Nov. 1 Inventory 15 units @ $8.00 8 Purchase 60 units @ $8.30 17 Purchase 30 units @ $8.40 25 Purchase 45 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Cost of goods sold (rounded to the nearest dollar) under the average-cost method is a. $870. b. $886. c. $889. d. $897.
Ans: B, SO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 94.
6 - 23
Netta Shutters has the following inventory information. Nov. 1 Inventory 15 units @ $8.00 8 Purchase 60 units @ $8.30 17 Purchase 30 units @ $8.40 25 Purchase 45 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is a. $369. b. $396. c. $870. d. $897.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
95.
Netta Shutters has the following inventory information. Nov. 1 Inventory 15 units @ $8.00 8 Purchase 60 units @ $8.30 17 Purchase 30 units @ $8.40 25 Purchase 45 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is a. $369. b. $396. c. $870. d. $897.
Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
96.
Netta Shutters has the following inventory information. Nov. 1 8 17 25
Inventory Purchase Purchase Purchase
15 units @ $8.00 60 units @ $8.30 30 units @ $8.40 45 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Assuming that the specific identification method is used and that ending inventory consists of 10 units from each of the three purchases and 15 units from the November 1 inventory, cost of goods sold is a. $870. b. $886. c. $891. d. $897. Ans: C, SO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 24 97.
Test Bank for Accounting Principles, Tenth Edition Romanoff Industries had the following inventory transactions occur during 2012: 2/1/10 3/14/10 5/1/10
Purchase Purchase Purchase
Units 18 31 22
Cost/unit $45 $47 $49
The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $1,106 b. $1,184 c. $2,316 d. $2,394 Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
98.
Romanoff Industries had the following inventory transactions occur during 2012: 2/1/10 3/14/10 5/1/10
Purchase Purchase Purchase
Units 18 31 22
Cost/unit $45 $47 $49
The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $774 b. $829 c. $1,106 d. $1,184 Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
99.
Romanoff Industries had the following inventory transactions occur during 2012: 2/1/10 3/14/10 5/1/10
Purchase Purchase Purchase
Units 18 31 22
Cost/unit $45 $47 $49
The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $1,106 b. $1,184 c. $2,316 d. $2,394 Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 100.
6 - 25
Romanoff Industries had the following inventory transactions occur during 2012: 2/1/10 3/14/10 5/1/10
Purchase Purchase Purchase
Units 18 31 22
Cost/unit $45 $47 $49
The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $774 b. $829 c. $1,106 d. $1,184 Ans: B, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
101.
Companies adopt different cost flow methods for each of the following reasons except a. balance sheet effects. b. cost effects. c. income statements effects. d. tax effects.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
102.
In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. LIFO method. c. average-cost method. d. tax method.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of good sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods available for sale of the companies will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
FOR INSTRUCTOR USE ONLY
6 - 26 105.
Test Bank for Accounting Principles, Tenth Edition In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average Cost d. Income tax expense for the period will be the same under all assumptions.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
106.
The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low cost homogeneous items. c. company sells large quantities of relatively low cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
107.
The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
108.
The managers of Constantine Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
109.
In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
110.
Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
FOR INSTRUCTOR USE ONLY
Inventories 111.
6 - 27
In a period of rising prices, the costs allocated to ending inventory may be understated in the a. average-cost method. b. FIFO method. c. gross profit method. d. LIFO method.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
112.
The accountant at Almira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $5,460. The LIFO method will result in income before taxes of $4,860. What is the difference in tax that would be paid between the two methods? a. $180. b. $420. c. $600. d. Cannot be determined from the information provided.
Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
113.
The accountant at Cedric Company has determined that income before income taxes amounted to $7,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $225 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $6,250 b. $7,000 c. $7,225 d. $7,750
Ans: D, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
114.
The manager of Brick Company is given a bonus based on income before income taxes. Net income, after taxes, is $5,600 for FIFO and $4,900 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? a. $42 b. $1,400 c. $200 d. $210
Ans: C, SO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
115.
The consistent application of an inventory costing method is essential for a. conservatism. b. accuracy. c. comparability. d. efficiency.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 28 116.
Test Bank for Accounting Principles, Tenth Edition Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-market is applied? a. Specific identification b. FIFO c. LIFO d. All of these methods can be used.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
117.
Inventory is reported in the financial statements at a. cost. b. market. c. the higher-of-cost-or-market. d. the lower-of-cost-or-market.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118.
The lower-of-cost-or-market basis of valuing inventories is an example of a. comparability. b. the cost principle. c. conservatism. d. consistency.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
119.
Under the lower-of-cost-or-market basis in valuing inventory, market is defined as a. current replacement cost. b. selling price. c. historical cost plus 10%. d. selling price less markup.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
The lower-of-cost-or-market (LCM) basis may be used with all of the following methods except a. average cost. b. FIFO. c. LIFO. d. The LCM basis may be used with all of these.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 121.
6 - 29
Alfalfa Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Product Cost Market A $110,000 $120,000 B 80,000 76,000 C 155,000 162,000 If Alfalfa applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $341,000. b. $345,000. c. $358,000. d. $362,000.
Ans: A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
Switzer, Inc. has 5 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. What value should Switzer, Inc., have for the computers at the end of the year? a. $1,500. b. $2,000. c. $3,000. d. $4,500.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
123.
Switzer, Inc. has 5 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. How much loss should Switzer, Inc., record for the year? a. $1,000. b. $1,500. c. $2,000. d. $2,500.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
Othello Company understated its inventory by $20,000 at December 31, 2012. It did not correct the error in 2012 or 2013. As a result, Othello's owner's equity was: a. understated at December 31, 2012, and overstated at December 31, 2013. b. understated at December 31, 2012, and properly stated at December 31, 2013. c. overstated at December 31, 2012, and overstated at December 31, 2013. d. understated at December 31, 2012, and understated at December 31, 2013.
Ans: B, SO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
125.
Understating beginning inventory will understate a. assets. b. cost of goods sold. c. net income. d. owner's equity.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 30 126.
Test Bank for Accounting Principles, Tenth Edition An error in the physical count of goods on hand at the end of a period resulted in a $15,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated
Ans: C, SO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
127.
If beginning inventory is understated by $13,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated
Ans: C, SO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
128.
A company uses the periodic inventory method and the beginning inventory is overstated by $7,000 because the ending inventory in the previous period was overstated by $7,000. The amounts reflected in the current end of the period balance sheet are Assets Owner’s Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct
Ans: B, SO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
Overstating ending inventory will overstate all of the following except a. assets. b. cost of goods sold. c. net income. d. owner's equity.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130.
Disclosures about inventory should include each of the following except the a. basis of accounting. b. costing method. c. quantity of inventory. d. major inventory classifications.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 131.
6 - 31
Days in inventory is calculated by dividing a. the inventory turnover ratio by 365 days. b. average inventory by 365 days. c. 365 days by the inventory turnover ratio. d. 365 days by average inventory.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
132.
The following information is available for Everett Company at December 31, 2012: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $700,000; and sales $1,200,000. Everette’s inventory turnover in 2012 is a. 5.8 times. b. 7 times. c. 8.8 times. d. 12 times.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133.
The following information was available for Pete Company at December 31, 2012: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $656,000; and sales $900,000. Pete’s inventory turnover ratio in 2012 was a. 7.3 times. b. 8.2 times. c. 9.4 times. d. 11.3 times.
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
The following information was available for Pete Company at December 31, 2012: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $656,000; and sales $900,000. Pete’s days in inventory in 2012 was a 32.3 days. b. 38.8 days. c. 44.5 days. d. 50.0 days.
Ans: C, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
135.
Delmar Company had beginning inventory of $90,000, ending inventory of $110,000, cost of goods sold of $500,000, and sales of $800,000. Delmar's days in inventory is: a 45.6 days. b. 65.2 days. c. 73.0 days. d. 81.1 days.
Ans: C, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 32 136.
a
Test Bank for Accounting Principles, Tenth Edition During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.
July 3 11 20
Purchases 20 units @ $12 20 units @ $13 10 units @ $15
July 13 22
Sales 25 units 10 units
Under the FIFO method, the cost of goods sold for each sale is: July 13 a. $300 b. 305 c. 325 d. 375
July 22 $120 130 130 150
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
a
During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.
July 3 11 20
Purchases 20 units @ $12 20 units @ $13 10 units @ $15
July 13 22
Sales 25 units 10 units
Under the LIFO method, the cost of goods sold for each sale is: July 13 a. $300 b. 320 c. 325 d. 375
July 22 $120 150 150 130
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
138.
a
Pappy’s Staff has the following inventory information. July 1 Beginning Inventory 10 units at $90 5 Purchases 60 units at $92 14 Sale 40 units 21 Purchases 30 units at $95 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis? a. $2,924 b. $2,930 c. $3,034 d. $6,346
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories 139
a
6 - 33
Pappy’s Staff Junkets has the following inventory information. July 1 Beginning Inventory 10 units at $90 5 Purchases 60 units at $92 14 Sale 40 units 21 Purchases 30 units at $95 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis? a. $2,924 b. $2,930 c. $3,034 d. $6,346
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
140.
a
Pappy’s Staff has the following inventory information. July 1 Beginning Inventory 10 units at $90 5 Purchases 60 units at $92 14 Sale 40 units 21 Purchases 30 units at $95 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the ending inventory (rounded) under the average-cost method? a. $2,930 b. $2,966 c. $2,987 d. $3,054
Ans: C, SO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
A new average cost is computed each time a purchase is made in the a. average-cost method. b. moving-average cost method. c. weighted-average cost method. d. all of these methods.
Ans: B, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
142. When valuing ending inventory under a perpetual inventory system, the a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumption under the periodic inventory system. b. moving average requires that a new average be computed after every sale. c. valuation using the FIFO assumption is the same as under the periodic inventory system. d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 34
Test Bank for Accounting Principles, Tenth Edition
a
143. Sawyer Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $40,000 in the beginning inventory. On August 10, 20,000 units were purchased for $8 per unit. On August 15, 24,000 units were sold for $16 per unit. The amount charged to cost of goods sold on August 15 was a. $40,000. b. $144,000. c. $160,000. d. $192,000.
Ans: C, SO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
144. Under the gross profit method, each of the following items are estimated except for the a. cost of ending inventory. b. cost of goods sold. c. cost of goods purchased. d. gross profit.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
145. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by a. net sales. b. goods available for sale at retail. c. goods purchased at retail. d. ending inventory at retail.
Ans: D, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
146. Inventories are estimated a. more frequently under a periodic inventory system than a perpetual inventory system. b. using the wholesale inventory method. c. more frequently under a perpetual inventory system than the periodic inventory system. d. using the net method.
Ans: A, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
147. Clooney Department Store estimates inventory by using the retail inventory method. The following information was developed: Beginning inventory Goods purchased Net sales
At Cost $360,000 900,000
At Retail $ 750,000 1,350,000 1,200,000
The estimated cost of the ending inventory is a. $360,000. b. $432,000. c. $540,000. d. $600,000. Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories
6 - 35
a
148. Turturro Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $400,000 and goods were sold during the period for $280,000. The estimated cost of the ending inventory is a. $90,000. b. $120,000. c. $210,000. d. $300,000.
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
149. TB Nelson Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $60,000; the beginning inventory on June 1 was $18,000; and the cost of goods purchased during June amounted to $30,000. The estimated cost of TB Nelson Company's inventory on June 30 is a. $7,200. b. $12,000. c. $24,000. d. $42,000.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
150.
Goods in transit should be included in the inventory of the buyer when the a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
Inventory items on an assembly line in various stages of production are classified as a. Finished goods. b. Work in process. c. Raw materials. d. Merchandise inventory.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
The cost flow method that often parallels the actual physical flow of merchandise is the a. FIFO method. b. LIFO method. c. average-cost method. d. gross profit method.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
FOR INSTRUCTOR USE ONLY
6 - 36 153.
Test Bank for Accounting Principles, Tenth Edition Goodman Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost $9.00 8.20 7.00
A physical inventory on December 31 shows 3,000 units on hand. Under the FIFO method, the December 31 inventory is a. $21,000. b. $24,600. c. $24,696. d. $27,000. Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154. In a period of inflation, the cost flow method that results in the lowest income taxes is the a. FIFO method. b. LIFO method. c. average-cost method. d. gross profit method. Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
155.
In a period of rising prices, FIFO will have a. lower net income than LIFO. b. lower cost of goods sold than LIFO. c. lower income tax expense than LIFO. d. lower net purchases than LIFO.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
156. Under the LCM approach, the market value is defined as a. FIFO cost. b. LIFO cost. c. current replacement cost. d. selling price. Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
157. Penny Company made an inventory count on December 31, 2012. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, 2012, the effects of this error are a. b. c. d.
Assets overstated understated overstated overstated
Liabilities understated no effect no effect overstated
Owner’s Equity overstated understated overstated understated
Ans: C, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories
6 - 37
158. The inventory turnover ratio is computed by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days. Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
159. H. Hunter Company's records indicate the following information for the year: Merchandise inventory, 1/1 Purchases Net Sales
$ 550,000 2,250,000 3,200,000
On December 31, a physical inventory determined that ending inventory of $500,000 was in the warehouse. H. Hunter's gross profit on sales has remained constant at 30%. H. Hunter suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory? a. $60,000 b. $100,000 c. $150,000 d. $1,340,000 Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
160.
The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
161.
The major IFRS requirements related to accounting for and reporting inventories are a. the same as GAAP. b. the same as GAAP with a couple of exceptions. c. completely different fom GAAP. d. not comparable to GAAP.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
162.
Inventory accounting under IFRS differs from GAAP in regard to a. neither the use of LIFO nor lower-of-cost-or-market. b. the use of LIFO but not lower-of-cost-or-market. c. the use of lower-of-cost-or-market but not LIFO. d. the use of LIFO and lower-of-cost-or-market.
Ans: D, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 38 163.
Test Bank for Accounting Principles, Tenth Edition Under GAAP, companies can choose which inventory system? LIFO FIFO a. Yes No b. Yes Yes c. No Yes d. Yes No
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
164.
Under IFRS, companies can choose which inventory system? LIFO FIFO a. Yes No b. Yes Yes c. No Yes d. No No
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
165.
GAAP’s definition for inventory and provision of guidelines for inventory accounting, as compared to IFRS are: Definitions for Inventory Guideliness for inventory accounting a. essentially similar more detailed b. essentially different more detailed c. essentially similar less detailed d. essentially different less detailed
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
166.
Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. all of the above.
Ans: D, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
167.
Specific Identification can be used for inventory valuation under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories 168.
6 - 39
Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: D, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
169.
GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are: Ownership of goods Costs to include in inventory a. essentially similar essentially similar b. essentially different essentially different c. essentially similar essentially different d. essentially different essentially similar
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
170.
The only acceptable cost flow assumptions under IFRS are a. FIFO and LIFO. b. FIFO and average. c. LIFO and average. d. FIFO, LIFO and average.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
171.
LIFO can be used a. under neither GAAP nor IFRS. b. under IFRS but not GAAP. c. under GAAP but not IFRS. d. under both GAAP and IFRS.
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
172.
The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: D, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
173.
IFRS defines market for lower-of-cost-or market as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal.
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 40 174.
Test Bank for Accounting Principles, Tenth Edition GAAP defines market for lower-of-cost-or market essentially as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal.
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
175.
Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: D, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
176.
The option to value inventory at fair value exists under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
177.
Certain agricultural and mineral products can be reported at net realizable value under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
178.
The convergence issue that will be most difficult to resolve in the area of inventory accounting is: a. FIFO. b. LIFO. c. ownership of goods. d. costs to include in inventory.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
179.
With a new conceptual framework being developed, it is likely that which concept will be eliminated? a. conservatism. b. prudence. c. conservatism and prudence. d. neither conservatism nor prudence.
Ans: C, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Inventories
6 - 41
Ans.
Item
Ans.
b c b c c c d a c a b d b a a b b c c c a
160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179.
c b d b c a d b d a b c d a c d c b b c
Answers to Multiple Choice Questions Item
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
Ans.
c c a c b a d c c b d b a a c c a c b b d
Item
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.
Ans.
b c a c b a c d c c b d b d a b c a c b b
Item
76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.
Ans.
b a d d a b a c b c a a b a d b a b b a c
Item
97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.
Ans.
a a b b b a c b b d d a b a d a d c c d d
Item
118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. a 136 a 137. a 138. .
Ans.
c a d a b a b b c c b b c c b b c c b b c
Item a
139. 140. a 141. a 142. a 143. a 144. a 145. a 146. a 147. a 148. a 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. a 159. a
BRIEF EXERCISES BE 180 Tommy Johnson Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Tommy Johnson to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 180 1. 2. 3. 4.
(3 min.)
Included Excluded Excluded Excluded
BE 181 In the first month of operations, C. T. King Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $9. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. C. T. King uses a periodic inventory system. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
6 - 42
Test Bank for Accounting Principles, Tenth Edition
Solution 181
(5 min.)
1. FIFO 300 × $9 = $2,700 2. LIFO 200 × $6 = $1,200 100 × $7 = 700 $1,900 BE 182 O’Daniel Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $40,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $15,500. Calculate cost of goods available for sale and cost of goods sold for the month. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 182
(4 min.)
Beginning inventory Net purchases ($40,000 – $2,000) Goods available for sale Ending inventory Cost of goods sold
$12,000 +38,000 $50,000 – 15,500 $34,500
BE 183 Homer Stokes Company's inventory records show the following data for the month of September: Inventory, September 1 Purchases: September 8 September 18
Units 100 450 350
Unit Cost $3.34 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(4 min.)
Ending inventory of 200 units: 200 x $3.70 = $740 Cost of goods sold: Units available for sale (100 + 450 + 350) = 900 Units sold 900 – 200 = 700 100 × $3.34 = 450 × $3.50 = 150 × $3.70 = Cost of goods sold
$ 334 1,575 555 $2,464 FOR INSTRUCTOR USE ONLY
Inventories
6 - 43
BE 184 Homer Stokes Company's inventory records show the following data for the month of September: Inventory, September 1 Purchases: September 8 September 18
Units 100 450 350
Unit Cost $3.34 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(4 min.)
Ending inventory: Cost of goods sold:
(100 units × $3.34) + (100 units × $3.50) = $684 (350 units × $3.70) + (350 units × $3.50) = $2,520
BE 185 Homer Stokes Company's inventory records show the following data for the month of September: Inventory, September 1 Purchases: September 8 September 18
Units 100 450 350
Unit Cost $3.34 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 185
(4 min.)
Weighted average cost per unit: Cost of goods available for sale = $3,204 Units available for sale 900 $3,204 ÷ 900 = $3.56 Ending inventory: 200 × $3.56 = $712 Cost of goods sold: 700 × $3.56 = $2,492
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
BE 186 The following accounts are included in the ledger of The Little Man Company: Advertising expense Freight-in Inventory Purchases Purchase returns and allowances Sales Sales returns and allowances Which of the accounts would be included in calculating cost of goods sold? Ans: N/A, SO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 186
(3 min.)
Freight-in Inventory Purchases Purchase returns and allowances BE 187 The Badalucco Company accumulates the following cost and market data at December 31. Inventory Categories Camera Camcorders DVDs
Cost Data $11,000 7,800 14,000
Market Data $9,900 8,500 12,000
What is the lower-of-cost-or-market value of the inventory? Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 187
(5 min.)
Inventory Categories Camera Camcorders DVDs
Cost Data $11,000 7,800 14,000
Market Data $9,900 8,500 12,000
Lower-of-costor-market value $9,900 7,800 12,000 $29,700
BE 188 Cooley Supply Company reports net income of $120,000 in 2012. The ending inventory did not include goods valued at $7,000 that Cooley had consigned to Sharif’s Gift Shop. (1) What is the correct net income for 2012? (2) What impact will this error have on the balance sheet at 12/31/12? Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories Solution 188
6 - 45
(4 min.)
(1) If ending inventory is understated by $7,000, cost of goods sold will be overstated and net income will be understated by $7,000. The correct net income is $127,000. (2) On the balance sheet, both inventory and owner’s equity will be understated by $7,000. BE 189 At December 31, 2012, the following information was available for Fife Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue $430,000. Calculate the inventory turnover ratio and days in inventory for Fife. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 189
(4 min.)
Inventory Turnover Ratio = $171,000 ÷ [($21,400 + $22,600) ÷ 2] = 7.8 times Days in Inventory = 365 ÷ 7.8 = 46.8 days
EXERCISES Ex. 190 The following information is available for Waldrip Company: Beginning inventory First purchase Second purchase
600 units at $4 900 units at $6 500 units at $7.20
Assume that Waldrip uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute the cost of ending inventory under the (a) FIFO method. (b) LIFO method. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 190
(7 min.)
(a) FIFO Ending Inventory Cost: 500 × $7.20 =$3,600 200 × $6 = 1,200 $4,800 (b) LIFO Ending Inventory Cost: 600 × $4 = $2,400 100 × $6 = 600 $3,000 FOR INSTRUCTOR USE ONLY
6 - 46
Test Bank for Accounting Principles, Tenth Edition
Ex. 191 The following information is available for Waldrip Company: Beginning inventory First purchase Second purchase
600 units at $4 900 units at $6 500 units at $7.20
Assume that Waldrip uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute each of the following under the average-cost method: (a) Cost of ending inventory. (b) Cost of goods sold. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 191
(7 min.)
Average cost/unit = $5.70 ($11,400 2,000) 600 × $4 = $ 2,400 900 × $6 = 5,400 500 × $7.20 = 3,600 2,000 $11,400 (a) Cost of ending inventory = $3,990 (700 × $5.70) (b) Cost of goods sold = $7,410 (1,300 × $5.70) or $11,400 – $3,990 Ex. 192 Hogwallop Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 400 $6 2,400 7/25 Purchase 200 $7 1,400 10/20 Purchase 300 $8 2,400 1,000 $6,600 A physical count of inventory on December 31 revealed that there were 400 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.
FOR INSTRUCTOR USE ONLY
Inventories Ex. 192
6 - 47
(Cont.)
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? Ans: N/A, SO: 2, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 192
(20 min.)
1. FIFO: Ending inventory $3,100 300 units @ $8 = $2,400 100 units @ $7 = 700 400 units $3,100 2. Average Cost: Ending inventory $2,480 $6,600 ÷ 1,000 = $6.60 per unit × 400 units = $2,640 3. LIFO: Ending Inventory $1,900 100 units @ $4 = $ 400 300 units @ $6 = 1,800 400 units $2,200 4. FIFO: Cost of goods sold $3,100 100 units @ $4 = $ 400 400 units @ $6 = 2,400 100 units @ $7 = 700 600 units $3,500
LIFO: Cost of goods sold $4,300 300 units @ $8 = $2,400 200 units @ $7 = 1,400 100 units @ $6 = 600 600 units $4,400
Income would have been $900 ($4,400 vs. $3,500) greater if the company used FIFO instead of LIFO. Ex. 193 Pomade Company sells many products. Fortenberry is one of its popular items. Below is an analysis of the inventory purchases and sales of Fortenberry for the month of March. Pomade Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 70 $80 3/10 Purchase 200 $55 3/16 Sales 80 $90 3/19 Sales 60 $90 3/25 Sales 40 $90 3/30 Purchase 40 $65
FOR INSTRUCTOR USE ONLY
6 - 48
Test Bank for Accounting Principles, Tenth Edition
Ex. 193
(Cont.)
Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
(20 min.)
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
Units 100 60 200
40 400
Purchases Unit Cost $40 $50
Units
Sales Selling Price/Unit
70
$80
80 60 40
$90 $90 $90
$55
$60 250
(a)
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 90 @ 55 = 4,950 250 units $11,950 = the cost of goods sold
(b)
Calculate the weighted average unit cost: $20,400 ÷ 400 = $51 $51 × units in ending inventory (400 available less 250 sold = 150) $51 × 150 = $7,650
(c)
There are 150 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 3/3 50 @ $50 = 2,500 150 units $6,500 = ending inventory
Ex. 194 Toso Company uses the periodic inventory system to account for inventories. Information related to Toso Company's inventory at October 31 is given below: October
1 8 16 24
Beginning inventory Purchase Purchase Purchase Total units and cost
400 800 600 200 2,000
units @ $9.80 = units @ $10.40 = units @ $10.80 = units @ $11.80 = units
FOR INSTRUCTOR USE ONLY
$ 3,920 8,320 6,480 2,360 $21,080
Inventories Ex. 194
6 - 49
(Cont.)
Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 194
(20 min.)
1. 550 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.80 = $2,360 10/16 350 units @ 10.80 = 3,780 550 units $6,140 2. 550 units in ending inventory. Under average cost method, the weighted average cost per unit must be computed. $21,080 ÷ 2,000 units = $10.54 550 units × $10.54 = $5,797 3. 550 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $9.80 = $3,920 10/8 150 units @ 10.40 = 1,560 550 units $5,480 Ex. 195 Wash Co. uses a periodic inventory system. Its records show the following for the month of May, in which 75 units were sold. May 1 Inventory 15 Purchases 24 Purchases Totals
Units 35 30 40 105
Unit Cost $ 8 12 13
Total Cost $ 280 360 520 $1,160
Instructions Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 50
Test Bank for Accounting Principles, Tenth Edition
Solution 195
(20 min.)
FIFO Beginning inventory (35 X $8) .................................................................. Purchases May 15 (30 X $12)............................................................................. May 24 (40 X $13) ............................................................................. Cost of goods available for sale............................................................... Less: Ending inventory (30 X $13)........................................................... Cost of goods sold...................................................................................
Date 5/1 5/15 5/24
Units 35 30 10
Proof Unit Cost $ 8 12 13
Units 40 30 5
Proof Unit Cost $13 12 8
$360 520
880 1,160 390 $770
Total Cost $280 360 130 $ 770
LIFO Cost of goods available for sale................................................................ Less: Ending inventory (30 X $8).............................................................. Cost of goods sold....................................................................................
Date 5/24 5/15 5/1
$280
$1,160 240 $ 920
Total Cost $520 360 40 $920
Ex. 196 Soggy Bottom Company reports the following for the month of June.
June 1 Inventory 12 Purchase 23 Purchase 30 Inventory
Units 300 450 750 180
Unit Cost $5 6 8
Total Cost $1,500 2,700 6,000
Instructions (a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO. (b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost method. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories Solution 196 (a)
(20 min.)
FIFO Beginning inventory (300 X $5) .................................................. Purchases June 12 (450 X $6) ............................................................. June 23 (750 X $8) .............................................................. Cost of goods available for sale ................................................. Less: Ending inventory (180 X $8) ............................................. Cost of goods sold .................................................................... LIFO Cost of goods available for sale ................................................ Less: Ending inventory (180 X $5) ............................................ Cost of goods sold ....................................................................
(b)
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Cost of Goods Available for Sale $10,200
Total Units Available for Sale 1,500
Ending inventory (180 X $6.80) Cost of goods sold (1,320 X $6.80)
=
$1,500 $2,700 6,000
8,700 10,200 1,440 $8,760
$10,200 900 $9,300
Weighted Average Unit Cost $6.80
$1,224 8,976
Ex. 197 Purdy Company is in the electronics industry and the price it pays for inventory is decreasing. Instructions Indicate which inventory method will: a. provide the highest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income. d. result in the lowest income tax expense. e. produce the most stable earnings over several years. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Quantitative Methods
Solution 197 a. b. c. d. e.
(4 min.)
LIFO FIFO LIFO FIFO Average cost
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 198 Siren Company reported the following summarized annual data at the end of 2012: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,000,000 600,000 400,000 250,000 $ 150,000
*Based on an ending FIFO inventory of $250,000. The income tax rate is 40%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $180,000. Instructions (a) Restate the summary information on a LIFO basis. (b)
What effect, if any, would the proposed change have on Siren’s income tax expense, net income, and cash flows?
(c)
If you were an owner of this business, what would your reaction be to this proposed change?
Ans: N/A, SO: 3, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198 (a)
(25 min.)
Restate to a LIFO basis: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,000,000 670,000 330,000 250,000 $ 80,000
*Ending inventory would be $70,000 less ($250,000 – $180,000 = $70,000) under LIFO, thereby increasing cost of goods by $70,000. (b)
The taxes on the FIFO basis would be: $150,000 ×.40 = $60,000 Leaving Net Income of $90,000 ($150,000 – $60,000 = $90,000). The taxes on the LIFO basis would be: $80,000 ×.40 = $32,000 Leaving Net Income of $48,000 ($80,000 – $32,000 = $48,000). Switching to the LIFO basis will result in $28,000 less income tax expense and less net income of $42,000. The cash effect is $28,000 ($60,000 – $32,000 = $28,000) saved in taxes if LIFO were used.
(c)
Owners of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.
FOR INSTRUCTOR USE ONLY
Inventories
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Ex. 199 Compute the lower-of-cost-or-market valuation for Wharvey Company's total inventory based on the following: Inventory Categories Cost Data Market Data A $18,000 $16,900 B 13,900 14,600 C 21,000 20,500 Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 199
(5 min.)
Inventory Categories Cost Data A $18,000 B 13,900 C 21,000 Total Valuation
Market Data $16,900 14,600 20,500
LCM $16,900 13,900 20,500 $51,300
Ex. 200 The controller of Cox Company is applying the lower-of-cost-or-market basis of valuing its ending inventory. The following information is available: Cost
Market
Lawnmowers: Self-propelled Push type Total
$14,800 19,000 33,800
$17,000 18,000 35,000
Snowblowers: Manual Self-start Total Total inventory
29,800 19,000 48,800 $82,600
31,000 21,000 52,000 $87,000
Instructions Compute the value of the ending inventory by applying the lower-of-cost-or-market basis. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 200
(15 min.) Lower-of-cost-or-market
Lawnmowers: Self-propelled Push type
$14,800 18,000
Snowblowers: Manual Self-start Total inventory
29,800 19,000 $81,600
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 201 Gihan Company is preparing the annual financial statements dated December 31, 2012. Information about inventory stocked for regular sale follows: Quantity on Hand 50 100 20 40
Item A B C D
Unit Cost When Acquired $20 45 59 40
Replacement Cost (market) at year end $19 45 62 36
Instructions Compute the valuation for the December 31, 2012, inventory using the lower-of-cost-or-market basis. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 201
(10 min.)
Item A B C D
Lower of Cost or Market $19 45 59 36
Units 50 100 20 40
Extension $ 950 4,500 1,180 1,440 $8,070
Ex. 202 Welch Company applied FIFO to its inventory and got the following results for its ending inventory. VCRs 140 units at a cost per unit of $59 DVD players 210 units at a cost per unit of $75 iPods 175 units at a cost per unit of $80 The cost of purchasing units at year-end was VCRs $71, DVD players $68, and iPods $78. Instructions Determine the amount of ending inventory at lower-of-cost-or-market. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 202
(10 min.)
VCRs DVD players Ipods Total inventory
Cost $ 8,260 15,750 14,000 $38,010
Market $ 9,940 14,280 13,650 $37,870
Lower of Cost or Market: $ 8,260 14,280 13,650 $36,190
FOR INSTRUCTOR USE ONLY
Inventories
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Ex. 203 Linden Watch Company reported the following income statement data for a 2-year period.
Sales Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Gross profit
2012 $260,000
2013 $320,000
32,000 193,000 225,000 44,000 181,000 $ 79,000
44,000 225,000 269,000 57,000 212,000 $108,000
Linden uses a periodic inventory system. The inventories at January 1, 2012, and December 31, 2013, are correct. However, the ending inventory at December 31, 2012, was overstated $5,000. Instructions (a) Prepare correct income statement data for the 2 years. (b) What is the cumulative effect of the inventory error on total gross profit for the 2 years? Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 203
(15 min.)
(a) Sales ............................................................ Cost of goods sold Beginning inventory ............................... Cost of goods purchased ....................... Cost of goods available for sale ............. Ending inventory ($44,000 – $5,000) ..... Cost of goods sold ................................. Gross profit ..................................................
2012 $260,000
2013 $320,000
32,000 193,000 225,000 39,000 186,000 $ 74,000
39,000 225,000 264,000 57,000 207,000 $113,000
(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference
$79,000 + $108,000 = $187,000 $74,000 + $113,000 = 187,000 $ 0
Ex. 204 Buck White Company reported net income of $60,000 in 2012 and $80,000 in 2013. However, ending inventory was overstated by $7,000 in 2012. Instructions Compute the correct net income for Buck White Company for 2012 and 2013. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 56
Test Bank for Accounting Principles, Tenth Edition
Solution 204
(6 min.)
2012 correct net income = $53,000 ($60,000 – $7,000) 2013 correct net income = $87,000 ($80,000 + $7,000) Ex. 205 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected
Events 1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. 2. The ending inventory in the previous period was overstated. 3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 5. The internal auditors discovered that the ending inventory in the previous period was understated $17,000 and that the ending inventory in the current period was overstated $27,000.
Assets
Owner’s Equity
Items Cost of Goods Sold
Net Income
Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(20 min.)
Events 1. 2. 3. 4. 5.
Items Owner’s Cost of Assets Equity Goods Sold O O U NA NA O U U O NA U O O O U FOR INSTRUCTOR USE ONLY
Net Income O U U U O
Inventories
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Ex. 206 Speer's Hardware Store prepared the following analysis of cost of goods sold for the previous three years: 2011 2012 2013 Beginning inventory 1/1 $40,000 $18,000 $25,000 Cost of goods purchased 50,000 55,000 70,000 Cost of goods available for sale 90,000 73,000 95,000 Ending inventory 12/31 18,000 25,000 40,000 Cost of goods sold $72,000 $48,000 $55,000 Net income for the years 2011, 2012, and 2013 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Speer hired a new accountant to investigate the cause(s) for the declines. The accountant determined the following: 1. Purchases of $25,000 were not recorded in 2011. 2. The 2011 December 31 inventory should have been $24,000. 3. The 2012 ending inventory included inventory costing $5,000 that was purchased FOB destination and in transit at year end. 4. The 2013 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year. Instructions Determine the correct net income for each year. (Show all computations.) Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 206
(25 min.)
Beginning inventory 1/1 Cost of goods purchased Cost of goods available for sale Ending inventory 12/31 Cost of goods sold
2011 $ 40,000 (1) 75,000 115,000 (2) 24,000 $ 91,000
2012 $24,000 55,000 79,000 (3) 20,000 $59,000
2013 $20,000 70,000 90,000 40,000 $50,000
Net Income previously reported Add: Prior cost of goods sold Less: Revised cost of goods sold Corrected Net Income
2011 $70,000 72,000 (91,000) $51,000
2012 $60,000 48,000 (59,000) $49,000
2013 $55,000 55,000 (50,000) $60,000
(1) (2) (3)
$25,000 $6,000 $5,000
Additional purchases Additional ending inventory Less ending inventory
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 207 Snodderly Pharmacy reported cost of goods sold as follows:
Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
2012 $ 54,000 847,000 901,000 64,000 $837,000
2013 $ 64,000 891,000 955,000 55,000 $900,000
Holt, the bookkeeper, made two errors: (1) 2012 ending inventory was overstated by $7,000. (2) 2013 ending inventory was understated by $16,000. Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2012 2013 Overstated/ Overstated/ Amount Understated Amount Understated Total assets
$_________
_______
$_________
_______
Owner’s equity
$_________
_______
$_________
_______
Cost of goods sold
$_________
_______
$_________
_______
Net income
$_________
_______
$_________
_______
Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207
(20 min.)
Total assets Owner’s equity Cost of goods sold Net income
2012 Overstated/ Amount Understated $7,000 O $7,000 O $7,000 U $7,000 O
2013 Overstated/ Amount Understated $16,000 U $16,000 U $23,000 O $23,000 U
Correct cost of goods sold: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
2012 $ 54,000 847,000 901,000 57,000 $844,000
2013 $ 57,000 891,000 948,000 71,000 $877,000
FOR INSTRUCTOR USE ONLY
Inventories
6 - 59
Ex. 208 This information is available for Grant's Photo Corporation for 2012 and 2013. 2012 2013 Beginning inventory $ 200,000 $ 300,000 Ending inventory 300,000 380,000 Cost of goods sold 1,150,000 1,330,000 Sales 1,600,000 1,900,000 Instructions Calculate inventory turnover, days in inventory, and gross profit rate for Grant's Photo Corporation for 2012 and 2013. Comment on any trends. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 208
(20 min.)
Inventory turnover
2012 $1,150,000 ($200,000 + $300,000) 2
2013 $1,330,000 ($300,000 + $380,000) 2
$1,150,000 = 4.6 $250,000 Days in inventory Gross profit rate
365 4.6
$1,330,000 $340,000
= 79.3 days
365 3.9
= 3.9 = 93.6 days
$1,600,000 – $1,150,000 = .28 $1,900,000 – $1,330,000 = .30 $1,600,000 $1,900,000
The inventory turnover ratio decreased by approximately 15% from 2012 to 2013 while the days in inventory increased by 18% over the same time period. Both of these changes would be considered negative since it's better to have a higher inventory turnover and lower days in inventory. However, Grant's Photo gross profit rate increased by 7% from 2012 to 2013, which is a positive sign. Ex. 209 The following information is available for Dobro Company: Beginning inventory Cost of goods sold Ending inventory Sales
$ 60,000 640,000 100,000 1,000,000
Instructions Compute each of the following: (a) Inventory turnover. (b) Days in inventory. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 209
(5 min.)
(a) Inventory turnover:
$640,000 $640,000 ———————————— = ———— = 8.0 ($60,000 + $100,000) 2 $80,000
(b) Days in inventory:
365 —— = 45.6 days 8.0
a
Ex. 210
Zimmer Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May: May 1 10 15 18 21 30
Beginning inventory Purchase Sales Purchase Sales Purchase
20 units @ $5 20 units @ $8 15 units 10 units @ $9 15 units 10 units @ $10
Instructions Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 210
(10 min.)
Cost of goods sold: May 15 sale May 21 sale
Ending inventory: May 1 May 30
15 units × $8 10 units × $9 5 units × $8 30 units
= $120 = 90 = 40 $250 Cost of goods sold
20 units × $5 = $100 10 units × $10 = 100 30 units $200 Ending inventory
a
Ex. 211
Lumley Company uses the perpetual inventory system and had the following purchases and sales during March.
3/1 3/3 3/4 3/10 3/16 3/19 3/25
Beginning inventory Purchase Sales Purchase Sales Purchase Sales
Purchases Units Unit Cost 100 $40 60 $50 200
$55
40
$60
FOR INSTRUCTOR USE ONLY
Units
Sales Selling Price/Unit
70
$80
80
$90
120
$90
Inventories Ex. 211
6 - 61
(Cont.)
Instructions Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 211
a) Date 3/1 3/3
(20 min.)
FIFO Purchases (60 @ $50)
$3,000
3/4 3/10
(70 @ $40)
$2,800
(30 @ $40) (50 @ $50)
$3,700
(200 @ $55) $11,000
3/16 3/19
Sales
(40 @ $60)
$2,400
3/25
(10 @ $50) (110 @ $55) $6,550 March cost of goods sold = $13,050 ($2,800 + $3,700 + $6,550) March 31 inventory = $7,350 b) Date 3/1 3/3
LIFO Purchases (60 @ $50)
3/25
Balance (100 @ $40) $4,000 (100 @ $40) (60 @ $50) $7,000
(60 @ $50) (10 @ $40)
$3,400
(80 @ $55)
$4,400
(200 @ $55) $11,000
3/16 3/19
Sales
$3,000
3/4 3/10
Balance (100 @ $40) $4,000 (100 @ $40) (60 @ $50) $7,000 (30 @ $40) (60 @ $50) $4,200 (30 @ $40) (60 @ $50) (200 @ $55) $15,200 (10 @ $50) (200 @ $55) $11,500 (10 @ $50) (200 @ $55) (40 @ $60) $13,900 (90 @ $55) (40 @ $60) $7,350
(40 @ $60)
$2,400
(40 @ $60) (80 @ $55)
$6,800
March cost of goods sold = $14,600 ($3,400 + $4,400 + $6,800) March 31 inventory = $5,800 FOR INSTRUCTOR USE ONLY
(90 @ $40) (90 @ $40) (200 @ $55) (90 @ $40) (120 @ $55) (90 @ $40) (120 @ $55) (40 @ $60) (90 @ $40) (40 @ $55)
$3,600 $14,600 $10,200
$12,600 $5,800
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Test Bank for Accounting Principles, Tenth Edition
a
Ex. 212 Tyminstii Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July: At Cost At Retail Beginning inventory $ 30,000 $ 50,000 Merchandise purchases 99,000 150,000 The net sales for July amounted to $142,000. Instructions Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 212
(10 min.)
Beginning inventory Merchandise purchases Goods available for sale Net sales (1) Ending inventory at retail
At Cost $ 30,000 99,000 $129,000
At Retail $ 50,000 150,000 200,000 142,000 $ 58,000
(2)
Cost to retail ratio = 64.5% ($129,000 ÷ $200,000).
(3)
Ending inventory at cost = ($58,000 × 64.5%) = $37,410.
a
Ex. 193
Banjo Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Banjo Company developed the following information: March net sales through March 28 Beginning Inventory, March 1 Merchandise purchases through March 28
$350,000 100,000 180,000
The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period. Instructions Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Inventories a
Solution 213
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(10 min.)
Net sales Less: Estimated gross profit ($350,000 × 35%) Estimated cost of goods sold
$350,000 122,500 $227,500
Beginning inventory Merchandise purchases Goods available for sale Less: Estimated cost of goods sold Estimated cost of ending inventory destroyed by fire
$100,000 180,000 280,000 227,500 $ 52,500
a
Ex. 214
The inventory of Hardcastle Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained: Sales Sales Returns and Allowances Purchases Freight-In Purchase Returns and Allowances
$185,000 5,000 110,000 3,500 4,000
Instructions Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and a gross profit rate of 40% on net sales. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 214
(10 min.)
Net Sales ($185,000 – $5,000) Less: Estimated gross profit (40% × $180,000) Estimated cost of goods sold
$180,000 72,000 $108,000
Beginning inventory Cost of goods purchased ($110,000 – $4,000 + $3,500) Cost of goods available for sale Less: Estimated cost of good sold Estimated cost of merchandise lost
$ 50,000 109,500 159,500 108,000 $ 51,500
a
Ex. 215
Georgia Rae Company reports goods available for sale at cost, $76,800. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $85,000. Instructions Determine the estimated cost of the ending inventory using the retail inventory method. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
6 - 64 a
Test Bank for Accounting Principles, Tenth Edition
Solution 215
(10 min.) At Cost
Beginning inventory Goods purchased Goods available for sale Net sales Ending inventory
$76,800
At Retail $ 40,000 80,000 120,000 85,000 $ 35,000
First calculate the cost to retail ratio. $76,800 ÷ $120,000 = 64% Apply this ratio to the ending inventory at retail. $35,000 × .64 = $22,400 $22,400 is the estimated cost of the ending inventory.
COMPLETION STATEMENTS 216. Accounting for inventories is important because inventories affect the ______________ section of the balance sheet and the ______________ section on the income statement. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
217. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
218. The cost of goods purchased during a period plus the beginning inventory is the amount of goods ________________ during the period. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
219. Inventoriable costs are allocated to ______________ and cost of goods ____________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
220. It is generally recognized that a major objective of accounting for inventory is the proper determination of ______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
221. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
FOR INSTRUCTOR USE ONLY
Inventories
6 - 65
222. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
223. The lower-of-cost-or-market basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
224. ______________ is calculated as cost of goods sold divided by average inventory. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
225. Two widely used methods of estimating inventories are the ______________ method and the _____________ method.
Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
ANSWERS TO COMPLETION STATEMENTS 216. 217. 218 219. 220.
current assets, cost of goods sold finished goods, merchandise inventory available for sale ending inventory, sold net income
221. 222. 223. 224. a 225.
specific identification, income first-in, last-in replacement Inventory turnover gross profit, retail inventory
MATCHING 226. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory B. Work in process C. FOB shipping point D. FOB destination E. Specific identification method
F. G. H. I. J.
First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average-cost method Inventory turnover Current replacement cost
____
1. Measures the number of times the inventory sold during the period.
____
2. Tracks the actual physical flow for each inventory item available for sale.
____
3. Goods that are only partially completed in a manufacturing company.
____
4. Cost of goods sold consists of the most recent inventory purchases.
____
5. Goods ready for sale to customers by retailers and wholesalers.
____
6. Title to the goods transfers when the public carrier accepts the goods from the seller.
____
7. Ending inventory valuation consists of the most recent inventory purchases.
____
8. The same unit cost is used to value ending inventory and cost of goods sold.
____
9. Title to goods transfers when the goods are delivered to the buyer. FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Matching 226. (Cont.) ____ 10. The amount that would be paid at the present time to acquire an identical item. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
I E B G A
6. 7. 8. 9. 10.
C F H D J
SHORT-ANSWER ESSAY QUESTIONS S-A E 227 FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective , AICPA FN: Reporting,
AICPA PC: None, IMA: Business Economic Solution 227 The FIFO method determines the ending inventory by the cost of the most recent purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory, then there will be no difference in ending inventory. S-A E 228 In a period of rising prices, the inventory reported in Marianna Company's balance sheet is close to the current cost of the inventory. Breland Company's inventory is considerably below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 228 Marianna Company is using the FIFO method of inventory costing, and Breland Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Marianna Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs. FOR INSTRUCTOR USE ONLY
Inventories
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S-A E 229 Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 229 The overstatement of ending inventory will cause cost of goods sold to be understated. Consequently, net income for the period will be overstated. The effect on the balance sheet is that assets and owner’s equity will be overstated. The subsequent period will have an overstatement of beginning inventory. This will cause cost of goods sold to be overstated and net income to be understated, counterbalancing the overstatement of income in the prior period. S-A E 230 A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods. Required: Provide brief, yet concise responses to the following questions. a. Why are LIFO and FIFO so popular? b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 230 a. FIFO and LIFO are based on cost flow assumptions that may be unrelated to the physical flow of goods. The reasons for using one of these methods involve the effects on the income statement, balance sheet, and taxes that the company must pay. In periods of rising prices (inflation), LIFO provides for a lower net income, thus resulting in a lower tax liability. LIFO reflects the most realistic cost of goods sold (the most recent or highest costs). However, the cost of inventory on the balance sheet is distorted because it consists of the earliest or lowest costs. In periods of rising prices, FIFO provides for the most realistic ending inventory cost on the balance sheet (using the most recent or highest costs). On the income statement, FIFO represents the least realistic cost of goods sold because the amount consists of the earliest or lowest costs. This makes net income higher, which is good for the external financial statements but it thus results in a higher tax liability. In periods of falling prices, opposite results apply. b. With computers and inventory management software, it would appear that the specific identification method would be the most popular because it matches the actual cost of each item sold to its selling price. However, using computers to keep up with the information does not eliminate some of the problems with using specific identification.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 230
(Cont.)
One problem is an ethical one. A major disadvantage of the specific identification method is that management may be able to manipulate net income. For example, it can boost net income by selling units purchased at a low cost, or reduce net income by selling units purchased at a high cost. As long as customers receive the units they demand, they are indifferent when the company bought them. This manipulation means that net income is not objectively measured. Another problem is that the costs of maintaining a specific identification system may outweigh the benefits of using such a method. As mentioned in part a, financial statement and tax effects of using FIFO and LIFO are more beneficial to companies than simply being able to match the actual cost of a unit to its selling price. S-A E 231 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 231 It is always good to hear from you and you have certainly asked a very good question. Since the consistency principle requires that you adopt accounting methods and stay with them (until there is need for a proper change), it is very important to consider the options before starting a business. I suggest that you consider one of the three cost flow assumptions—Average, First-In, First-Out (FIFO), or Last-In, First-Out (LIFO). These methods are based on the assumption of cost flows instead of the actual physical flow of goods. The effects on the income statement, balance sheet, and tax returns depend on whether your company experiences rising prices or falling prices. Here is a summary of the effects for each inventory method, for companies that experience rising prices (the opposite will be true for falling prices). Inventory Method Tax Effect Average Falls between FIFO and LIFO FIFO Highest net income, thus highest taxes
LIFO
Income Statement Effect Falls between FIFO and LIFO Highest net income. Thus more attractive for external financial reporting
Lowest net income, Lowest net income (If you thus lowest taxes use LIFO for tax purposes, (works best if constant you must also use it for levels of inventory external financial reporting.) units are maintained) FOR INSTRUCTOR USE ONLY
Balance Sheet Effect Falls between FIFO and LIFO Most realistic ending inventory because latest costs are matched to ending inventory Most unrealistic ending inventory because the earliest costs are matched to ending inventory
Inventories
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S-A E 232 Shayne Tingle is studying for the next accounting mid-term examination. What should Shayne know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "market" in the lower-of-cost-or-market method? Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 232 Shayne should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to market should be recognized in the period in which the price decline occurs. (b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities. S-A E 233 (Ethics) Rachel Rave and Chris Rock are department managers in the house wares and shoe departments, respectively, for Litwins, a large department store. Chris has observed Rachel taking inventory from her own department home, apparently without paying for it. He hesitates confronting Rachel because he is due to be promoted, and needs Rachel's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Rachel tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Chris relaxes. "The system will catch Rachel now," he says to himself. Required: 1. Is Chris's attitude justified? Why or why not? 2. What, if any, action should Chris take now? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Internal Controls
Solution 233 1. Chris's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Chris should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Chris's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Chris's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Litwins if someone else reports Rachel's actions. The resulting investigation may implicate Chris because of his failure to notify the proper authorities in a timely manner.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
S-A E 234 (Communication) Craig Ferguson, a new employee of Riggs Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Craig reasoned that the goods should be included in inventory sooner because Riggs paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Riggs’s inventory at all. Craig told Sara Himes, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Craig's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Himes has reported the problem to the accounting department. Required: You are Craig's supervisor. Write a memo to Craig explaining why the error should have been corrected. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA
Solution 214 MEMO TO:
Craig Ferguson, Accounting Department
FROM: Mary Farr, Supervisor DATE:
March 12, 2012
It has come to my attention that $1,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error. The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate. The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so. Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter. (signature)
FOR INSTRUCTOR USE ONLY
CHAPTER 7 ACCOUNTING INFORMATION SYSTEMS SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
4 4 4 4 1 1 2
C K K K K K K
sg
29. 30. sg 31.
3 3 4
K K K
83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
K K K K K C K C K K K K C K C K K
st
100. 101. st 102. sg 103. st 104. sg 105. sg 106. st 107. sg 108. sg 109. 110. 111. 112. 113. 114.
1 1 2 2 3 3 3 4 4 4 4 4 4 4 4
K C K K C K K K K K K K K K K
133. 134. 135. 136.
3,4 4 4 4
AP AP AP C
137. 138.
4 2,4
C AN
True-False Statements 1. 2. 3. 4. 5. 6. 7.
1 1 1 1 2 2 2
K C K K K K K
8. 9. 10. 11. 12. 13. 14.
2 2 2 2 2 3 3
C K C K C K K
15. 16. 17. 18. 19. 20. 21.
3 3 3 3 3 4 4
K K C K K K K
22. 23. 24. 25. sg 26. sg 27. sg 28.
sg
Multiple Choice Questions 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48.
1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2
K K K C K C K C C K K K K K C K K
49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65.
2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K K K K K K K C K K K C K K K K K
66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.
3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4
C K K K C C C K K C C K K K K C K
sg
Brief Exercises 115. 116.
1 2
C K
117. 118.
3 3
C C
119. 120.
3 4
K C
Exercises 121. 122. 123. 124. sg st a
2 2 2 2
AN AP AP AP
125. 126. 127. 128.
2,3 3 3 3
AP AP AP AN
129. 130. 131. 132.
3 3 3,4 3,4
C C C AN
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
7-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Completion Statements 139. 140.
1 2
K K
141. 142.
3 3
K K
143. 144.
4 4
K K
145. 146.
4 4
K K
Matching Statements 147.
1
K
Short-Answer Essay 148. 149. sg st a
1 2
K K
150. 151.
2 3
2 3
152. 153.
1 1
C K
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4.
TF TF TF TF
26. 27. 32. 33.
TF TF MC MC
34. 35. 36. 37.
5. 6. 7. 8. 9.
TF TF TF TF TF
10. 11. 12. 28. 41.
TF TF TF TF MC
42. 43. 44. 45. 46.
13. 14. 15. 16. 17. 18. 19. 29.
TF TF TF TF TF TF TF TF
30. 50. 51. 52. 53. 54. 55. 56.
TF MC MC MC MC MC MC MC
57. 58. 59. 60. 61. 62. 63. 64.
20. 21. 22. 23. 24. 25. 31. 73.
TF TF TF TF TF TF TF MC
74. 75. 76. 77. 78. 79. 80. 81.
MC MC MC MC MC MC MC MC
82. 83. 84. 85. 86. 87. 88. 89.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Type Item Type Item Type Study Objective 1 MC 38. MC 101. MC MC 39. MC 115. BE MC 40. MC 139. C MC 100. MC 147. MA Study Objective 2 MC 47. MC 116. BE MC 48. MC 121. Ex MC 49. MC 122. Ex MC 102. MC 123. Ex MC 103. MC 124. Ex Study Objective 3 MC 65. MC 104. MC MC 66. MC 105. MC MC 67. MC 106. MC MC 68. MC 117. BE MC 69. MC 118. BE MC 70. MC 119. BE MC 71. MC 125. Ex MC 72. MC 126. Ex Study Objective 4 MC 90. MC 98. MC MC 91. MC 99. MC MC 92. MC 107. MC MC 93. MC 108. MC MC 94. MC 109. MC MC 95. MC 110. MC MC 96. MC 111. MC MC 97. MC 112. MC BE = Brief Exercise Ex = Exercise
FOR INSTRUCTOR USE ONLY
Item
Type
Item
Type
148. 152. 153.
SA SA SA
125. 138. 140. 149. 150.
Ex Ex C SA SA
127. 128. 129. 130. 131. 132. 133. 141.
Ex Ex Ex Ex Ex Ex Ex C
142. 151.
C SA
113. 114. 115. 131. 132. 133. 134. 135.
MC MC BE Ex Ex Ex Ex Ex
136. 137. 138. 143. 144. 145. 146.
Ex Ex Ex C C C C
C = Completion MA = Matching
Accounting Information Systems
7-3
CHAPTER STUDY OBJECTIVES 1. Identify the basic concepts of an accounting information system. The basic principles in developing an accounting information system are cost effectiveness, useful output, and flexibility. Most companies use a computerized accounting system. Smaller companies use entry-level software such as QuickBooks or Peachtree. Larger companies use custom-made software packages, which often integrate all aspects of the organization. 2. Describe the nature and purpose of a subsidiary ledger. A subsidiary ledger is a group of accounts with a common characteristic. It facilitates the recording process by freeing the general ledger from details of individual balances. 3. Explain how companies use special journals in journalizing. Companies use special journals to group similar types of transactions. In a special journal, generally only one line is used to record a complete transaction. 4. Indicate how companies post a multi-column journal. In posting a multi-column journal: (a)
Companies post all column totals except for the Other Accounts column once at the end of the month to the account title specified in the column heading.
(b)
Companies do not post the total of the Other Accounts column. Instead, they post the individual amounts comprising the total separately to the general ledger accounts specified in the Account Credited (Debited) column.
(c)
The individual amounts in a column posted in total to a control account are posted daily to the subsidiary ledger accounts specified in the Account Credited (Debited) column.
TRUE-FALSE STATEMENTS 1.
An accounting information system should be cost effective; that is, the benefits of the information must outweigh the cost of providing it.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
2.
An accounting system has flexibility if it is able to be used by many different companies at the same time.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
3.
General ledger accounting systems are software programs that integrate the various accounting functions related to sales, purchases, cash receipts and disbursements, and payroll.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
4.
Enterprise resource planning systems integrate all aspects of the organization, including accounting, sales, human resource management, and manufacturing.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
5.
A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
7-4 6.
Test Bank for Accounting Principles, Tenth Edition An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
7.
The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
8.
The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Control accounts are always located in the general ledger.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
A control account and subsidiary ledger can be established for inventory.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11.
A subsidiary ledger provides up-to-date information on specific account balances.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12.
An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
13.
Special journals are used to record unique transactions which do not occur very often.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
14.
A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
15.
The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
A cash payments journal should not be used to record transactions which require payment by check.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 18.
7-5
A debit column for Sales Returns and Allowances may be found in the cash payments journal.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
19.
A one-column purchases journal is used to record purchases of merchandise on account.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
20.
Using special journals can save time in posting because column totals are often posted rather than individual entries.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
21.
The reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
22.
Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
23.
The amounts appearing in the Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
24.
Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
25.
When control and subsidiary accounts are involved, there must be a dual posting.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
26.
An accounting information system involves data collection, data processing, and information dissemination.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
27.
The basic principles of an accounting information system are cost awareness, usefulness, and fixed structure.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
28.
Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger at the end of an accounting period.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
When special journals are employed, all postings must be monthly or daily but cannot be both.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7-6 30.
Test Bank for Accounting Principles, Tenth Edition Totaling the columns of a journal and proving the equality of the totals is called footing and cross-footing a journal.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
Only transactions that cannot be entered in a special journal are recorded in the general journal.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to True-False Statements Item
1. 2. 3. 4. 5.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T F T T F
6. 7. 8. 9. 10.
F T F T T
11. 12. 13. 14. 15.
T F F T F
16. 17. 18. 19. 20.
F F T T T
21. 22. 23. 24. 25.
F F F F T
26. 27. 28. 29. 30.
T F T F T
31.
T
MULTIPLE CHOICE QUESTIONS 32.
The principle of an efficient accounting system that states that an accounting system should accommodate a variety of users is a. cost effectiveness. b. flexibility. c. useful output. d. implementation.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
33.
Which of the following is not a basic principle of designing and developing an effective accounting information system? a. Approval by the SEC b. Usefulness c. Flexibility d. Cost effectiveness
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
34.
A company will usually replace a manual accounting information system with an electronic system as the operations increase in a. efficiency. b. complexity. c. simplicity. d. productivity.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 35.
7-7
In developing an accounting system, cost effectiveness does not imply that a. the benefits obtained from the system outweigh the costs. b. an electronic system must be cheaper than the system it is replacing. c. the system should be cost effective. d. the value of an accounting report should be at least equal to the cost of producing it.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
36.
To be useful, the information outputs of a system should be a. relevant, reliable, timely, and accurate. b. reliable, flexible, understandable and timeless. c. such that one report meets all different users needs. d. distributed only to management personnel.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
37.
The accounting environment does not change as a result of a. technological advances. b. government regulation. c. the double entry system. d. organizational growth.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
38.
The principles of developing an accounting information system do not include a. usefulness. b. flexibility. c. cost effectiveness. d. elimination of human involvement.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
39.
A student should recognize a need to study manual accounting systems because a. the structure of electronic systems differs greatly from manual systems. b. all small companies only use manual accounting systems. c. the software and hardware of electronic systems vary greatly, which makes manual procedures more practical to study. d. companies that use manual systems hire more accountants.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Applications
40.
Which of the following is a true statement about manual and electronic accounting systems? a. Few small companies begin with manual systems. b. The design and structure of manual and electronic systems are essentially the same. c. Many companies convert from electronic to manual systems. d. The design and structure of manual and electronic systems are fundamentally different.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
7-8 41.
Test Bank for Accounting Principles, Tenth Edition Postings to the control accounts in the general ledger are made a. annually. b. daily. c. monthly. d. weekly.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
42.
The balance of a control account in the general ledger a. must always be zero. b. must equal the amount of total assets. c. is always greater than the composite balance of individual accounts in a related subsidiary ledger. d. must equal the composite balance of individual accounts in a related subsidiary ledger.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
A subsidiary ledger is a. used in place of the general ledger if the general ledger is destroyed or stolen. b. a group of accounts used by branches and subsidiaries of a corporate business. c. a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger. d. used to post excess transactions if a general ledger account becomes full during an accounting period.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
44.
Postings are made daily to the a. Accounts Receivable control account. b. Accounts Payable control account. c. Accounts Receivable subsidiary ledger. d. control accounts in the general ledger.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
A subsidiary ledger frees the general ledger from details of a. individual balances. b. external transactions. c. internal transactions. d. the control account.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
46.
A company would not likely use subsidiary ledgers for a. inventory. b. owner's capital. c. equipment. d. accounts receivable.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 47.
7-9
Postings are made daily to subsidiary ledgers so that a. employees are kept busy. b. debits equal credits. c. individual account information is kept current. d. the control account will balance to the subsidiary ledger.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
48.
Accounts Receivable and Accounts Payable are examples of a. nominal accounts. b. controlling accounts. c. subsidiary ledger accounts. d. both nominal accounts and controlling accounts.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
The composite balance of individual accounts in the accounts payable subsidiary ledger must a. equal the composite balance of the individual accounts in the accounts receivable subsidiary ledger. b. always be zero. c. equal the balance of the accounts payable account in the general ledger. d. agree with the total of the Accounts payable column in the cash receipt journal.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
The one characteristic that all entries recorded in a cash payments journal have in common is a. that they all represent purchases of merchandise. b. a credit to the cash account. c. that they are all posted to the accounts payable subsidiary ledger. d. a debit to the accounts payable or purchases accounts.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
51.
In which journal would a customer's partial payment on account be recorded? a. Sales journal b. Cash receipts journal c. General journal d. Cash payments journal
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
In which journal would a cash purchase of inventory be recorded? a. Purchase journal b. General journal c. Cash payments journal d. None of these
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7 - 10 53.
Test Bank for Accounting Principles, Tenth Edition The individual amounts in the sales journal are posted to the accounts receivable subsidiary ledger a. daily. b. weekly. c. monthly. d. yearly.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
54.
A sales journal is used to record a. only cash sales of merchandise. b. sales of all assets on credit and for cash. c. only credit sales of merchandise. d. credit sales of merchandise, sales returns and allowances, and sales discounts.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
55.
If a transaction cannot be recorded in a special journal a. the company must refuse to enter into the transaction. b. it is recorded in the general journal. c. it is recorded directly in the accounts in the general ledger. d. it is recorded as an adjustment on the work sheet.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
56.
The one characteristic that all entries recorded in a cash receipts journal have in common is a. a credit to the Cash account. b. that they all represent collections from customers. c. that they originate from the sales of merchandise. d. a debit to the Cash account.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
57.
A one column purchases journal indicates that a. only purchases of merchandise on account can be recorded. b. all purchases of merchandise can be recorded. c. all acquisitions on account can be recorded. d. another column must be added so that debits and credits can be recorded.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
58.
The one characteristic that all entries recorded in a multi-column purchases journal have in common is a a. credit to the Cash account. b. debit to the Cash account. c. debit to the Accounts Payable account. d. credit to the Accounts Payable account.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 59.
7 - 11
A company which uses special journals should record a transaction involving the purchase of merchandise for cash in a a. one column purchases journal. b. multi-column purchases journal. c. cash payments journal. d. general journal.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
60.
If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the a. general journal. b. cash receipts journal. c. cash payments journal. d. sales journal.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
Which of the following is not a special journal? a. Sales journal b. Purchases journal c. General journal d. Cash receipts journal
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
62.
Correcting entries are journalized in a. a special journal. b. the general journal. c. the general ledger. d. a correcting journal.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
63.
Adjusting entries are recorded a. only on the worksheet. b. only in the general ledger. c. in the general journal. d. in the special journals.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
64.
All of the column totals in the cash receipts journal are posted to general ledger accounts except the a. Accounts Receivable column total. b. Cash column total. c. Sales column total. d. Other Accounts column total.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7 - 12
Test Bank for Accounting Principles, Tenth Edition
65.
If a transaction cannot be recorded in a special journal, it is a. not recorded. b. a correcting entry. c. recorded in the general journal. d. an error.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
66.
A company uses a sales journal, cash receipts journal, purchases journal, cash payments journal, and a general journal. A cash sales return would be recorded in the a. sales journal. b. cash receipts journal. c. cash payments journal. d. general journal.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
67.
The entries in a sales journal will show a. all sales of merchandise. b. the cash sales of the company. c. the credit sales of merchandise. d. all sales of the company.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
Entries in a sales journal a. are made from sales invoices. b. will indicate the invoice number in the reference column of the sales journal. c. will occupy two lines of the sales journal. d. indicate either a cash debit or accounts receivable debit.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
Journalizing in a sales journal will not a. require a debit to Accounts Receivable. b. show a sales invoice number. c. affect the reference column of the journal. d. include a credit to the Sales Revenue account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
If an owner withdraws cash for personal use, the transaction should be recorded in the a. sales journal. b. cash receipts journal. c. general journal. d. cash payments journal.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 71.
7 - 13
If a company purchases merchandise for cash, the transaction should be recorded in the a. purchases journal. b. general journal. c. cash payments journal. d. sales journal.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72.
Cash from sales of merchandise will be recorded in the a. purchases journal. b. sales journal. c. cash receipts journal. d. general journal.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
73.
Postings from the purchases journal to the general ledger are made a. daily. b. monthly. c. weekly. d. yearly.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
74.
The individual amounts in the Accounts Payable column in the cash payments journal are posted to the subsidiary ledger a. daily. b. monthly. c. weekly. d. yearly.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
75.
Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the a. sales journal. b. cash receipts journal. c. purchases journal. d. cash payments journal.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
76.
Entries in a sales journal are a. posted only to accounts in an accounts receivable subsidiary ledger. b. posted only to accounts in the general ledger. c. posted to accounts in an accounts receivable subsidiary ledger and to accounts in the general ledger. d. never posted.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7 - 14 77.
Test Bank for Accounting Principles, Tenth Edition Which one of the following columns in a cash receipts journal is not posted in total to an account in the general ledger? a. Cash column b. Sales Discounts column c. Accounts Receivable column d. Other Accounts column
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
78.
The use of special journals to record transactions a. eliminates the need for a general ledger. b. can save time in the posting process. c. eliminates the need for a general journal. d. should only be used if the volume of transactions is small.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
79.
Posting a sales journal to the accounts in the general ledger requires a a. debit to Cash and a credit to Sales Revenue. b. debit to Sales Revenue and a credit to Inventory. c. debit to Accounts Receivable and a credit to Inventory. d. debit to Accounts Receivable and a credit to Sales Revenue.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
80.
The entries recorded in the Other Accounts column of a cash payments journal a. are posted to the accounts payable subsidiary ledger daily. b. are posted individually to accounts in the general ledger. c. are not posted individually but are posted as a column total to the general ledger. d. do not require posting.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
The entry to record the granting of credit to a customer for a sales return is posted to a. the accounts receivable subsidiary ledger only. b. the general ledger only. c. both the accounts receivable subsidiary ledger and the general ledger. d. both the accounts payable subsidiary ledger and the general ledger.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
82.
Proving the equality of the totals in the columns of multiple-column special journals is called a. posting to the subsidiary. b. debiting and crediting. c. footing and crossfooting. d. updating the master file.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 83.
7 - 15
If a company records merchandise it returns to suppliers in the general journal, then a. a posting must be made only to the accounts payable control account. b. a posting must be made only to the accounts payable subsidiary ledger account. c. a dual posting must be made. d. there will be a debit to Merchandise Inventory.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
84.
Richmond's Wholesale uses a sales journal. An entry in this journal represents a a. debit to Cash; credit to Sales Revenue. b. debit to Accounts Receivable; credit to Sales Revenue. c. debit to Sales Discounts; credit to Cash. d. debit to Accounts Payable; credit to Sales Returns and Allowances.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
85.
Which accounts in the general ledger are affected when the monthly posting is made from the sales journal? a. Accounts Receivable; accounts receivable subsidiary accounts b. Accounts receivable subsidiary accounts; Sales Revenue c. Accounts Receivable; Sales Revenue d. Accounts Receivable; Purchases
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
Which of the following is not a true statement about the daily posting of the sales journal? a. There is a debit posting to accounts in the accounts receivable subsidiary ledger. b. There is no credit posting. c. The reference column in the sales journal is checked when the posting is complete for each entry in the journal. d. The invoice number supporting the sales transaction is posted to the reference column in the subsidiary ledger.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
87.
Evidence that the monthly posting of the sales journal total has been accomplished is indicated by a. a signature of the accountant doing the posting. b. a date under the double-line total. c. the general ledger account numbers under the double-lined total. d. inspecting the postings in the accounts payable subsidiary ledger.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls
88.
Which of the following economic events would not be recorded in the cash receipts journal? a. Cash sales of merchandise b. Collections of accounts receivable c. Cash from sale of land d. Cash purchases of merchandise
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7 - 16 89.
Test Bank for Accounting Principles, Tenth Edition The "Other Accounts" column in a cash receipts journal is also referred to as the a. miscellaneous column. b. excess column. c. sundry accounts column. d. compound-entry column.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
90.
An entry in the "Other Accounts" column in a cash receipts journal could occur when the credit is to a. Owner's Drawings. b. Accounts Payable. c. Owner's Capital. d. Inventory.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
The process of totaling the columns of a journal is termed a. ruling. b. columnizing. c. sizing. d. footing.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
92.
An (x) below the "Other Accounts" column in a cash receipts journal indicates the a. total has been posted to the general ledger. b. total is not posted to the general ledger. c. column has been footed. d. column has been cross-footed.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
93.
Cross-footing a cash receipts journal means a. the equality of debits and credits in the journal have been proved. b. each line of the journal has a horizontal total. c. the columns of the journal have been cross-referenced. d. all necessary postings have been completed.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
Which of the following would not be an appropriate heading for a column in the cash receipts journal? a. Cash b. Accounts Payable c. Sales Discounts d. Sales Revenue
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 95.
7 - 17
Entries in the purchases journal are made a. from sales invoices. b. from the general journal. c. without supporting documentation. d. from purchase invoices.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
96.
Proving the postings of a one-column purchases journal would involve comparing the a. general ledger posting to Accounts Payable to the debit postings of the accounts receivable subsidiary ledger. b. general ledger debit posting to Accounts Payable to the general ledger credit posting to Inventory. c. general ledger credit posting to Accounts Payable to the general ledger debit posting to Inventory. d. debit postings to the accounts receivable subsidiary ledger to the credit postings to the accounts payable subsidiary ledger.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
97.
If a company uses a multi-column purchases journal, which of the following possible headings for debit columns of the journal would not be appropriate? a. Accounts Payable b. Inventory c. Store Supplies d. Office Supplies
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
98.
The reference column of a multi-column cash payments journal after posting a. will only contain check marks. b. will be blank. c. will only contain account numbers. d. may contain either account numbers or check marks.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
99.
The reference column of the accounts in the accounts payable subsidiary ledger after posting may show a. only P references. b. CP, P, or G references. c. G, P, or S references. d. only CP references.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
100.
Principles of an efficient and effective accounting information system include all of the following except a. cost effectiveness. b. flexibility. c. useful output. d. All of these options are principles.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
7 - 18 101.
Test Bank for Accounting Principles, Tenth Edition Which of the following statements is incorrect? a. A major consideration in developing an accounting system is cost effectiveness. b. When an accounting system is designed, no consideration needs to be given to the needs and knowledge of the various users. c. The accounting system should be able to accommodate a variety of users and changing information needs. d. To be useful, information must be understandable, relevant, reliable, timely, and accurate.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
102.
All of the following are advantages of using subsidiary ledgers except they a. eliminate errors in individual accounts. b. free the general ledger of excessive details. c. show, in a single account, transactions affecting one customer or one creditor. d. make possible a division of labor.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
103.
Which of the following is not an advantage of a subsidiary ledger? a. Shows transactions affecting one customer or one creditor in a single account. b. Helps locate errors in individual accounts. c. Puts greater detail in the general ledger. d. Makes possible a division of labor.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
104.
Credit sales of assets other than merchandise are recorded in the a. cash payments journal. b. cash receipts journal. c. general journal. d. sales journal.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
105.
When the totals of the sales journal are posted at the end of the month, there will be credits to a. Sales Revenue and Inventory and debits to Accounts Receivable and Cost of Goods Sold. b. Accounts Receivable and Cost of Goods Sold and debits to Sales Revenue and Inventory. c. Sales Revenue and debits to each individual customer account. d. the Sales Revenue account only, and no debits.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
106.
The Other Accounts column of a multi-column journal is often referred to as the a. Sundry Accounts column. b. Controlling Account column. c. Credit Account column. d. Debit Account column.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 107.
7 - 19
Companies record credit purchases of equipment or supplies in the a. cash payments journal. b. cash receipts journal. c. general journal. d. one-column purchases journal.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
108.
In the expanded purchases journal, debits are made in which columns? a. Accounts Payable, Inventory, and Office Supplies b. Inventory, Office Supplies, and Store Supplies c. Cash, Office Supplies, and Store Supplies d. Accounts Payable, Cash, and Inventory
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
109.
If a customer takes a sales discount, an entry is made in the a. cash receipts journal. b. sales journal. c. cash payments journal. d. general journal.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
110.
Information in a company’s first IFRS statements must include each of the following except a. be transparent. b. provide a suitable starting point. c. have a cost that does not exceed the benefits. d. explain differences between IFRS and GAAP statements.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
111.
When converting to IFRS statements, a company must do each of the following except a. identify the timing of its first IFRS statements. b. prepare an income statement at the date of transition to IFRS. c. select accounting principles that comply with IFRS. d. make extensive disclosures to explain the transition to IFRS.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
112.
Once a company decides to convert to IFRS, the transition date is the a. end of the period for which full comparative IFRS information is presented. b. closing balance sheet date for the first IFRS financial statements. c. beginning of the earliest period for which full comparative IFRS information is presented. d. reporting date for the first IFRS financial statements.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
7 - 20 113.
Test Bank for Accounting Principles, Tenth Edition Once a company decides to convert to IFRS, the reporting date is the a. closing balance sheet date for the first IFRS financial statements. b. beginning of the earliest period for which full comparative IFRS information is presented. c. end of the period for which full comparative IFRS information is presented. d. beginning of the first IFRS reporting date.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
114.
Upon first-time adoption of IFRS, a company must present at least how many years of comparative information under IFRS? a. 5 b. 3 c. 2 d. 1
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.
b a b b a c d c b c d c
44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
c a b c b c b b c a c b
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67.
d a d c c c b c d c c c
68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.
a c d c c b a a c d b d
80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
b c c c b c d c d c c d
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103.
b a b d c a d b d b a c
104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
c a a c b a d b c a d
FOR INSTRUCTOR USE ONLY
Accounting Information Systems
7 - 21
BRIEF EXERCISES BE 115 Match each of the principles and phases in the development of an accounting system with the statement that best describes them. a. Cost effectiveness b. Flexibility c. Useful output _____ 1. Information must be understandable, relevant, reliable, timely, and accurate. _____ 2. Benefits of information must outweigh the cost of providing it. _____ 3. The system should accommodate a variety of users and changing information needs. _____ 4. The accounting system must consider the needs and knowledge of various users. _____ 5. The system should be capable of meeting the changes in the demands made upon it. Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
Solution 115 1. c 2. a
(3 min.) 3. b 4. c
5. b
BE 116 Indicate whether each of the following accounts would be shown in the general ledger or subsidiary ledger. 1.
Cash ____________________
2.
Accounts Receivable—Larson
3.
Equipment
4.
Accounts Payable—Parks
5.
Common Stock
____________________
6.
Sales Revenue
____________________
____________________
____________________ ____________________
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
Solution 116
(3 min.)
1. General ledger 2. Subsidiary ledger 3. General ledger
4. Subsidiary ledger 5. General ledger 6. General ledger
FOR INSTRUCTOR USE ONLY
7 - 22
Test Bank for Accounting Principles, Tenth Edition
BE 117 Richey Company maintains four special journals and a general journal to record its transactions. Using the code below, indicate in the space provided the appropriate journal for recording the transactions listed. Code S CR CP P G
Journals Sales journal Cash receipts journal Cash payments journal Single-column purchases journal General journal
____
1. Mr. Richey invested cash in the business.
____
2. Purchased store supplies on account.
____
3. Sold merchandise to customer on account.
____
4. Purchased a 2-year fire insurance policy for cash.
____
5. Received a check from a customer as payment on account.
____
6. Paid for store supplies purchased in transaction 2.
____
7. Purchased merchandise on account.
____
8. Issued a credit memorandum to a customer who returned defective merchandise previously sold on account.
____
9. Purchased office equipment for cash.
____ 10. Made an adjusting entry for store supplies used during the period. Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
Solution 117 1. 2. 3. 4. 5.
CR G S CP CR
(5 min.) 6. 7. 8. 9. 10.
CP P G CP G
FOR INSTRUCTOR USE ONLY
Accounting Information Systems
7 - 23
BE 118 Indicate in which journal each of the following transactions is recorded. 1.
Cash purchase of merchandise.
_______________________
2.
Owner investment of cash.
3.
Sale of merchandise on account.
_______________________
4.
Purchase of supplies for cash.
_______________________
5.
Credit purchase of merchandise.
_______________________
6.
Collection on account from customers.
_______________________
_______________________
Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
Solution 118
(5 min.)
1. Cash Payments Journal 2. Cash Receipts Journal 3. Sales Journal
4. Cash Payments Journal 5. Purchases Journal 6. Cash Receipts Journal
BE 119 Indicate the special journal(s) in which the following column headings appear. 1. Cash Cr.
_______________________
2. Cost of Goods Sold Dr. 3. Accounts Receivable Dr.
_______________________ _______________________
4. Accounts Payable Cr.
_______________________
5. Inventory Cr.
_______________________
6. Sales Discounts Dr.
_______________________
Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
Solution 119
(3 min.)
1. Cash Payments Journal 2. Sales or Cash Receipts Journal 3. Sales Journal
4. Purchases Journal 5. Sales or Cash Receipts Journal 6. Cash Receipts Journal
FOR INSTRUCTOR USE ONLY
7 - 24
Test Bank for Accounting Principles, Tenth Edition
BE 120 Indicate which of the following cash payments journal columns are posted only in total, only daily, or both in total and daily. 1. Other Accounts
_______________________
2. Accounts Payable
_______________________
3. Inventory
_______________________
4. Cash
_______________________
Ans: N/A, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 120
(3 min.)
1. Only daily 2. Both in total and daily
3. In total 4. In total
EXERCISES Ex. 121 After Picard Company had completed all posting for the month of December, the sum of the balances in the following accounts payable subsidiary ledger did not agree with the balance of the control account in the general ledger. Name Ryker’s Address 286 Buck Avenue ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 2 P25 2,400 2,400
Name Geordie Company Address 818 Western Avenue ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 7,600 10 CP23 7,600 — 20 P32 3,300 3,300 29 J15 600 3,900
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Ex. 121
7 - 25
(Cont.)
Name Laforge Company Address 90210 Baker Boulevard ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 9,900 18 CP28 9,900 — 29 P34 10,700 800 Name Deanna Troi Address 2720 Sommers Avenue ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 8 P27 6,000 6,000 27 P33 8,000 14,000 Name OBrien Supplies Address 1560 Puckett Street ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 8,200 7 P26 5,600 13,800 12 J11 520 12,280 20 CP29 6,000 18,280 The balance in the Accounts Payable control account of $37,080 has been verified as correct. Also assume that the journals references in the Post Ref. columns of the accounts payable subsidiary ledger have been verified as correct. Instructions Determine the errors in the preceding accounts payable subsidiary accounts and prepare a corrected schedule of accounts payable. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 121
(20 min.)
IDENTIFICATION OF ERRORS: Geordie Company The $600 represents merchandise returned and should be subtracted from the balance owed. Correct balance is $2,700. Laforge Company The $10,600 represents new purchases on account and should be added to the previous balance of zero. The correct balance is $10,700.
FOR INSTRUCTOR USE ONLY
7 - 26
Test Bank for Accounting Principles, Tenth Edition
Solution 121
(Cont.)
OBrien Supplies There is an addition error. Adding $5,600 to the beginning balance of $8,200 yields a balance of $13,800. Subtracting merchandise returned of $520 leaves a balance of $13,280. The $6,000 is a payment on account, not an increase. The correct balance is $7,280. ACCOUNTS PAYABLE SUBSIDIARY LEDGER ACCOUNT BALANCES Ryker's Geordie Company Laforge Company Deanna Troi OBrien Supplies Total
$ 2,400 2,700 10,700 14,000 7,280 $37,080
Ex. 122 On December 1, the accounts receivable control account balance in the general ledger of the Worf Company was $9,000. The accounts receivable subsidiary ledger contained the following detailed customer balances: Stewart $2,000, Gates $2,100, Burton $2,600, and Levar $2,300. The following information is available from the company's special journals for the month of December: Cash Receipts Journal: Cash received from Burton $2,200, from Stewart $1,600, from Mirana $1,700, and from Gates $1,800. Sales Journal: $2,400.
Sales to Mirana $3,900, to Burton $1,700, to Stewart $3,100, and to Levar
Additionally, Burton returned defective merchandise for credit for $650. Stewart returned defective merchandise for $600 which he had purchased for cash. Instructions (a) Using T-accounts for Accounts Receivable Control and the detail customer accounts, post the activity for the month of December. (b) Reconcile the accounts receivable control account with the subsidiary ledger by preparing a detail list of customer balances at December 31. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 122 (a)
(15 min.)
Control Account:
Accounts Receivable 9,000 11,100 12,150
(SJ) Bal.
(CR) (G)
7,300 650
Subsidiary Accounts: Stewart (S) Bal.
2,000 3,100 3,500
(CR)
Gates 1,600 Bal.
FOR INSTRUCTOR USE ONLY
2,100 300
(CR)
1,800
Accounting Information Systems Solution 122
7 - 27
(Cont.) Burton 2,600 1,700 1,450
(S) Bal.
Levar
(CR) (G)
2,200 650
(S) Bal.
2,300 2,400 4,700
Mirana (S) Bal. (b)
3,900 2,200
(CR)
1,700
Listing of accounts receivable at end of the month: Stewart Gates Burton Levar Mirana Total
$ 3,500 300 1,450 4,700 2,200 $12,150
Accounts receivable balance
Ex. 123 Maldanado Company has a balance in its Accounts Payable control account of $10,500 on January 1, 2012. The subsidiary ledger contains three accounts: Smith Company, balance $3,000; White Company, balance $2,500 and Marino Company. During January, the following payable-related transactions occurred. Smith Company White Company Marino Company
Purchases $7,500 5,250 6,100
Payments $6,000 2,500 6,750
Returns $ -01,500 -0-
Instructions (a) What is the January 1 balance in the Marino Company subsidiary account? (b) What is the January 31 balance in the control account? (c) Compute the balances in the subsidiary accounts at the end of the month. (d) Which January transaction would not be recorded in a special journal? Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 123
(10 min.)
(a) $5,000 [$10,500 – ($3,000 + $2,500)]. (b) $12,600 [$10,500 + ($7,500 + $5,250 + $6,100) – ($6,000 + $ 2,500 + $6,750) – $1,500]. (c) Smith ($3,000 + $7,500 – $6,000) $ 4,500 White ($2,500 + $5,250 – $2,500 – $1,500) 3,750 Marino ($5,000 + $6,100 – $6,750) 4,350 $12,600 (d) The purchase return ($1,500) would be recorded in the general journal.
FOR INSTRUCTOR USE ONLY
7 - 28
Test Bank for Accounting Principles, Tenth Edition
Ex. 124 Mangino Company has a balance in its Accounts Receivable control account of $15,000 on January 1, 2012. The subsidiary ledger contains three accounts: Jones Company, balance $6,000; Black Company, balance $2,500 and Denny Company. During January, the following receivable-related transactions occurred. Jones Company Black Company Denny Company
Credit Sales $11,000 9,000 8,500
Collections $8,000 2,500 7,000
Returns $ -02,000 -0-
Instructions (a) What is the January 1 balance in the Denny Company subsidiary account? (b) What is the January 31 balance in the control account? (c) Compute the balances in the subsidiary accounts at the end of the month. (d) Which January transaction would not be recorded in a special journal? Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
Solution 124
(10 min.)
(a) $6,500 [$15,000 – ($6,000 + $2,500)]. (b) $24,000 [$15,000 + ($11,000 + $9,000 + $8,500) – ($8,000 + $ 2,500 + $7,000) – $2,000]. (c) Jones ($6,000 + $11,000 – $8,000) $ 9,000 Black ($2,500 + $9,000 – $2,500 – $2,000) 7,000 Denny ($6,500 + $8,500 – $7,000) 8,000 $24,000 (d) The sales return ($2,000) would be recorded in the general journal. Ex. 125 Devotchka Co. uses special journals and a general journal. The following transactions occurred during May 2012. May 1 Z. Devotchka invested $20,000 cash in the business. 2 Sold merchandise to A. A. Bondy for $5,600 cash. The cost of the merchandise sold was $3,500. 3 Purchased merchandise for $4,300 from Y. Vandyver using check no. 101. 14 Paid salary to D. Dilego $900 by issuing check no. 102. 16 Sold merchandise on account to S. Stevens for $840, terms n/30. The cost of the merchandise sold was $500. 22 A check of $7,200 is received from S. Sufjan in full for invoice 101; no discount given. Instructions (a) Prepare a multiple-column cash receipts journal and a multiple-column cash payments journal. (Use page 1 for each journal.) (b) Record the transaction(s) for May that should be journalized in the cash receipts journal and cash payments journal. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Solution 125
(20 min.)
(a) & (b)
Date 2012 May
DEVOTCHKA CO. Cash Receipts Journal
Account Credited 1 2 22
Owner’s, Cap. S. Sufjan
Ref.
Cash Dr.
Sales Discounts Dr.
CR1
Accounts Receivable Cr.
20,000 5,600 7,200 32,800
3 14
Ck No
Account Debited
101 102
Inventory Salaries/Wages Expense
Cost of Goods Sold Dr. Other Accounts Inventory Cr. Cr.
Sales Revenue Cr.
20,000 5,600 7,200 7,200
Ref.
Other Accounts Dr.
3,500
5,600
DEVOTCHKA CO. Cash Payments Journal
Date 2012 May
7 - 29
20,000
CP1 Accounts Payable Dr.
4,300 900 5,200
Cash Cr. 4,300 900 5,200
Ex. 126 Danielson Company uses a sales journal, a cash receipts journal, and a general journal to record transactions with its customers. Record the following transactions in the appropriate journals. The cost of all merchandise sold was 60% of the sales price. July
2
Sold merchandise for $15,000 to B. Pine on account. Credit terms 2/10, n/30. Sales invoice No. 100.
July
5
Received a check for $1100 from R. Giger in payment of his account.
July
8
Sold merchandise to F. Wenger for $900 cash.
July 10
Received a check in payment of Sales invoice No. 100 from B. Pine minus the 2% discount.
July 15
Sold merchandise for $9,000 to J. Long on account. Credit terms 2/10, n/30. Sales invoice No. 101.
July 18
Borrowed $20,000 cash from United Bank signing a 6-month, 10% note.
July 20
Sold merchandise for $12,000 to C. Judd on account. Credit terms 2/10, n/30. Sales invoice No. 102.
July 25
Issued a credit (reduction) of $800 to C. Judd as an allowance for damaged merchandise previously sold on account.
July 31
Received a check from J. Long for $6,500 as payment on account.
FOR INSTRUCTOR USE ONLY
3,500
7 - 30
Test Bank for Accounting Principles, Tenth Edition
Ex. 126 (Cont.) DANIELSON COMPANY Sales Journal S1 ——————————————————————————————————————————— Invoice Acct. Rec. Dr. C. of G. S. Dr. Date Account Debited No. Ref. Sales Rev. Cr. Inventory. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— DANIELSON COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanations Ref. Debit Credit ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— DANIELSON COMPANY Cash Receipts Journal CR1 ——————————————————————————————————————————— Sales Accounts Sales Other Accounts Cash Discounts Rec. Rev. Accounts C. of G. S. Dr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. Inventory. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Solution 126
7 - 31
(20 min.) DANIELSON COMPANY Sales Journal
S1 ——————————————————————————————————————————— Invoice Acct. Rec. Dr. C. of G. S. Dr. Date Account Debited No. Ref. Sales Rev. Cr. Inventory. Cr. ——————————————————————————————————————————— July 2 B. Pine 100 15,000 9,000 July 15
J. Long
101
9,000
5,400
July 20 C. Judd 102 12,000 7,200 ———————————————————————————————————————————
DANIELSON COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— July 25 Sales Returns and Allowances 800 ——————————————————————————————————————————— Accounts Receivable—C. Judd 800 ———————————————————————————————————————————
DANIELSON COMPANY Cash Receipts Journal CR1 ——————————————————————————————————————————— Sales Accounts Sales Other Accounts Cash Discounts Rec. Rev. Accounts C. of G. S. Dr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. Inventory. Cr. ——————————————————————————————————————————— July 5 R. Giger 1,100 1,100 July 8
900
July 10 B. Pine
14,700
July 18 Notes Pay.
20,000
900 300
540
15,000 20,000
July 31 J. Long 6,500 6,500 ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
7 - 32
Test Bank for Accounting Principles, Tenth Edition
Ex. 127 Hawk Company uses a single-column purchases journal, a cash payments journal, and a general journal to record transactions with its suppliers and others. Record the following transactions in the appropriate journals. Transactions Oct.
5
Purchased merchandise on account for $18,000 from Harrelson Company. Terms: 2/10, n/30; FOB shipping point.
Oct.
6
Paid $6,600 to Ken’s Insurance Company for a two-year fire insurance policy.
Oct.
8
Purchased store supplies on account for $800 from Stone Pony Supply Company. Terms: 2/10, n/30.
Oct. 11
Purchased merchandise on account for $15,000 from Steve Corporation. Terms: 2/10, n/30; FOB shipping point.
Oct. 13
Granted a reduction of $3,000 from Steve Corporation for merchandise purchased on October 11 and returned because of damage.
Oct. 15
Paid Harrelson Company for merchandise purchased on October 5, less discount.
Oct. 16
Purchased merchandise for $9,000 cash from Williams Company.
Oct. 21
Paid Steve Corporation for merchandise purchased on October 11, less merchandise returned on October 13, less discount.
Oct. 25
Purchased merchandise on account for $21,000 from Ozzle Company. Terms: 2/10, n/30; FOB shipping point.
Oct. 31
Purchased equipment for $27,000 cash from Guillen Office Supply Company. HAWK COMPANY Purchases Journal
P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Ex. 127
7 - 33
(Cont.) HAWK COMPANY General Journal
G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————----------————————————————————————————————— ————————————----------——————————————————————————————— —————————————————————————————————————-----------—————— -----------——————————————————————————————————————————— ———-----------———————————————————————————————————————— ——————-----------—————————————————————————————————————
HAWK COMPANY Cash Payments Journal CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ————————————————————————————————————-----------——————— ------——————————————————————————————————-----------——————— ————————————————————————————————————-----------——————— ————————————————————————————————————-----------——————— ————————————————————————————————————-----------——————— ————————————————————————————————————-----------——————— Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 127
(20 min.) HAWK COMPANY Purchases Journal
P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— Oct. 5 Harrelson Company 18,000 ——————————————————————————————————————————— Oct. 11 Steve Corporation 15,000 ——————————————————————————————————————————— Oct. 25 Ozzle Company 21,000 ———————————————————————————————————————————
FOR INSTRUCTOR USE ONLY
7 - 34
Test Bank for Accounting Principles, Tenth Edition
Solution 127
(Cont.) HAWK COMPANY General Journal
G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— Oct. 8 Store Supplies 800 ——————————————————————————————————————————— Accounts Payable—Stone Pony ——————————————————————————————————————————— Supply Company 800 ——————————————————————————————————————————— Oct. 13 Accounts Payable—Steve Corp. 3,000 ——————————————————————————————————————————— Inventory 3,000 ——————————————————————————————————————————— HAWK COMPANY Cash Payments Journal CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— Oct. 6 Prepaid Insurance 6,600 6,600 Oct. 15
Glover Company
Oct. 16
Inventory
Oct. 21
Steve Corp.
18,000
360
9,000
17,640 9,000
12,000
240
11,760
Oct. 31 Equipment 27,000 27,000 ——————————————————————————————————————————— Ex. 128 Reinsdorf Company uses both special journals and a general journal. The company accountant made the following errors during July. 1. Incorrectly added the credit entries in a customer's account in the accounts receivable subsidiary ledger. The total was listed as $2,690; it should have been $2,890. 2. A remittance of $500 from Harold Baines was correctly recorded in the cash receipts journal, but the amount was posted incorrectly to the account of customer Henry Balinco in the subsidiary ledger. 3. A purchase of merchandise on account from Manny Company for $2,000 was incorrectly entered in the purchases journal at $20,000. 4. In the sales journal, the entries were incorrectly added for the month. The monthly total was listed as $24,720; it should have been $24,270. FOR INSTRUCTOR USE ONLY
Accounting Information Systems Ex. 128
7 - 35
(Cont.)
Instructions Indicate how each of the above errors might be discovered. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 128
(10 min.)
1. The subsidiary ledger will not agree with the general ledger control account. Refooting the subsidiary ledger should locate the error. 2. The error will be discovered when the customer receives his statement. Mr. Harold Baines’ statement will indicate a balance of $500 more than he owes. 3. The error may not be discovered until the payment is sent to the supplier. Then, hopefully Manny will send back the excess payment. Additionally, analysis of gross profit may indicate it is inordinately out of line with prior periods. 4. When the accounts receivable control account is reconciled with the accounts receivable subsidiary ledger, it will be $450 higher than the subsidiary ledger. Refooting the sales journal should then locate the error. Ex. 129 Below are some typical transactions incurred by Piper Company. ____
1. Purchase of merchandise on account.
____
2. Collection on account from customers.
____
3. Payment of employee's wages.
____
4. Sales of merchandise for cash.
____
5. Close Income Summary to owner's capital.
____
6. Adjusting entry for depreciation on machinery.
____
7. Payment of creditors on account.
____
8. Purchase of office equipment on credit.
____
9. Sales discount taken on goods sold on credit.
____ 10. Sales of merchandise on account. ____ 11. Purchase of a delivery truck for cash. ____ 12. Return of merchandise purchased on credit. ____ 13. Payment of rent in advance. ____ 14. Adjusting entry for accrued interest expense. ____ 15. Purchase of office supplies for cash.
FOR INSTRUCTOR USE ONLY
7 - 36
Test Bank for Accounting Principles, Tenth Edition
Ex. 129
(Cont.)
For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized. CR — Cash Receipts Journal CP — Cash Payments Journal S — Sales Journal P — Single-Column Purchases Journal G — General Journal Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 129 1. 2. 3. 4. 5.
(10 min.)
P CR CP CR G
6. 7. 8. 9. 10.
G CP G CR S
11. 12. 13. 14. 15.
CP G CP G CP
Ex. 130 Circle the correct answer to each situation. (a)
(b)
A sales journal will be used for: Credit Sales
Cash Sales
Sales Discounts
Yes
Yes
Yes
No
No
A single-column purchases journal will be used for: Cash Purchases Yes
(c)
No
No
Purchases on Account Yes
No
Purchase Returns and Allowances Yes
No
A multi-column purchases journal will be used for: Cash Purchases Yes
No
Supplies Purchased on Account Yes
No
Equipment Purchased on Account Yes
No
(d) A cash payments journal will be used for:
(e)
Payments to Creditors
Purchases Discounts
Owner Cash Investment
Yes
Yes
Yes
No
No
No
A cash receipts journal will be used for: Owner Cash Withdrawals Yes
No
Purchases Discounts Yes
No
Cash Sales Yes
No
Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting Information Systems
7 - 37
Solution 130 (10 min.) (a) Yes, No, No (b) No, Yes, No (c) No, Yes, Yes
(d) Yes, Yes, No (e) No, No, Yes
Ex. 131 Listed below are various column headings that may appear in special journals. Using the following code letters, identify for each column heading (1) the special journal where the column heading would appear, and (2) whether the amounts entered under the column heading would be posted in total, individually, or both in total and individually. (Note: column headings may appear in more than one special journal) Code: S = P = CR = CP =
Special Journals Sales journal Single-column purchases journal Cash receipts journal Cash payments journal
Code: I = T = B =
Posting Individual posting Total posting Both individual and total posting
Heading 1. Accounts Payable—Cr.
Special Journal ___________
Posting ___
2. Sales Revenue—Cr.
___________
___
3. Sales Discounts—Dr. 4. Inventory—Dr.
___________ ___________
___ ___
5. Cash—Cr.
___________
___
6. Accounts Receivable—Dr.
___________
___
7. Other Accounts—Cr. 8. Inventory—Cr.
___________ ___________
___ ___
9. Accounts Receivable—Cr.
___________
___
10. Accounts Payable—Dr.
___________
___
Ans: N/A, SO: 3,4, Bloom: C, Difficulty: Easy, Min: 15, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 131
(15 min.)
Heading 1. Accounts Payable—Cr. 2. Sales Revenue—Cr. 3. Sales Discounts—Dr. 4. Inventory—Dr. 5. Cash—Cr. 6. Accounts Receivable—Dr. 7. Other Accounts—Cr. 8. Inventory—Cr. 9. Accounts Receivable—Cr. 10. Accounts Payable—Dr.
Special Journal P S, CR CR P, CP CP S CR CP CR CP
FOR INSTRUCTOR USE ONLY
Posting B T, T T T, T T B I T B B
7 - 38
Test Bank for Accounting Principles, Tenth Edition
Ex. 132 Marks Company uses four special journals, (cash receipts, cash payments, sales, and purchases journal) in addition to a general journal. On November 1, 2012, the control accounts in the general ledger had the following balances: Cash $12,000, Accounts Receivable $200,000 and Accounts Payable $42,000. Selected information on the final line of the special journals for the month of November is presented below: Cash Receipts Journal: Cash Dr. ?
Sales Discount Dr. $1,080
Accounts Receivable Cr. $54,000
Other Accounts Sales Rev. Cr. Cr. Acct. Ref. Amount $29,000 (X) $1,000
C. of G. S. Dr. Inventory Cr. $17,400
Cash Payments Journal: Other Accounts Dr. Acct. Ref. Amount (X) $1,600
Accounts Payable Dr. ?
Purchases Journal: Accounts Merchandise Payable Inventory Cr. Dr. ? $34,000
Office Supplies Dr. $1,300
Office Supplies Dr. $800
Store Supplies Dr. $1,100
Store Supplies Dr. $650
Inventory Cr. $700
Cash Cr. $37,600
Other Accounts Dr. Acct. Ref. Amount (X) $3,300
Additional Data: The Sales Journal totaled $42,000. A customer returned merchandise for credit for $460 and Marks Company returned store supplies to a supplier for credit for $500. Instructions (a)
Determine the missing amounts in the special journals.
(b)
Determine the balances in the general ledger accounts (Cash, Accounts Receivable, and Accounts Payable) at the end of November.
Ans: N/A, SO: 3,4, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 132 (20 min.) (a) The missing amounts can be determined by crossfooting the journals. Cash Receipts Credits ($54,000 + $29,000 + $1,000) $84,000 Debits 1,080 Cash debit $82,920 Cash Payments Credits ($700 + $37,600) Debits ($1,600 + $1,300 + $1,100) Accounts payable debit
$38,300 4,000 $34,300
Purchases Debits ($34,000 + $800 + $650 + $3,300) Credits Accounts payable credit
$38,750 -0$38,750
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Solution 132 (b) (CR) Bal.
(CP) (G)
7 - 39
(Cont.)
Cash 12,000 (CP) 82,920 57,320 Accounts Payable 34,300 500 (P) Bal.
37,600
Accounts Receivable 200,000 (CR) 54,000 (S) 42,000 (G) 460 Bal. 187,540
42,000 38,750 45,950
Ex. 133 Gaston Company began business on October 1. The partial sales journal, as it appeared at the end of the month, follows: SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post. Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Robin Pryor 1001 575 11 Ted Haag 1002 335 16 Robin Pryor 1003 818 19 Betty Frye 1004 147 26 Nancy Sloan 1005 1,184 3,059 1. Open general ledger T-accounts for Accounts Receivable (No. 112) and Sales Revenue (No. 401) and an accounts receivable subsidiary T-account ledger with an account for each customer. Make the appropriate postings from the sales journal. Fill in the appropriate posting references in the sales journal above. 2. Prove the accounts receivable subsidiary ledger by preparing a schedule of accounts receivable. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 133 (20 min.) 1. SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Robin Pryor 1001 575 11 Ted Hagg 1002 335 16 Robin Pryor 1003 818 19 Betty Fyre 1004 147 26 Nancy Sloan 1005 1,184 3,059 (112)/(401)
FOR INSTRUCTOR USE ONLY
7 - 40
Test Bank for Accounting Principles, Tenth Edition
Solution 133
(Cont.) GENERAL LEDGER
SUBSIDIARY LEDGER
Accounts Receivable 10/31 (S1) 3,059
112
Sales Revenue 10/31 (S1)
401 3,059
10/19 (S1)
Frye, Betty 147
10/11 (S1)
Haag, Ted 335
10/5 (S1) 10/16 (S1)
10/26 (S1)
2.
Pryor, Robin 575 818 1,393 Sloan, Nancy 1,184
SCHEDULE OF ACCOUNTS RECEIVABLE Betty Frye Ted Haag Robin Pryor Nancy Sloan Total Accounts Receivable
$ 147 335 1,393 1,184 $3,059
Ex. 134 Selected account balances for Lightning Company at January 1, 2012, are presented below. Accounts Payable $20,000 Accounts Receivable 22,000 Cash 12,000 Inventory 13,500 Lightning's sales journal for January shows a total of $130,000 in the selling price column, and its one-column purchases journal for January shows a total of $88,000. The column totals in Lightning's cash receipts journal are: Cash Dr. $101,000; Sales Discounts Dr. $1,100; Accounts Receivable Cr. $80,000; Sales Revenue Cr. $6,000; and Other Accounts Cr. $11,100. The column totals in Lightning's cash payments journal for January are: Cash Cr. $85,000; Inventory Cr. $1,000; Accounts Payable Dr. $76,000; and Other Accounts Dr. $10,000. Hernandez's total cost of goods sold for January is $83,000. Accounts Payable, Accounts Receivable, Cash, Inventory, and Sales Revenue are not involved in the "Other Accounts" column in either the cash receipts or cash payments journal, and are not involved in any general journal entries.
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Ex. 134
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(Cont.)
Instructions Compute the January 31 balance for Lightning in the following accounts. (a) Accounts Payable. (b) Accounts Receivable. (c) Cash. (d) Inventory. (e) Sales Revenue. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 134
(10 min.)
(a)
$20,000 + $88,000 – $76,000 = $32,000
(b)
$22,000 + $130,000 – $80,000 = $72,000
(c)
$12,000 + $101,000 – $85,000 = $28,000
(d)
$13,500 + $88,000 – $1,000 – $83,000 = $17,500
(e)
$130,000 + $6,000 = $136,000
Ex. 135 Kappy Products uses both special journals and a general journal as described in this chapter. Kappy also posts customers' accounts in the accounts receivable subsidiary ledger. The postings for the most recent month are included in the subsidiary T accounts below.
Bal.
Ski 340 310
Bal.
Holmes -0220
340
175
Bal.
Mulley 150 290
150
Bal.
Vizquel 120 230 290
120
Instructions Determine the correct amount of the end-of-month posting from the sales journal to the Accounts Receivable control account. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 135
(15 min.)
$1,340 ($310 + $290 + $220 + $230 + $290). All of the debit postings to the subsidiary ledger accounts should be from sales invoices. The total of all these debits should therefore be the total credit sales for the month, which would be the same amount as the end-of-month debit to Accounts Receivable.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 136 CASH PAYMENTS JOURNAL Page 45 ——————————————————————————————————————————— Other Accounts Ck. Account Post. Accounts Payable Inventory Cash Date No. Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— 20— Jan. 4 659 N. Barger (a) 4,000 40 3,960 11 660 Prepaid Rent (b) 1,000 1,000 13 661 Inventory (c) 565 565 14 662 Owner’s Drawings (d) 2,000 2,000 18 663 Yount (e) 1,300 1,300 20 664 Inventory (f) 450 450 29 665 Equipment (g) 3,400 3,400 7,415 5,300 40 12,675 (h) (i) (j) (k) Using the cash payments journal above, identify each of the posting references indicated by a letter, as representing: (1) a posting to a general ledger account. (2) a posting to a subsidiary ledger account. (3) that no posting is required. Ans: N/A, SO: 4, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 136 a. b. c. d. e. f.
2 1 1 1 2 1
(10 min.) g. h. i. j. k.
1 3 1 1 1
Ex. 137 Shown below is a page from a special journal. 1. What is the name of this journal? 2. Give an explanation for each of the transactions in this journal. 3. Explain the following: (a) the numbers under the bottom lines. (b) the checks entered into the Post. Ref. column. (c) the numbers 113 and 416 in the Post. Ref. column. (d) the (x) below the Other Accounts column.
FOR INSTRUCTOR USE ONLY
Accounting Information Systems Ex. 137
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(Cont.)
——————————————————————————————————————————— Sales Accounts Sales Other C. of G. S. Accounts Post Cash Discounts Receivable Revenue Accounts Dr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. Inventory Cr. ——————————————————————————————————————————— May 27 Tony Karr 1,960 40 2,000 28 Notes Receivable 113 4,480 4,000 Interest Revenue 416 480 29 425 425 250 31 Jim Borke 500 500 7,365 40 2,500 425 4,480 250 (101) (414) (112) (401) (x) (505)(120) Ans: N/A, SO: 4, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 137
(10 min.)
1. Cash receipts journal. 2. May 27— Tony Karr has paid for merchandise previously purchased on account. He is paying within the discount period and taking the discount. May 28— A note receivable has matured. Payment is received for the $4,000 face value and $480 of interest revenue. May 29— A cash sale of merchandise is made for $425. The cost of the merchandise sold was $250. May 31— Jim Borke has paid $500 on account. 3. (a) The numbers in parentheses under the bottom line of the journal indicate that these column totals have been posted to the general ledger accounts with these account numbers. (b) The check in the posting reference column of the journal indicated that the accounts receivable subsidiary account for that customer has been credited for the amount shown in the accounts receivable column of this journal. (c) The 113 indicates that account No. 113 in the general ledger, Notes Receivable, has been credited for the $4,000. The 416 indicates that account No. 416 in the general ledger, Interest Revenue, has been credited for $480. (d) The (x) below the Other Accounts column indicates that this column total is not posted. All the amounts in this column have already been posted individually to the appropriate general ledger account.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Ex. 138 On September 30, after all monthly postings had been completed, the Accounts Receivable control account in the general ledger had a debit balance of $250,000; the Accounts Payable control account had a credit balance of $105,000. The October transactions recorded in the special journals are presented below. Special Journals Sales journal Purchases journal Cash receipts journal Cash payments journal
October Transactions Total sales Total purchases Accounts receivable column total Accounts payable column total
$160,000 62,000 120,000 41,000
Instructions Compute the balances of the (1) Accounts Receivable and (2) Accounts Payable control accounts after the monthly postings on October 31. Ans: N/A, SO: 2,4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 138
(8 min.)
(1) Accounts Receivable balance = $290,000 ($250,000 + $160,000 – $120,000) (2) Accounts Payable balance = $126,000 ($105,000 + $62,000 – $41,000)
COMPLETION STATEMENTS 139.
The basic principles in the development of an accounting information system are (1)________________, (2)________________, and (3)_______________.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
140.
The accounts receivable ______________ provides detailed information about customer accounts which is summarized in one ______________ account in the general ledger.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
141.
If a certain type of transaction occurs with great frequency, it is more efficient to create a ______________ to record that type of transaction.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
142.
If a company maintains special journals, sales of merchandise on credit should be recorded in a _______________ whereas sales of merchandise for cash should be recorded in the _______________.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
143.
The use of special journals often saves time in the _______________ process.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
Accounting Information Systems 144.
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The entries in the Accounts Receivable Credit column of the cash receipts journal must be posted _______________ to the accounts in the accounts receivable subsidiary ledger and in _______________ to the control account in the general ledger.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
145.
Transactions that cannot be entered in a special journal are recorded in the _______________, and if control and subsidiary accounts are involved, there must be a _______________ posting.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
146.
Only transactions that cannot be entered in a _______________ journal are recorded in the _______________ journal.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 139. cost effectiveness, useful output, flexibility 140. subsidiary ledger, control 141. special journal 142. sales journal, cash receipts journal
143. 144. 145. 146.
posting individually, total general journal, dual special, general
MATCHING 147. Match the items below by entering the appropriate code letter in the space provided. A. Cost effectiveness B. Enterprise resource planning systems C. General ledger accounting system D. Manual accounting system E. Special journals
F. G. H. I. J.
Subsidiary ledger Control account Accounts receivable ledger Accounting information system Flexibility
____
1. A general ledger account which summarizes detailed information in a subsidiary ledger.
____
2. Benefits of information must exceed the cost of providing it.
____
3. The accounting system should accommodate a variety of users.
____
4. Software programs that integrate various accounting functions.
____
5. Group of accounts with a common characteristic which provides detailed information.
____
6. Collects and processes transaction data and communicates financial information.
____
7. Integrate all aspects of the organization, including accounting, sales, and manufacturing.
____
8. Used to record high volume, similar type transactions.
____
9. Transactions are journalized and posted by hand. FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Matching 147. (Cont.) ____ 10. A subsidiary ledger that contains individual customer accounts. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
Answers to Matching 1. 2. 3. 4. 5.
G A J C F
6. 7. 8. 9. 10.
I B E D H
SHORT-ANSWER ESSAY QUESTIONS S-A E 148 Angie Rizzoli operates a small business and uses a manual system of accounting. Transactions are entered in the general journal and posted to accounts in the general ledger at the end of the month. Although the volume of transactions has increased significantly in the past year, Ms. Rizzoli does not feel that it would be cost-effective to install an electronic accounting system. She hires you as a consultant to make recommendations about how to record transactions more efficiently. Briefly describe the principles that you would consider in making recommendations to Ms. Rizzoli. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
Solution 148 In order for Ms. Rizzoli to have a more efficient accounting system, three principles must be followed. These principles are cost effectiveness, usefulness, and flexibility. Cost effectiveness simply means that the benefits received must outweigh the costs. Usefulness refers to the fact that the system must provide the users with timely, accurate, and understandable information. And flexibility means that the system must be able to adapt to changing needs. Applying these principles to Ms. Rizzoli's situation would lead to the recommendation for the use of special journals. S-A E 149 (a) When do companies normally post to (1) subsidiary accounts and (2) the general ledger control accounts? (b) Describe the relationship between a control account and a subsidiary ledger. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 149 (a) (1) (2)
Transactions to subsidiary accounts are generally posted daily. In contrast, postings to the control accounts are usually made in total at the end of the month. (b) A control account is a general ledger account that summarizes subsidiary ledger data. Subsidiary ledger accounts keep track of specific account activity (i.e., specific debtors or creditors). A subsidiary ledger is an addition to, and an expansion of, the general ledger. FOR INSTRUCTOR USE ONLY
Accounting Information Systems
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S-A E 150 At the end of the month, the accountant for Seneca Company prepared a schedule of accounts receivable from the accounts receivable subsidiary ledger. Its total did not agree with the balance in the Accounts Receivable control account in the general ledger. Briefly describe the procedure that should be followed in reconciling the two balances. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 150 The first step would be to go back and double check the total of the accounts receivable subsidiary ledger. There may have been a math error which caused the total to be incorrect. If the math is accurate, then the next step would be to review the postings in the accounts receivable control account. This review includes checking both the accuracy of the math and the accuracy of the posting from the journals. If the control account is correct, then the next step is to repeat the procedure with each individual subsidiary account. If the error still has not been found, then the final step is to look at the journals to see if there were any entries that failed to get recorded. S-A E 151 Why would special journals used in different businesses not be identical in format? What type of business would maintain a cash receipts journal but not include a column for accounts receivable? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Professional Demeanor, IMA: Business Applications
Solution 151 The purpose of special journals is to facilitate the recording process of the business entity. Therefore, the columns included in any special journal should correspond to the unique needs of the entity. In particular, one type of business which might not require an Accounts Receivable column would be grocery stores. These businesses rarely sell on credit to their customers. The minimum frequency of the transaction implies no need for an Accounts Receivable column in the cash receipts journal. S-A E 152 (Ethics) Sasha Isles has been a manager at MoonBeam, a large telecommunications company, for ten years. She has worked very hard, but she had to take two unpaid leaves of absence to assist her sick mother, and then later, she took unpaid leave when her children needed care. As a result, she has received only two promotions during that time. She realizes that she probably will not receive any more promotions, since the company views her as somewhat unstable. Last week, a newly promoted manager bragged that he could just "sniff out" accounting errors. Sasha, angered at his arrogance, deliberately recorded sales salaries as rent expense. Other accountants were present when she did so. The dollar amounts of her changes were not significant. Required: Has there been a violation of ethical standards? Explain. Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 152 There has certainly been a violation of integrity. Sasha has no right to let her personal animosity toward a fellow employee cause her to misrecord journal entries. The fact that others knew of her actions does not make what she did right—in fact it causes them to be accomplices. Even though the amounts are not significant, and net income is not affected, Julie's action is wrong. There is also reason for concern that Julie's frustration will show itself in more serious forms of sabotage. S-A E 153 (Communication) You are a supervisor in the accounting department of a large manufacturing company. Two weeks ago, you were anxious to leave for your vacation, and so you hurriedly recorded a whole stack of journal entries so that the others would not have as much to do while you were gone. When you returned, you realized that you had entered a payment on account of a customer, Horton, as payment on another customer's account, Holten. Even worse, you realized that Horton's payment had been on an overdue account, and that Holten had received a refund for overpayment. Required: Write a memo to Paula Prezzoli, your boss, explaining your mistake. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Internal Controls
Solution 153 MEMO TO:
Paula Prezzoli, Controller
FROM: Marty Kline, Accounting Supervisor DATE:
October 15, 200x
I'm ba–ack! Unfortunately, I already have a problem. It seems that my mind went on vacation before the rest of me did. You remember that I sent you a note telling you that I had recorded all those journal entries—well, I got almost all of them right. I recorded Horton's payment in Holten's account. I found it out when I saw Horton’s account in the file of accounts sent for collection. I thought I remembered a payment—and I had. When I checked further, I found out that I had recorded the payment in Holten's account. Unfortunately, Customer Service was on the ball and sent Holten a refund—of a payment they never made! I am trying to sort all this out—I've already removed Horton from the collection list and I'm sending them an apology letter. What do you wish to do about the refund that Holten got? I'm really sorry about all this. Next year, I'll try not to be so “helpful.” (signature)
FOR INSTRUCTOR USE ONLY
CHAPTER 8 FRAUD, INTERNAL CONTROL, AND CASH SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
6 7 7 7 8 8 1 2
C K C K K K K K
sg
33. 34. sg 35. sg 36. sg 37. sg 38.
2 3 4 5 6 7
C K K C K K
117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
C K K C AP C AP K AP AP K C AP AP AP AP AP AP AP AP AP AP AP AP AP AP
143. 144. 145. 146. st 147. sg 148. st 149. sg 150. st 151. sg 152. sg 153. st 154. sg 155. st 156. sg 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167.
7 8 8 8 2 2 3 3 4 4 5 6 6 7 8 8 8 8 8 8 8 8 8 8 8
AP C C C K C K K K C K K K K K K K K K K K K K K K
177. 178. 179.
7 7 7
K AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 2 2 2 2
K C K K C K K K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 3 3
C C C C K C C K
17. 18. 19. 20. 21. 22. 23. 24.
3 4 4 4 4 5 5 6
C K C AP K C C K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2
K K K K K K K C C C K K C K K C C K C C C C K K C K
65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.
2 2 2 2 2 2 2 2 2 2 3 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5
C C K K K C C K C C C C C C C K C K C K C K C K K C
91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.
168. 169. 170.
2 2 3
C C C
171. 172. 173.
4 5 7
C AP K
174. 175. 176.
5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7
K C K C C C C C K K K K C C K K K C AP AP AP AP AP AP AP AP
Brief Exercises
sg st
7 7 7
K K AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
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Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 180. 181. 0. 182. 183. 184. 185.
2 2 2 2 3 4
C C C C C C
186. 187. 188. 189. 190. 191.
5 5 5 5 7 7
AP AP AP AP AN AP
192. 193. 194. 195. 196. 197.
7 7 7 7 7 7
AN AN AN AP AP C
198. 199. 200. 201. 202. 203.
7 7 7 7 7 7
AN AN AN AN AN C
204. 205.
7 7
AN AN
6 6 7 7
K K K K
222.
7
AP
2
K
Completion Statements 206. 207. 208. 209.
1 2 2 2
K K K K
210. 211. 212. 213.
2 2 2 2
K K K K
214. 215. 216. 217.
4 4 4 5
K K K K
218. 219. 220. 221.
Matching Statements 223.
2
K
224. 225.
1 2
K K
Short-Answer Essay 226. 227.
1 5
K K
228. 229.
7 1
K K
230.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
MC MC MC MC
54. 55. 206. 224.
MC MC C SA
226. 229.
SA SA
MC MC MC MC MC BE BE
180. 181. 182. 183. 207. 208. 209.
Ex Ex Ex Ex C C C
210. 211. 212. 213. 223. 225. 230.
C C C C MA SA SA
171. 185. 214.
BE Ex C
215. 216.
C C
STUDY OBJECTIVE 1 1. 2. 3. 4.
TF TF TF TF
31. 39. 40. 41.
TF MC MC MC
42. 43. 44. 45.
5. 6. 7. 8. 9. 10. 11.
TF TF TF TF TF TF TF
12. 13. 14. 32. 33. 56. 57.
TF TF TF TF TF MC MC
58. 59. 60. 61. 62. 63. 64.
15. 16.
TF TF
17. 34.
TF TF
75. 149.
18. 19. 20.
TF TF TF
21. 35. 76.
TF TF MC
77. 78. 79.
MC 46. MC 50. MC 47. MC 51. MC 48. MC 52. MC 49. MC 53. Study Objective 2 MC 65. MC 72. MC 66. MC 73. MC 67. MC 74. MC 68. MC 147. MC 69. MC 148. MC 70. MC 168. MC 71. MC 169. Study Objective 3 MC 150. MC 184. MC 170. BE Study Objective 4 MC 80. MC 83. MC 81. MC 151. MC 82. MC 152.
Ex
MC MC MC
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
22. 23. 36. 84.
TF TF TF MC
85. 86. 87. 88.
MC MC MC MC
89. 90. 91. 92.
24. 25. 37.
TF TF TF
99. 100. 101.
MC MC MC
102. 103. 104.
Study Objective 5 MC 93. MC 97. MC 94. MC 98. MC 95. MC 153. MC 96. MC 172. Study Objective 6 MC 105. MC 108. MC 106. MC 154. MC 107. MC 155.
MC MC MC BE
186. 187. 188. 189.
Ex Ex Ex Ex
MC MC MC
218. 219.
C C
8-3
217. 227.
C SA
203. 204. 205. 220. 221. 222. 228.
Ex Ex Ex C C C SA
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 26. 27. 28. 38. 109. 110. 111. 112. 113. 114.
TF TF TF TF MC MC MC MC MC MC
115. 116. 117. 118. 119. 120. 121. 122. 123. 124.
MC MC MC MC MC MC MC MC MC MC
125. 126. 127. 128. 129. 130. 131. 132. 133. 134.
29. 30. 144.
TF TF MC
145. 146. 157.
MC MC MC
158. 159. 160.
Note: TF = True-False MC = Multiple Choice SA = Short-answer Essay
Study Objective 7 MC 135. MC 173. MC 136. MC 174. MC 137. MC 175. MC 138. MC 176. MC 139. MC 177. MC 140. MC 178. MC 141. MC 179. MC 142. MC 190. MC 143. MC 191. MC 156. MC 192. Study Objective 8 MC 161. MC 164. MC 162. MC 165. MC 163. MC 166.
BE BE BE BE BE BE BE Ex Ex Ex
193. 194. 195. 196. 197. 198. 199. 200. 201. 202.
Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex
MC MC MC
167.
MC
BE = Brief Exercise Ex = Exercise
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Define fraud and internal control. A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. The fraud triangle refers to the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. 2. Identify the principles of internal control. The principles of internal control are: establishment of responsibility; segregation of duties; documentation procedures; physical controls; independent internal verification; and human resource controls such as bonding and requiring employees to take vacations.
FOR INSTRUCTOR USE ONLY
8-4
Test Bank for Accounting Principles, Tenth Edition
3. Explain the applications of internal control principles to cash receipts. Internal controls over cash receipts include: (a) designating specific personnel to handle cash; (b) assigning different individuals to receive cash, record cash, and maintain custody of cash; (c) obtaining remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips for bank deposits; (d) using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers in executing over-thecounter receipts; (e) making independent daily counts of register receipts and daily comparing total receipts with total deposits; and (f) bonding personnel that handle cash and requiring them to take vacations. 4. Explain the applications of internal control principles to cash disbursements. Internal controls over cash disbursements include: (a) having specific individuals such as the treasurer authorized to sign checks and approve invoices; (b) assigning different individuals to approve items for payment, pay the items, and record the payment; (c) using prenumbered checks and accounting for all checks, with each check supported by an approved invoice; (d) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a checkwriting machine to imprint amounts on checks; (e) comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks. 5. Describe the operation of a petty cash fund. Companies operate a petty cash fund to pay relatively small amounts of cash. They must establish the fund, make payments from the fund, and replenish the fund when the cash in the fund reaches a minimum level. 6. Indicate the control features of a bank account. A bank account contributes to good internal control by providing physical controls for the storage of cash. It minimizes the amount of currency that a company must keep on hand, and it creates a double record of a depositor's bank transactions. 7. Prepare a bank reconciliation. It is customary to reconcile the balance per books and balance per bank to their adjusted balances. The steps in the reconciling process are to determine deposits in transit, outstanding checks, errors by the depositor or the bank, and unrecorded bank memoranda. 8. Explain the reporting of cash. Companies list cash first in the current assets section of the balance sheet. In some cases, they report cash together with cash equivalents. Cash restricted for a special purpose is reported separately as a current asset or as a noncurrent asset, depending on when the cash is expected to be used.
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
8-5
TRUE-FALSE STATEMENTS 1.
Internal control is mainly concerned with the amount of authority a supervisor exercises over a subordinate.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
2.
A highly automated computerized system of accounting eliminates the need for internal control.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
3.
The safeguarding of assets is an objective of a company's system of internal control.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
4.
Management is responsible for establishing a system of internal control.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
5.
Internal control is most effective when several people are responsible for a given task.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
6.
The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
7.
Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
8.
The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
9.
An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
10.
Only large companies need to be concerned with a system of internal control.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
11.
The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
12.
In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8-6 13.
Test Bank for Accounting Principles, Tenth Edition Firms use physical controls primarily to safeguard their assets.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
14.
A segregation of duties among employees eliminates the possibility of collusion.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
15.
For efficiency of operations and better control over cash, a company should maintain only one bank account.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
16.
Cash registers are an important internal control device used in controlling over-thecounter receipts.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
17.
Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
18.
Control over cash disbursements is improved if major expenditures are paid by check.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
19.
In a voucher system, vouchers are prepared in the accounts receivable department.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
20.
Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or computer to transfer cash from one location to another.
Ans: T, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Resource Management, AICPA FN: None, AICPA PC: Project Management, IMA: Business Economics
21.
A voucher system is used by many large companies as a means of controlling cash receipts.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
22.
The petty cash fund eliminates the need for a bank checking account.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
23.
Cash register overages are deposited in the petty cash fund and cash shortages are made-up from the petty cash fund.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
24.
A deposit ticket is a negotiable instrument that can be transferred to another party by endorsement.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: None, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 25.
8-7
If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company's record of its checking account balance.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
26.
Checks from customers who pay their accounts promptly are called outstanding checks.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics
27.
All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
28.
A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled checks.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
29.
Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
30.
Cash which is restricted for a specific use should be separately reported.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
Internal control consists of the plan of organization and all of the related methods and measures adopted within a business to (a) safeguard its assets, and (b) enhance the accuracy and reliability of its accounting records.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
32.
In general, documents should be prenumbered and all documents should be accounted for.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Internal Controls
33.
Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
34.
Personnel who handle cash receipts should have the option of taking a vacation or not.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
35.
The duties of approving an item for payment and paying the item should be done by different departments or individuals.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8-8 36.
Test Bank for Accounting Principles, Tenth Edition The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
37.
A debit memorandum could show the collection of a note receivable by the bank.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
38.
To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F F T T F T
7. 8. 9. 10. 11. 12.
F T F F T F
13. 14. 15. 16. 17. 18.
T F F T F T
19. 20. 21. 22. 23. 24.
F T F F F F
25. 26. 27. 28. 29. 30.
F F T F T T
31. 32. 33. 34. 35. 36.
T T F F T F
37. 38.
F T
MULTIPLE CHOICE QUESTIONS 39.
Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets b. Overstate liabilities in order to be conservative c. Enhance the accuracy and reliability of accounting records d. Reduce the risks of errors
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
40.
Internal controls are concerned with a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets. d. preparing income tax returns.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
41.
The Foreign Corrupt Practices Act requires that all U.S. corporations under the jurisdiction of the Securities and Exchange Commission a. have at least one foreign subsidiary. b. maintain accounting records of foreign branches and subsidiaries in the local foreign currency. c. maintain an adequate system of internal control. d. must file reports with the National Commission on Fraudulent Financial Reporting.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Global Business
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 42.
8-9
Internal control is defined, in part, as a plan that safeguards a. all balance sheet accounts. b. assets. c. liabilities. d. capital stock.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
43.
The importance of a good system of internal controls was recognized with the passage of a. the Securities and Exchange Act of 1933. b. the Securities and Exchange Act of 1994. c. the Blue Sky Laws. d. the Foreign Corrupt Practices Act of 1977.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Global Business
44.
Companies that are subject to, but fail to comply with, the Foreign Corrupt Practices Act of 1977 a. may do so legally by obtaining an exemption. b. will be automatically dissolved. c. may be subject to fines and officer imprisonment. d. may be forced to sell their foreign subsidiaries.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Global Business
45.
Internal controls are not designed to safeguard assets from a. natural disasters. b. employee theft. c. robbery. d. unauthorized use.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
46.
Having one person post entries to accounts receivable subsidiary ledger and a different person post to the Accounts Receivable Control account in the general ledger is an example of a. inadequate internal control. b. duplication of effort. c. external verification. d. segregation of duties.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
47.
Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control. d. is a good example of safeguarding the company's assets.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8 - 10
Test Bank for Accounting Principles, Tenth Edition
48.
The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
49.
Internal auditors a. are hired by CPA firms to audit business firms. b. are employees of the IRS who evaluate the internal controls of companies filing tax returns. c. evaluate the system of internal controls for the companies that employ them. d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
50.
When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
51.
From an internal control standpoint, the asset most susceptible to improper diversion and use is a. prepaid insurance. b. cash. c. buildings. d. land.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
52.
The principle of establishing responsibility does not include a. one person being responsible for one task. b. authorization of transactions. c. independent internal verification. d. approval of transactions.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
53.
The control principle related to not having the same person authorize and pay for goods is known as a. establishment of responsibility. b. independent internal verification. c. segregation of duties. d. rotation of duties.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 54.
8 - 11
Two individuals at a retail store work the same cash register. You evaluate this situation as a. a violation of establishment of responsibility. b. a violation of segregation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
55.
An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated. d. segregation of duties is violated.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
56.
Controls that enhance the accuracy and reliability of the accounting records are a. automated controls. b. external controls. c. mechanical and electronic controls. d. physical controls.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
57.
Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
58.
The independent internal verification principle involves each of the following except the ______________ of data prepared by other employees. a. comparison b. reconciliation c. review d. segregation
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
59.
Related buying activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8 - 12 60.
Test Bank for Accounting Principles, Tenth Edition Jolene is warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates a. documentation procedures are violated. b. independent internal verification is violated. c. segregation of duties is violated. d. establishment of responsibility is violated.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
61.
Physical controls to safeguard assets do not include a. cashier department supervisors. b. vaults. c. employee identification badges. d. security guards.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
62.
In large companies, the independent internal verification procedure is often assigned to a. computer operators. b. management. c. internal auditors. d. outside CPAs.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
63.
Maximum benefit from independent internal verification is obtained when a. it is made on a pre-announced basis. b. it is done by the employee possessing custody of the asset. c. discrepancies are reported to management. d. it is done at the time of the audit.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
64.
If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
65.
Rebekah Grace has worked for Specoly Inc., for 20 years without taking a vacation. An internal control feature that would address this situation would be a. other controls. b. establishment of responsibility. c. physical controls. d. documentation procedures.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 66.
8 - 13
A system of internal control a. is infallible. b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits. d. is premised on the concept of absolute assurance.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
67.
For accounting purposes, postdated checks (checks payable in the future) are considered to be a. money orders. b. cash. c. petty cash. d. accounts receivable.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
68.
Postage stamps on hand are considered to be a. cash. b. petty cash. c. cash equivalents. d. a prepaid expense.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
Which one of the following items would not be considered cash? a. Coins b. Money orders c. Currency d. Postdated checks
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
Checks received through the mail should a. immediately be endorsed "For Deposit Only." b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the customer's account. c. be cashed at the bank as soon as possible. d. be "rung up" on a cash register immediately.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
71.
Proper control for over-the-counter cash receipts includes a. a cash register with totals visible to the customer. b. using electronic cash registers with no tapes. c. cash count sheets requiring only the supervisor's signature. d. cash count sheets requiring only the cashier's signature.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8 - 14 72.
Test Bank for Accounting Principles, Tenth Edition A company stamps checks received in the mail with the words "For Deposit Only". This endorsement is called a(n) a. blank endorsement. b. rubber stamp. c. restrictive endorsement. d. operational endorsement.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
73.
The daily cash count of cash register receipts made by department supervisors is an example of a. other controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
74.
The use of remittance advices for mail receipts is an example of a. documentation procedures. b. other controls. c. physical controls. d. independent internal verification.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
75.
Allowing only designated personnel to handle cash receipts is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
76.
Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
77.
Reconciling the bank statement monthly is an example of a. segregation of duties. b. independent internal verification. c. establishment of responsibility. d. documentation procedures.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 78.
8 - 15
An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
79.
Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. segregation of duties. c. other controls. d. establishment of responsibility.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
80.
Blank checks a. should be safeguarded. b. should be pre-signed. c. do not need to be safeguarded since they must be signed to be valid. d. should not be prenumbered.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
81.
An employee authorized to sign checks should not record a. owner cash contributions. b. mail receipts. c. cash disbursement transactions. d. sales transactions.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
82.
A voucher system is a series of prescribed control procedures a. to check the credit worthiness of customers. b. designed to assure that disbursements by check are proper. c. which eliminates the need for a sales journal. d. specifically designed for small firms who may not have checking accounts.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
83.
Under a voucher system, a prenumbered voucher is prepared for every a. cash receipt, regardless of source. b. transaction entered into by the business. c. expenditure except those made from petty cash. d. journal entry.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8 - 16
Test Bank for Accounting Principles, Tenth Edition
84.
A credit balance in Cash Over and Short is reported as a(n) a. asset. b. liability. c. miscellaneous expense. d. miscellaneous revenue.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-in. d. Postage Expense.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
A petty cash fund of $100 is replenished when the fund contains $4 in cash and receipts for $94. The entry to replenish the fund would a. credit Cash Over and Short for $2. b. credit Miscellaneous Revenue for $2. c. debit Cash Over and Short for $2. d. debit Miscellaneous Expense for $2.
Ans: C, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
A petty cash fund is generally established in order to a. pay for all merchandise purchased on account. b. pay employees’ wages. c. make loans internally to employees. d. pay relatively small expenditures.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
89.
A petty cash fund should be replenished a. every day. b. at the end of every accounting period. c. once a year. d. as soon as an expense is paid from the fund.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 90.
8 - 17
A petty cash fund should not be used for a. postage due. b. loans to the petty cash custodian. c. taxi fares. d. customer lunches.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
91.
The size of the petty cash fund is dependent on a. the wishes of the custodian of the fund. b. anticipated disbursements for the year. c. anticipated disbursements for a three- to four-week period. d. the size of the regular cash account.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
92.
Replenishing the petty cash fund requires a. a debit to Cash. b. a credit to Petty Cash. c. a debit to various expense accounts. d. no accounting entry.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
93.
Entries are made to the Petty Cash account when a. establishing the fund. b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
A $100 petty cash fund has cash of $13 and receipts of $84. The journal entry to replenish the account would include a credit to a. Cash for $87. b. Petty Cash for $87. c. Cash Over and Short for $3. d. Cash for $84.
Ans: A, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
95.
A $100 petty cash fund has cash of $16 and receipts of $81. The journal entry to replenish the account would include a a. debit to Cash for $81. b. credit to Petty Cash for $84. c. debit to Cash Over and Short for $3. d. credit to Cash for $81.
Ans: C, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
8 - 18 96.
Test Bank for Accounting Principles, Tenth Edition A $100 petty cash fund has cash of $17 and receipts of $87. The journal entry to replenish the account would include a a. debit to Cash for $87. b. credit to Petty Cash for $87. c. credit to Cash Over and Short for $4. d. credit to Cash for $87.
Ans: C, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
97.
If a petty cash fund is established in the amount of $200, and contains $121 in cash and $84 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $84. b. Petty Cash, $79. c. Cash, $79; Cash Over and Short, $5. d. Cash, $79.
Ans: C, SO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
98.
If a petty cash fund is established in the amount of $250, and contains $151 in cash and $94 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $94. b. Petty Cash, $99. c. Cash, $94; Cash Over and Short, $5. d. Cash, $99.
Ans: D, SO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
99.
All of the following are parties to a check except the a. bank. b. Federal Reserve. c. maker. d. payee.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
100.
When opening a bank checking account, a signature card a. indicates to whom money is to be paid. b. indicates each person authorized to sign checks on the account. c. is attached to all pre-printed checks. d. is required only when dealing with an out-of-state bank.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
101.
Which one of the following is not necessarily a party to a check? a. Maker b. Buyer c. Payee d. Payer
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 102.
8 - 19
A bank statement a. lets a depositor know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor's bank. c. is a bill from the bank for services rendered. d. shows the activity which increased or decreased the depositor's account balance.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
103.
Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge b. Collection of a note receivable c. Wiring of funds to other locations d. Checks marked NSF
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
104.
A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account which is a. a contra-asset account. b. a liability account. c. also an asset account. d. an owner's equity account.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
A remittance advice attached to a company check provides a. details about the running cash balance in the checking account. b. the magnetic bank routing numbers. c. the explanation of the purpose of the check. d. the signature space for the maker.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls
106.
A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
107.
A check returned by the bank marked "NSF" means a. no service fee. b. no signature found. c. not satisfactorily filled-out. d. not sufficient funds.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
8 - 20
Test Bank for Accounting Principles, Tenth Edition
108.
A debit memorandum would not be issued by the bank for a. a bank service charge. b. the issuance of traveler's checks. c. the wiring of funds. d. the collection of a notes receivable.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
109.
If the month-end bank statement shows a balance of $36,000, outstanding checks are $10,000, a deposit of $4,000 was in transit at month end, and a check for $600 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $29,400. b. $30,000. c. $30,600. d. $41,400.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
In preparing its bank reconciliation for the month of April 2012, Delano, Inc. has available the following information. Balance per bank statement, 4/30/12 NSF check returned with 4/30/12 bank statement Deposits in transit, 4/30/12 Outstanding checks, 4/30/12 Bank service charges for April
$39,300 470 5,000 5,200 30
What should be the adjusted cash balance at April 30, 2012? a. $38,630. b. $38,800. c. $39,010. d. $39,100. Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
The cash account shows a balance of $45,000 before reconciliation. The bank statement does not include a deposit of $2,500 made on the last day of the month. The bank statement shows a collection by the bank of $1,200 and a customer’s check for $320 was returned because it was NSF. A customer’s check for $450 was recorded on the books as $540, and a check written for $69 was recorded as $96. The correct balance in the cash account was a. $45,790. b. $45,817. c. $46,200. d. $48,317.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 112.
8 - 21
The cash account shows a balance of $20,000 before reconciliation. The bank statement does not include a deposit of $4,600 made on the last day of the month. The bank statement shows a collection by the bank of $1,980 and a customer’s check for $650 was returned because it was NSF. A customer’s check for $690 was recorded on the books as $960, and a check written for $159 was recorded as $195. The correct balance in the cash account was a. $21,024. b. $21,096. c. $21,564. d. $25,696.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
If the month-end bank statement shows a balance of $24,000, outstanding checks are $18,000, a deposit of $5,000 was in transit at month end, and a check for $1,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $11,000. b. $12,000. c. $24,000. d. $38,000.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
114.
In preparing its bank reconciliation for the month of April 2012, Haskins, Inc. has available the following information. Balance per bank statement, 4/30/12 NSF check returned with 4/30/12 bank statement Deposits in transit, 4/30/12 Outstanding checks, 4/30/12 Bank service charges for April
$27,280 900 7,000 10,400 40
What should be the adjusted cash balance at April 30, 2012? a. $22,940. b. $22,980. c. $23,840. d. $23,880. Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
8 - 22 115.
Test Bank for Accounting Principles, Tenth Edition In preparing its August 31, 2012 bank reconciliation, Annie Corp. has available the following information: Balance per bank statement, 8/31/12 Deposit in transit, 8/31/12 Return of customer’s check not sufficient funds, 8/30/12 Outstanding checks, 8/31/12 Bank service charges for August
$21,650 3,900 600 2,750 100
At August 31, 2012, Annie’s adjusted cash balance is a. $18,900. b. $18,800. c. $22,800. d. $20,500. Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
Trudy, Inc. had the following bank reconciliation at March 31, 2012: Balance per bank statement, 3/31/12 Add: Deposit in transit Less: Outstanding checks Balance per books, 3/31/12 Data per bank for the month of April 2012 follow: Deposits Disbursements
$37,200 6,300 43,500 8,600 $34,900 $46,700 49,700
All reconciling items at March 31, 2012 cleared the bank in April. Outstanding checks at April 30, 2012 totaled $6,000. There were no deposits in transit at April 30, 2012. What is the cash balance per books at April 30, 2012? a. $25,900 b. $31,900 c. $34,200 d. $38,500 Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
On a bank reconciliation, deposits in transit are a. added to the bank balance. b. deducted from the bank balance. c. added to the book balance. d. deducted from the book balance.
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 118.
8 - 23
A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud. c. to explain any difference between the depositor's balance per books and the balance per bank. d. by the person who is authorized to sign checks.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
119.
Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are checks from customers which have not yet been received by the company.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
120.
In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank.
Ans: D, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
121.
If a check correctly written and paid by the bank for $418 is incorrectly recorded on the company's books for $481, the appropriate treatment on the bank reconciliation would be to a. add $63 to the bank's balance. b. add $63 to the book's balance. c. deduct $63 from the bank's balance. d. deduct $418 from the book's balance.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
122.
Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary.
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
8 - 24 123.
Test Bank for Accounting Principles, Tenth Edition Jukebox Company had checks outstanding totaling $5,400 on its June bank reconciliation. In July, Jukebox Company issued checks totaling $38,900. The July bank statement shows that $38,300 in checks cleared the bank in July. A check from one of Jukebox Company's customers in the amount of $500 was also returned marked "NSF." The amount of outstanding checks on Jukebox Company's July bank reconciliation should be a. $600. b. $5,500. c. $6,000. d. $6,500.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
124.
Each of the following items affect the cash balance per books except a. bank service charges. b. notes collected by the bank. c. NSF checks. d. outstanding checks.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
Electric Sunset Company gathered the following reconciling information in preparing its July bank reconciliation: Cash balance per books, 7/31 $5,500 Deposits in transit 300 Notes receivable and interest collected by bank 1,100 Bank charge for check printing 20 Outstanding checks 2,000 NSF check 170 The adjusted cash balance per books on July 31 is a. $4,410. b. $4,710. c. $6,410. d. $6,710.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
126.
Unicycle Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check
$12,000 6,000 7,000 3,500 75 1,200
Determine the cash balance per books (before adjustments) for Unicycle Company. a. $1,225. b. $3,775. c. $4,775. d. $8,500. Ans: B, SO: 7, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 127.
8 - 25
Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
128.
An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges.
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
Winter Gloves Company had checks outstanding totaling $6,400 on its May bank reconciliation. In June, Winter Gloves Company issued checks totaling $39,900. The July bank statement shows that $35,700 in checks cleared the bank in July. A check from one of Winter Gloves Company's customers in the amount of $1,000 was also returned marked "NSF." The amount of outstanding checks on Winter Gloves Company's July bank reconciliation should be a. $4,200. b. $9,600. c. $10,600. d. $11,600.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
Candy Claws Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check The adjusted cash balance per books on August 31 is a. $3,720. b. $4,020. c. $7,720. d. $8,020.
$6,500 300 1,600 40 4,000 340
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
8 - 26 131.
Test Bank for Accounting Principles, Tenth Edition Shane Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $6,600 Deposits in transit 900 Notes receivable and interest collected by bank 2,200 Bank charge for check printing 50 Outstanding checks 4,500 NSF check 420 The adjusted cash balance per books on April 30 is a. $4,310. b. $4,730. c. $7,910. d. $8,330.
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Bacher Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 $15,400 Note receivable collected by bank 8,400 Outstanding checks 8,000 Deposits in transit 6,300 Bank service charge 105 NSF check 1,680 Using the above information, determine the cash balance per books (before adjustments) for the Jeter Company. a. $7,085 b. $13,700 c. $20,370 d. $22,070
Ans: A, SO: 7, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133.
In the month of November, Kinsey Company Inc. wrote checks in the amount of $9,250. In December, checks in the amount of $12,658 were written. In November, $8,468 of these checks were presented to the bank for payment, and $10,883 were presented in December. What is the amount of outstanding checks at the end of November? a. $782 b. $2,415 c. $2,557 d. $3,408
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 134.
8 - 27
In the month of November, Kinsey Company Inc. wrote checks in the amount of $9,250. In December, checks in the amount of $12,658 were written. In November, $8,468 of these checks were presented to the bank for payment, and $10,883 were presented in December. What is the amount of outstanding checks at the end of December? a. $782 b. $2,415 c. $2,557 d. $3,408
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
135.
At April 30, Yaddof Company has the following bank information: cash balance per bank $4,600; outstanding checks $780; deposits in transit $550; credit memo for interest $100; bank service charge $20. What is Mareska’s adjusted cash balance on April 30? a. $4,370 b. $4,490 c. $4,600 d. $4,680
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
136.
At June 30, Yaddof Company has the following bank information: cash balance per bank $3,600; outstanding checks $680; deposits in transit $550; credit memo for interest $150; bank service charge $20. What is Mareska’s adjusted cash balance on June 30? a. $3,470 b. $3,600 c. $3,620 d. $3,730
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
Hoppmann Company wrote checks totaling $8,540 during October and $9,325 during November. $8,120 of these checks cleared the bank in October, and $9,110 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $215 b. $420 c. $635 d. $785
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
138.
Fitzgerald Company wrote checks totaling $17,080 during October and $18,650 during November. $16,240 of these checks cleared the bank in October, and $18,220 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $1,430 b. $840 c. $1,270 d. $1,570
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
8 - 28 139.
Test Bank for Accounting Principles, Tenth Edition Carothers Company assembled the following information in completing its March bank reconciliation: balance per bank $3,820; outstanding checks $775; deposits in transit $1,250; NSF check $80; bank service charge $25; cash balance per books $4,400. As a result of this reconciliation, Carothers will a. reduce its cash account by $25. b. reduce its cash account by $105. c. reduce its cash account by $475. d. increase its cash account by $55.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
140.
Macrinez Company assembled the following information in completing its July bank reconciliation: balance per bank $11,460; outstanding checks $2,325; deposits in transit $3,750; NSF check $240; bank service charge $75; cash balance per books $13,200. As a result of this reconciliation, Macrinez will a. reduce its cash account by $75. b. reduce its cash account by $315. c. reduce its cash account by $1,425. d. increase its cash account by $165.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
If a check correctly written and paid by the bank for $591 is incorrectly recorded on the company’s books for $519, the appropriate treatment on the bank reconciliation would be to a. deduct $72 from the book’s balance. b. add $72 to the book’s balance. c. deduct $72 from the bank’s balance. d. deduct $591 from the book’s balance.
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142.
In the month of May, Kijak Company Inc. wrote checks in the amount of $28,000. In June, checks in the amount of $38,000 were written. In May, $25,000 of these checks were presented to the bank for payment, and $33,000 in June. What is the amount of outstanding checks at the end of May? a. $3,000 b. $5,000 c. $8,000 d. $10,000
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
143.
In the month of May, Kijak Company Inc. wrote checks in the amount of $28,000. In June, checks in the amount of $38,000 were written. In May, $25,000 of these checks were presented to the bank for payment, and $33,000 in June. What is the amount of outstanding checks at the end of June? a. $3,000 b. $5,000 c. $8,000 d. $10,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 144.
8 - 29
Cash equivalents include each of the following except a. bank certificates of deposit. b. money market funds. c. petty cash. d. U.S. Treasury bills.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
145.
Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund b. Sixty-day certificate of deposit c. Six-month Treasury bill d. Money market savings certificate
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
Compensating balances are a restriction on the use of a company's cash and should be a. reported as a current asset. b. reported as a noncurrent asset. c. disclosed in the financial statements. d. reported as a reduction of cash.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
147.
The principles of internal control include all of the following except a. establishment of responsibility. b. combining of duties. c. physical, mechanical, and electronic controls. d. independent internal verification.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
148.
An example of poor internal control is a. The accountant should not have physical custody of the asset nor access to it. b. The custodian of an asset should not maintain or have access to the accounting records. c. One person should be responsible for handling related transactions. d. A salesperson makes the sale, and a different person ships the goods.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
149.
Having different individuals receive cash, record cash receipts, and hold the cash is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
8 - 30 150.
Test Bank for Accounting Principles, Tenth Edition Storing cash in a company safe is an application of which internal control principle? a. Segregation of duties b. Documentation procedures c. Physical controls d. Establishment of responsibility
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
151.
Using prenumbered checks and having an approved invoice for each check is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
152.
An application of good internal control over cash disbursements is a. following payment, the approved invoice should be stamped PAID. b. blank checks should be stored in the treasurer's desk. c. each check should be compared with the approved invoice after the check is issued. d. check signers should record the cash disbursements.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
153.
When making a payment from the petty cash fund for postage stamps, the following journal entry is made. a. Office Supplies ......................... XXXX Petty Cash ........................ XXXX b. Postage Expense ..................... XXXX Petty Cash ........................ XXXX c. Miscellaneous Expense ........... XXXX Petty Cash ........................ XXXX d. No entry is made.
Ans: D, SO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
154.
All of the following would involve a debit memorandum except a. a bank service charge. b. an NSF check. c. the cost of printing checks. d. interest earned.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
155.
A bank may issue a credit memorandum for a. a bank service charge. b. an NSF (not sufficient funds) check from a customer. c. the collection of a note receivable for the depositor by the bank. d. the cost of printing checks.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash 156.
8 - 31
Journal entries are required by the depositor for all of the following except a. collection of a note receivable. b. bank errors. c. bank service charges. d. an NSF check.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
157.
Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of a. 1 month or less when purchased. b. 3 months or less when purchased. c. 6 months or less when purchased. d. 1 year or less when purchased.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
158.
The principles of internal control activities are used in the a. U.S. but not globally. b. internationally but not in the U.S. c. in the U.S. and Canada but not globally. d. globally.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
159.
Sarbanes Oxley applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
160.
The fraud triangle applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
161.
What percentage of companies worldwide have experienced fraud in a recent two-year period? a. 1% b. 10% c. 50% d. 100%
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
8 - 32 162.
Test Bank for Accounting Principles, Tenth Edition Tangible frauds include a. asset misappropriation. b. false pretenses. c. counterfeiting. d. all of the above.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
163.
IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosures requirements.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
164.
GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosures requirements.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
165.
GAAP's, accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are: Accounting and internal control procedures Definition of cash equivalents a. essentially similar essentially similar b. essentially different essentially similar c. essentially similar essentially different d. essentially different essentially different
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
Cash is defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. cash on hand, demand deposits, and highly liquid investments.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
167.
Cash equivalents are defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. short-term, highly liquid investments that are readily convertible into known amounts of cash.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
8 - 33
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.
b c c b d c a d a c c b b c c a d c a
58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76.
d a c a c c c a b d d d a a c b a a c
77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.
b c d a c b c d b c c d b b c c a a c
96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
c c d b b b d b b c b d d c d b b b d
115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133.
d a a c a d b a c d c b c a c c d a a
134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
c a a c c b b a a c c c c b c b c c a
153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167.
d d c b b d d d c d c b a c d
FOR INSTRUCTOR USE ONLY
8 - 34
Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 168 Match the principle of internal control to each of the following cases. a) b) c) d) e)
Establishment of responsibility Segregation of duties Accountability for assets Documentation procedures Physical controls
_____ 1. Cash is locked in a safe overnight. _____ 2. Employees who receive shipments of goods do not have access to the accounting records for merchandise. _____ 3. Shipping documents are prenumbered. _____ 4. The bookkeeper does not have physical custody of assets. _____ 5. Only the treasurer of the company can sign checks. Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 168 1. 2. 3. 4. 5.
(4 min.)
e b d b a
BE 169 Identify which principle of internal control is being followed in each of the following cases. 1. Warehouse employees do not have access to the accounting records. 2. Prenumbered shipping documents are prepared for each shipment of goods. 3. The locked warehouse is accessible only by warehouse employees with keys. Ans: N/A, SO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 169
(3 min.)
1. Segregation of duties 2. Documentation procedures 3. Physical controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
8 - 35
BE 170 Identify the internal control procedures applicable to cash receipts for Ferguson Company in each of the following cases. 1. All cashiers are bonded. 2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts. 5. Deposit slips are completed for each deposit. Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 170 1. 2. 3. 4. 5.
(4 min.)
Human resource controls Independent internal verification Segregation of duties Establishment of responsibility Documentation procedures.
BE 171 Identify the internal control procedures applicable to cash disbursements followed by Downey Company in each of the following cases. 1. Company checks are prenumbered. 2. Only the treasurer is authorized to sign checks. 3. All employees are required to take vacations. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 171 1. 2. 3. 4. 5.
(4 min.)
Documentation procedures Establishment of responsibility Human resource controls Physical controls Segregation of duties
BE 172 On October 1, Head and Heart Company’s petty cash fund of $150 is replenished. The fund contains cash of $40, and receipts for supplies of $65 and postage of $45. Prepare the journal entry to record the replenishment of the petty cash fund. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 172
(3 min.)
Supplies ............................................................................. Postage Expense ................................................................ Cash...........................................................................
FOR INSTRUCTOR USE ONLY
65 45 110
8 - 36
Test Bank for Accounting Principles, Tenth Edition
BE 173 Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation. 1. EFT transfer to a supplier 2. Bank service charge 3. Check printing charge 4. Error recording check # 214 which was written for $450 but recorded for $540 5. Collection of note and interest by bank on company’s behalf Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 173 1. 2. 3. 4. 5.
(3 min.)
b b b a a
BE 174 Identify whether each of the following items would be (a) added to the book balance, (b) deducted from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted from the bank balance. 1. Deposits in transit 2. Bank service charge 3. Collection of note and interest by bank on company’s behalf 4. NSF check 5. Outstanding checks Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 174 1. 2. 3. 4. 5.
( 4 min.)
c b a b d
BE 175 Identify which of the following reconciling items would require an adjusting entry to be made by Danielle Doyle Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $415 by Cartography Company was returned NSF. 3. The bank charged the company $25 for printing checks. 4. Outstanding checks totaled $3,300 5. A debit memorandum reported an EFT of $178 to Salome Utilities Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Solution 175
8 - 37
(3 min.)
Adjusting entries would be required for: 2, 3, and 5 because they are reconciling items for the books. BE 176 Harnish Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case. 1. A check for $127 written to the company by J. Chandler was returned NSF. 2. The monthly service charge by the bank was $20. 3. The bank collected a $1,000 note plus interest of $100 on the company’s behalf. The company had not accrued the interest. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 176
(4 min.)
1. Debit: Accounts Receivable 2. Debit: Miscellaneous Expense 3. Debit: Cash
Credit: Cash Credit: Cash Credit: Note Receivable, Interest Revenue
BE 177 The following reconciling items are applicable to the bank reconciliation for the Spahn Company. Indicate how each item should be shown on a bank reconciliation. a. b. c. d.
Outstanding checks. Bank credit memorandum for collecting a note for the depositor. Bank debit memorandum for service charge. Deposit in transit.
Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 177 a. b. c. d.
(4 min.)
Outstanding checks should be deducted from the balance per bank. Bank credit memorandum should be added to the balance per books. Bank debit memorandum should be deducted from the balance per books. Deposits in transit should be added to the balance per bank.
BE 178 At August 31, Coffman Company has this bank information: cash balance per bank $5,950; outstanding checks $2,762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2012. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
8 - 38
Test Bank for Accounting Principles, Tenth Edition
Solution 178
(5 min.) Coffman Company Partial Bank Reconciliation August 31, 2012
Cash balance per bank Add: Deposit in transit
$5,950 1,700 7,650 2,762 $4,888
Less: Outstanding checks Adjusted cash balance per bank BE 179
Given the following information, determine the adjusted cash balance per books from the following information: a. b. c. d. e. f.
Balance per books as of June 30, $7,300. Outstanding checks, $820. NSF check returned with bank statement, $130. Deposit mailed the afternoon of June 30, $300. Check printing charges, $30. Interest earned on checking account, $12.
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 179
(4 min.)
$7,152: ($7,300 – $130 – $30 + $12)
EXERCISES Ex. 180 Match each of the following principles of internal control with the appropriate description below. A. Establishment of responsibility B. Segregation of duties C. Documentation procedures D. Physical controls E. Independent internal verification F. Human resource controls _____ 1.
Involves the review, comparison, and reconciliation of data prepared by other employees.
_____ 2.
Provide evidence that transactions and events have occurred.
_____ 3.
Includes the authorization and approval of transactions.
_____ 4.
Rotating employees' duties and requiring employees to take vacations.
_____ 5.
Related activities should be assigned to different individuals.
_____ 6.
Using garment sensors to deter theft.
Ans: N/A, SO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Solution 180 1. E 2. C
8 - 39
(5 min.) 3. A 4. F
5. B 6. D
Ex. 181 Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described. Internal Control Principles A. Establishment of responsibility B. Segregation of duties C. Physical controls D. Documentation procedures E. Independent internal verification F. Human resource controls ____
1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
____
2. Three people handle cash sales from the same cash register drawer.
____
3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.
____
4. The person who is authorized to sign checks approves purchase orders for payment.
____
5. Some cash payments are not recorded because checks are not prenumbered.
____
6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
____
7. The treasurer of the company has not taken a vacation for over 20 years.
Ans: N/A, SO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 181 1. 2. 3. 4.
B A C B
(5 min.) 5. D 6. E 7. F
Ex. 182 Joe Foss has worked for Dr. Sam Milton for several years. Joe demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Joe's primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Joe doesn't bother with giving each patient a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office, Joe offers to help Ann post the payments to the patients' accounts receivable. She is always happy to receive his help, because he is a very conscientious worker.
FOR INSTRUCTOR USE ONLY
8 - 40
Test Bank for Accounting Principles, Tenth Edition
Ex. 182
(Cont.)
Instructions Identify any principles of internal control that may be violated in this medical office situation. Ans: N/A, SO: 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 182
(10 min.)
Violations: 1. It is Ann's responsibility to post payments to patient accounts. In allowing Joe to assist her, the establishment of responsibility principle is violated. 2. Although it appears to be a small office, it is not appropriate that Joe both opens the mail, receives and records cash receipts from patients, and also appears to have custody of cash. This situation violates the segregation of duties principle. By posting to patients' accounts, it would be possible to post credits to patient accounts and pocket the cash. 3. The documentation principle is violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary. 4. Independent internal verification is also being violated. There is no independent counting of the cash and comparison to total receipts. 5. Human resource controls are being violated. There is no mention of Joe being bonded. Also, personnel should be required to take vacations. Ex. 183 Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply. Possible Errors or Problems 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise. 2. A small fire destroys 3 days of cash receipts. 3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection. 4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer. 5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand. 6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor. 7. Cashiers with over 5 years’ experience are not bonded.
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Ex. 183
8 - 41
(Cont.) Internal Control Principles
a. b. c. d. e. f.
Establishment of responsibility Segregation of duties Physical controls Documentation procedures Independent internal verification Human resource controls
Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 183 1. 2. 3. 4.
(10 min.)
b c c c
5. a and e 6. d and e 7. f
Ex. 184 Match the internal control principle below with the appropriate cash receipts procedure described. a. b. c. d. e. f.
Documentation procedures Establishment of responsibility Independent internal verification Human resource controls Physical controls Segregation of duties
_____ 1.
Only designated personnel are authorized to handle cash receipts.
_____ 2.
Different individuals receive cash and record cash receipts.
_____ 3.
Use remittance advice and cash register tapes.
_____ 4.
Store cash in safes and bank vaults.
_____ 5.
Treasurer compares total receipts to bank deposits daily.
_____ 6.
Bonding of employees that handle cash.
Ans: N/A, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 184 1. b 2. f
(5 min.) 3. a 4. e
5. c 6. d
FOR INSTRUCTOR USE ONLY
8 - 42
Test Bank for Accounting Principles, Tenth Edition
Ex. 185 Match the internal control principle below with the appropriate cash disbursements procedure described. a. Establishment of responsibility b. Segregation of duties c. Documentation procedures d. Physical controls e. Independent internal verification f. Human resource controls _____ 1.
Compare checks to invoices.
_____ 2.
Different individuals approve and make payments.
_____ 3.
Print check amounts by machine with indelible ink.
_____ 4.
Only designated personnel are authorized to sign checks.
_____ 5.
Each check must have approved invoice.
_____ 6.
Requiring employees to take vacations.
Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 185 1. e 2. b
(5 min.) 3. d 4. a
5. c 6. f
Ex. 186 The petty cash fund of $200 for Ginther Company appeared as follows on December 31, 2012: Cash Petty cash vouchers Freight in Postage Balloons for a special occasion Meals
$63.60 $26.40 45.00 28.00 35.00
Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare in general journal form the entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Solution 186
8 - 43
(10 min.)
1. Petty cash should be replenished on a periodic basis or when the cash is low. It must be replenished on the balance sheet date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period. 2. Freight-in ........................................................................................ Postage Expense ........................................................................... Miscellaneous Expense.................................................................. Meals Expense............................................................................... Cash Over and Short...................................................................... Cash ......................................................................................
26.40 45.00 28.00 35.00 2.00
3. Petty Cash ..................................................................................... Cash ......................................................................................
50.00
136.40
50.00
Ex. 187 Prepare the entry to replenish the $200 petty cash fund of Erin Company, assuming the fund has receipts for: freight-out $60, postage $105, and miscellaneous expense $22. The fund contains $9 in cash. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 187
(5 min.)
Freight-out ........................................................................................... Postage Expense ................................................................................. Miscellaneous Expense ....................................................................... Cash Over and Short ........................................................................... Cash ($200 – $9) ......................................................................
60 105 22 4 191
Ex. 188 On October 1, 2012, Ellington Company establishes an imprest petty cash fund by issuing a check for $200 to Erin Angelo, the custodian of the petty cash fund. On October 31, 2012, Erin Angelo submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $42 cash in the fund: Freight-in $27 Supplies Expense 42 Entertainment of Clients 65 Postage Expense 20 Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
8 - 44
Test Bank for Accounting Principles, Tenth Edition
Solution 188 Oct. 1
31
(10 min.)
Petty Cash .......................................................................... Cash........................................................................... (To establish a petty cash fund)
200
Cash Over and Short .......................................................... Freight-in............................................................................. Supplies Expense ............................................................... Entertainment Expense ....................................................... Postage Expense ................................................................ Cash........................................................................... (To record expenses for October and to replenish the petty cash fund)
4 27 42 65 20
200
158
Ex. 189 Ernest Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $200. During March the following petty cash receipts were found in the petty cash box.
Date 3/5 7 9 11 14
Receipt No. 1 2 3 4 5
For Stamp Inventory Freight-out Miscellaneous Expense Travel Exoense Miscellaneous Expense
Amount $76 42 22 49 10
The fund was replenished on March 15 when the fund contained $6 in cash. On March 20, the amount in the fund was increased to $300. Instructions Journalize the entries in March that pertain to the operation of the petty cash fund. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189 Mar. 1
15
20
(5 min.)
Petty Cash .......................................................................... Cash...........................................................................
200
Postage Expense ................................................................ Freight-out .......................................................................... Miscellaneous Expense ...................................................... Travel Expense ................................................................... Cash Over and Short .......................................................... Cash...........................................................................
76 42 22 49 5
Petty Cash .......................................................................... Cash...........................................................................
100
FOR INSTRUCTOR USE ONLY
200
194
100
Fraud, Internal Control, and Cash
8 - 45
Ex. 190 Sky Company is unable to reconcile the bank balance at January 31. Sky’s reconciliation is as follows. Cash balance per bank Add: NSF check Less: Bank service charge Adjusted balance per bank Cash balance per books Less: Deposits in transit Add: Outstanding checks Adjusted balance per books Instructions (a) Prepare a correct bank reconciliation. (b) Journalize the entries required by the reconciliation.
$5,300 1,070 35 $6,335 $5,705 750 1,450 $6,405
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 190
(8 min.)
(a) Cash balance per bank statement .................................................. Add: Deposits in transit ..................................................................
$5,300 750 6,050 1,450 $4,600
Less: Outstanding checks .............................................................. Adjusted cash balance per bank .................................................... Cash balance per books................................................................. Less: NSF check ............................................................................ Bank service charge .............................................................. Adjusted cash balance per books ...................................................
$5,705 1,070 35
(b) Accounts Receivable ...................................................................... Cash ......................................................................................
1,070
Miscellaneous Expense.................................................................. Cash ......................................................................................
35
1,105 $4,600 1,070 35
Ex. 191 On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $820, and no. 357, $615. The May bank statement and the May cash payments journal show the following.
Date 5/4 5/2 5/17 5/12 5/20 5/29 5/30
Bank Statement Checks Paid Check No. Amount 354 650 355 820 358 159 359 275 360 890 363 480 362 750
Date 5/2 5/5 5/10 5/15 5/22 5/24 5/29
Cash Payments Journal Checks Issued Check No. Amount 358 159 359 275 360 890 361 800 362 750 363 480 364 840
FOR INSTRUCTOR USE ONLY
8 - 46
Test Bank for Accounting Principles, Tenth Edition
Ex. 191
(Cont.)
Instructions Using step 2 in the reconciliation procedure, list the outstanding checks at May 31. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 191
(3 min.)
The outstanding checks are as follows: No. 357 361 364 Total
Amount $ 615 800 840 $2,255
Ex. 192 The information below relates to the Cash account in the ledger of Lee Company. Balance September 1—$25,725; Cash deposited—$96,000. Balance September 30—$22,225; Checks written—$99,500. The September bank statement shows a balance of $24,635 on September 30 and the following memoranda. Credits Collection of $2,250 note plus interest $50 $2,300 Interest earned on checking account $40
Debits NSF check: J. E. Hoover Safety deposit box rent
$735 $75
At September 30, deposits in transit were $4,695, and outstanding checks totaled $5,575. Instructions Prepare the bank reconciliation at September 30. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Solution 192 (a)
8 - 47
(10 min.)
LEE COMPANY Bank Reconciliation September 30 Cash balance per bank statement .................................................. Add: Deposits in transit ..................................................................
$24,635 4,695 29,330 5,575 $23,755
Less: Outstanding checks .............................................................. Adjusted cash balance per bank .................................................... Cash balance per books................................................................. Add: Collection of note receivable ($2,250 + $50) .......................... Interest earned ......................................................................
Less: NSF check ............................................................................ Safety deposit box rent .......................................................... Adjusted cash balance per books ...................................................
$22,225 $2,300 40
735 75
2,340 24,565
810 $23,755
Ex. 193 The cash records of Jasmin Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $1,110. During July the general ledger account Cash shows deposits of $23,620, but the bank statement indicates that only $23,400 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,250. During the month of July, Jasmin Company books show that $25,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July. 3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $2,900. 4. In September, cash disbursements per books were $35,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $3,200. There were no bank debit or credit memoranda. No errors were made by either the bank or Jasmin Company. Instructions Answer the following questions. (a) In situation (1), what were the deposits in transit at July 31? (b) In situation (2), what were the outstanding checks at July 31? (c) In situation (3), what were the deposits in transit at August 31? (d) In situation (4), what were the outstanding checks at August 31? Ans: N/A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
8 - 48
Test Bank for Accounting Principles, Tenth Edition
Solution 193
(12 min.)
(a) Deposits in transit: Deposits per books in July ..................................................... Less: Deposits per bank in July.............................................. Deposits in transit, June 30 ............................................ July receipts deposited in July ........................................................ Deposits in transit, July 31 ..............................................................
$23,400 (1,110)
(b) Outstanding checks: Checks per books in July ....................................................... Less: Checks clearing bank in July ........................................ Outstanding checks, June 30 ........................................ July checks cleared in July ............................................................. Outstanding checks, July 31 ...........................................................
$24,600 (1,250)
$23,620
22,290 $ 1,330
$25,800
23,350 $ 2,450
(c) Deposits in transit: Deposits per bank statement in September ........................... Add: Deposits in transit, September 30 .................................. Total deposits to be accounted for ......................................... Less: Deposits per books ....................................................... Deposits in transit, August 31 ................................................
$40,100 2,900 43,000 38,100 $ 4,900
(d) Outstanding checks: Checks clearing bank in September ....................................... Add: Outstanding checks, September 30 ............................... Total checks to be accounted for ........................................... Less: Cash disbursements per books .................................... Outstanding checks, August 31..............................................
$37,500 3,200 40,700 35,550 $ 5,150
Ex. 194 Lyleen Boat Company's bank statement for the month of September showed a balance per bank of $7,000. The company's Cash account in the general ledger had a balance of $5,459 at September 30. Other information is as follows: (1)
Cash receipts for September 30 recorded on the company's books were $5,700 but this amount does not appear on the bank statement.
(2)
The bank statement shows a debit memorandum for $40 for check printing charges.
(3)
Check No. 119 payable to Mann Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Mann Company and that the payment to them should have been for $284.
(4)
The total amount of checks still outstanding at September 30 amounted to $6,000.
(5)
Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490.
(6)
The bank returned an NSF check from a customer for $360.
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Ex. 194 (7)
8 - 49
(Cont.)
The bank included a credit memorandum for $1,560 which represents collection of a customer's note by the bank for the company; principal amount of the note was $1,500 and interest was $60. Interest has not been accrued.
Instructions (a) Prepare a bank reconciliation for Lyleen Boat Company at September 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 194
(25 min.)
(a)
LYLEEN BOAT COMPANY Bank Reconciliation September 30
Cash balance per bank Add: (1) Deposit in transit
$ 7,000 5,700 12,700 6,000 $ 6,700
Less: (4) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (5) Accounts Payable Error (7) Collect $1,500 note and interest $60 Less: (2) Check printing (6) NSF Check Adjusted cash balance per books
$ 5,459 $
81 1,560 40 360
1,641 7,100 400 $ 6,700
Note: Item (3) is not a reconciling item. (b) Sept. 30
30
30
30
Cash .............................................................................. Accounts Payable ................................................... (To correct error in recording Check No. 138)
81
Cash ................................................................................ Notes Receivable .................................................... Interest Revenue ..................................................... (To record collection of note receivable and interest by the bank)
1,560
Miscellaneous Expense ................................................... Cash ....................................................................... (To record check printing charges)
40
Accounts Receivable ....................................................... Cash ....................................................................... (To record NSF check)
360
FOR INSTRUCTOR USE ONLY
81
1,500 60
40
360
8 - 50
Test Bank for Accounting Principles, Tenth Edition
Ex. 195 Bell Food Store developed the following information in recording its bank statement for the month of March. Balance per books March 31 $ 3,664 Balance per bank statement March 31 $10,900 ——————————————————————————————————————————— (1) Checks written in March but still outstanding $7,000. (2) Checks written in February but still outstanding $2,100. (3) Deposits of March 30 and 31 not yet recorded by bank $5,200. (4) NSF check of customer returned by bank $1,200. (5) Check No. 210 for $593 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $539. (6) Bank service charge for March was $50. (7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in March. (8) The bank collected a note receivable for the company for $4,000 plus $100 interest revenue. Instructions Prepare a bank reconciliation at March 31. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 195
(20 min.) BELL FOOD STORE Bank Reconciliation March 31
Cash balance per books $3,664 Add: (7) Error on Check No. 318 $ 540 (8) Collect $4,000 note and interest $100 4,100 4,640 8,304 Less: (4) NSF Check 1,200 (5) Error on Check No. 210 54 (6) Bank Service Charge 50 1,304 Adjusted cash balance per books $7,000
Cash balance per bank Add: (3) Deposit in transit
$10,900 5,200 16,100
Less: (1) Mar. outstanding checks ($7,000) (2) Feb. outstanding checks ($2,100) 9,100 Adjusted cash balance per bank $ 7,000
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
8 - 51
Ex. 196 Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item. Code A Add to cash balance per books B Deduct from cash balance per books C Add to cash balance per bank D Deduct from cash balance per bank E Does not affect the bank reconciliation Items: ____
1. Outstanding checks.
____
2. Bank service charge.
____
3. Check for $420 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $240.
____
4. Deposit in transit.
____
5. Bank returns deposited check marked NSF.
____
6. Bank collects notes receivable and interest for depositor.
____
7. Bank debit memorandum for check printing fees.
____
8. Petty cash custodian has $91 in paid petty cash vouchers that have not been reimbursed.
____
9. Bank charged a check against the company which should have been charged to another company.
____ 10. A check for $246 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $264. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 196 1. 2. 3. 4. 5.
D B B C B
(10 min.) 6. 7. 8. 9. 10.
A B E C A
FOR INSTRUCTOR USE ONLY
8 - 52
Test Bank for Accounting Principles, Tenth Edition
Ex. 197 The following adjusting entries for Donkey Company were prepared after completing a bank reconciliation. For each of the following adjustments, prepare a probable explanation for the adjusting entry. 1. Supplies ......................................................................................... Cash ......................................................................................
180
2. Accounts Receivable—B. Borke ..................................................... Cash ......................................................................................
460
3. Cash .............................................................................................. Notes Receivable ................................................................... Interest Revenue ...................................................................
2,240
4. Sales .............................................................................................. Cash ......................................................................................
72
5. Miscellaneous Expense .................................................................. Cash ......................................................................................
18
180
460
2,000 240
72
18
Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197
(10 min.)
1. To adjust book balance for error in recording supplies. 2. To record an NSF check returned with the bank statement. 3. To record collection of Notes Receivable and interest upon notification by bank through bank statement. 4. To adjust book balance for transposition error in recording sales. 5. To reduce the book balance for bank service or check printing charges. Ex. 198 The cash balance per books for Feagen Company on September 30, 2012 is $10,740.93. The following checks and receipts were recorded for the month of October, 2012:
No. 17 18 19 20 21
Amount $372.96 $780.62 $157.00 $587.50 $234.15
Checks No. 22 23 24 25
Receipts Amount $ 578.84 $1,687.50 $ 921.30 $ 246.03
Amount $843.86 $941.54 $808.58 $967.00
FOR INSTRUCTOR USE ONLY
Date 10/ 5 10/21 10/27 10/30
Fraud, Internal Control, and Cash
8 - 53
Ex. 198 (Cont.) In addition, the bank statement for the month of October is presented below: Balance Deposits and Credits Checks and Debits Balance Last Statement No. Total Amount No. Total Amount This Statement ———————————————————————————————————————— $5,404.84 5 $9,178.36 10 $3,632.19 $10,951.01 ———————————————————————————————————————— Checks and other debits Deposits Date Balance ——————————————————————— No. Amount No. Amount No. Amount ———————————————————————————————————————— 14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31 18 708.62 24 921.30 843.86 10/ 8 $9,219.03 19 157.00 25 246.03 941.54 10/23 $9,541.58 21 234.15 25.00 SC 808.58 10/29 $10,101.01 240.00 NSF 1,100.00 CM 10/31 $10,951.01 ———————————————————————————————————————— Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo) ————————————————————————————————————————
Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Long, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 which has not been accrued. The bank service charge is $25.00. Instructions (a) Prepare a bank reconciliation at October 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 30, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
8 - 54
Test Bank for Accounting Principles, Tenth Edition
Solution 198 (a)
(30–35 min.) FEAGEN COMPANY Bank Reconciliation October 31, 2012
Cash balance per bank statement ......................................... Add: Deposits in transit ........................................................
$10,951.01 967.00 11,918.01
Less: Outstanding checks No. 20................................................................ No. 23................................................................ Adjusted cash balance per bank ............................................
$ 587.50 1,687.50
Cash balance per books ........................................................ Add: Error in recording check No. 18 ................................... Note collected by bank ................................................
$
$ 8,736.01*
Less: Bank service charge .................................................... NSF check ................................................................... Adjusted cash balance per books .......................................... *9/30 balance per books + Receipts – Checks written = $10,740.93 + $3,560.98 – $5,565.90 =
72.00 1,100.00 25.00 240.00
1,172.00 9,908.01 265.00 $ 9,643.01
10/31 balance per books $8,736.01
(b) Oct. 31 Cash ............................................................................. Accounts Payable ................................................. (To correct recording error on check No. 18)
72.00
31 Cash ............................................................................. Notes Receivable ................................................. Interest Revenue .................................................. (To record collection of note and interest)
1,100.00
31 Miscellaneous Expense................................................. Cash ..................................................................... (To record bank service charge for the month of October)
25.00
31 Accounts Receivable—S. Long ..................................... Cash ..................................................................... (To record NSF check)
240.00
FOR INSTRUCTOR USE ONLY
2,275.00 $ 9,643.01
72.00
1,040.00 60.00
25.00
240.00
Fraud, Internal Control, and Cash
8 - 55
Ex. 199 Tetsch Company received a notice with its bank statement that the bank had collected a note receivable for $6,000 plus $180 of interest. The bank had credited these amounts to Tetsch 's account less a collection fee of $10. Tetsch Company had already accrued the interest for this note on its books. (a)
How will these items affect Tetsch Company's bank reconciliation?
(b)
Prepare the journal entry that Tetsch Company will make to record this information on its books.
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 199 (a)
(5 min.)
Riley Company must add the amount of the note plus interest less the collection charge to its cash balance per books on the bank reconciliation. Add: Collection of note receivable $6,170
(b)
Cash ........................................................................................... Miscellaneous Expense ............................................................... Note Receivable ................................................................. Interest Receivable .............................................................
6,170 10 6,000 180
Ex. 200 The cash records of Mercury Company show the following: 1. The June 30 bank reconciliation indicated that deposits in transit totaled $790. During July the general ledger account Cash shows deposits of $9,800, but the bank statement indicates that only $9,240 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,200. During the month of July, Mercury Company books show that $11,070 of checks were issued, yet the bank statement showed that $11,100 of checks cleared the bank in July. There were no bank debit or credit memoranda and no errors were made by either the bank or Mercury Company. Answer the following questions: (a) What were the deposits in transit at July 31? (b) What were the outstanding checks at July 31? Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 200 (a)
(10 min.)
Deposits in Transit: Deposits per books in July ............................................ Deposits per the bank in July ........................................ Less: June 30 deposits in transit ................................... July receipts deposited in July ...................................... Deposits in transit, July 31 ............................................
(b)
$ 9,800 $ 9,240 790 8,450 $ 1,350
Outstanding Checks: Checks per books in July .............................................. Checks clearing the bank in July................................... Less: Outstanding checks, June 30 ............................. July checks clearing in July ........................................... Outstanding checks, July 31 .........................................
$11,070 $11,100 1,200 9,900 $ 1,170
Ex. 201 Indicate how each of the following items would be shown on a bank reconciliation. 1. 2. 3. 4. 5. 6.
Bank error (The bank charged our account with another company's check) Check printing charge Deposits in transit Note collected by the bank NSF checks Outstanding checks
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 201 1. 2. 3. 4. 5. 6.
(7 min.)
Added to balance per bank Deducted from balance per books Added to balance per bank Added to balance per books Deducted from balance per books Deducted from balance per bank
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
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Ex. 202 The cash records of Barry Company show the following: 1. In September, deposits per the bank statement totaled $37,600; deposits per books $39,000; and deposits in transit at September 30 were $4,600. 2. In September, cash disbursements per books were $36,500; checks clearing the bank were $37,800; and outstanding checks at September 30 were $3,100. There were no bank debit or credit memoranda and no errors were made by either the bank or Barry Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 202 (a)
(10 min.)
Deposits in Transit: Deposits per bank statement in September ................ Add: Deposits in transit, September 30....................... Total deposits to be accounted for .............................. Less: Deposits per books ........................................... Deposits in transit, August 31 .....................................
(b)
$37,600 4,600 42,200 39,000 $ 3,200
Outstanding Checks: Checks clearing the bank in September ..................... Add: Outstanding checks, September 30.................... Total checks to be accounted for ................................ Less: Cash disbursements per books ......................... Outstanding checks, August 31 ..................................
FOR INSTRUCTOR USE ONLY
$37,800 3,100 40,900 36,500 $ 4,400
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Test Bank for Accounting Principles, Tenth Edition
Ex. 203 Listed below are items that may be useful in preparing the March 2012, bank reconciliation for Walker Machine Works. Using the following code, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process. Code A B C D E
Located or Treated Add to the cash balance per books Deduct from the cash balance per books Add to the cash balance per bank Deduct from the cash balance per bank Does not affect the bank reconciliation
____
1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped "account closed."
____
2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account.
____
3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works.
____
4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance.
____
5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.
____
6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.
____
7. The bank statement included a credit memorandum dated March 28, 2012, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.
____
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.
____
9. On March 24, 2012, Walker Machine Works delivered to the bank for collection a $4,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2012, indicated the collection of the note and $90.00 of interest.
____ 10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest. Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Solution 203 1. 2. 3. 4. 5.
B D B A C
8 - 59
(10 min.) 6. 7. 8. 9. 10.
E A D A B
Ex. 204 The following information was used to prepare the March 2012, bank reconciliation for Walker Machine Works. Identify the items that require adjustment to the cash balance per books and prepare the appropriate adjusting entries. 1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped "NSF." 2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account. 3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works. 4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance. 5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings. 6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement. 7. The bank statement included a credit memorandum dated March 28, 2012, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March. 9. On March 24, 2012, Walker Machine Works delivered to the bank for collection a $4,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2012, indicated the collection of the note and $90.00 of interest. 10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204 Item #1
Item #3
Item #4
(20 min.)
Accounts Receivable .......................................................... Cash ..........................................................................
40.00
Miscellaneous Expense ...................................................... Cash ..........................................................................
22.00
Cash ................................................................................... Interest Revenue........................................................
24.75
FOR INSTRUCTOR USE ONLY
40.00
22.00
24.75
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Test Bank for Accounting Principles, Tenth Edition
Solution 204 Item #7
Item #9
Item #10
(Cont.)
Cash ................................................................................... Interest Revenue ........................................................
45.00
Cash ................................................................................... Note Receivable ......................................................... Interest Revenue ........................................................
4,590
Miscellaneous Expense ...................................................... Cash...........................................................................
25.00
45.00
4,500 90
25.00
Ex. 205 Compute Whiz Company’s adjusted cash balance per books based on the following information: Beginning cash balance per books Deposit in transit Check printing charge Note collected by bank for Whiz
$4,500 900 20 1,600
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(5 min.)
Beginning cash balance per books Add: Collection of note Less: Check printing charge Adjusted cash balance per books
$4,500 1,600 6,100 20 $6,080
COMPLETION STATEMENTS 206. Internal control consists of the related methods and measures adopted to ____________ its assets and enhance the ______________ and ______________ of its accounting records. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
207. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
208. Maintaining an adequate system of internal control is required by the _______________ Act of 1977. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
209. The ______________ of an asset should not have access to the accounting records of that asset. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
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210. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called ______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
211. Using _______________ documents is a control measure which helps in accounting for all documents in a series and also prevents a document from being recorded more than once. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
212. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
213. Two limitations of systems of internal control are the concept of ______________ and the ______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
214. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
215. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
216. A voucher is recorded in the ________________ and filed according to the date on which it is to be paid. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
217. A __________________ fund is used to pay relatively small expenditures. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
218. A debit memorandum issued by the bank ______________ the cash balance in the depositor's account. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
219. There are three parties to a check: (1)_______________, (2)______________, and the (3)______________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
220. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
221. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
222. A check correctly written for $270 was incorrectly entered in the cash payments journal for $720. In preparing a bank reconciliation, $_____________ must be ______________ the cash balance per ______________. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to Completion Statements 206. 207. 208. 209. 210. 211. 212. 213. 214.
safeguard, accuracy, reliability segregation of duties Foreign Corrupt Practices custodian internal auditors prenumbered bonded reasonable assurance, human element check, cash
215. 216. 217. 218. 219. 220. 221. 222.
electronic funds transfer (EFT) voucher register petty cash reduces maker, payer, payee time lags, errors deducted, bank $450, added to, books
MATCHING 223. Match the items below by entering the appropriate code letter in the space provided. A. B.
C. D. E. F.
Prenumbered documents Custody of an asset should be kept separate from the record-keeping for that asset Cash registers, garment sensors and burglar alarms are examples Bonding employees Collusion Cash
G. H. I. J. K. L. M. N. O.
Bank signature card Payee Maker Canceled checks NSF checks Outstanding checks Petty cash receipt Cash equivalents Voucher system
____
1. Segregation of duties.
____
2. One to whom a check is payable.
____
3. Two or more employees circumventing prescribed procedures.
____
4. Prevent a transaction from being recorded more than once.
____
5. Checks which have been returned by the maker's bank for lack of funds.
____
6. Checks which have been paid by the depositor's bank.
____
7. Indicates those people authorized to sign checks.
____
8. Anything that a bank will accept for deposit. FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash Matching 223. ____
8 - 63
(Cont.)
9. Mechanical and electronic control devices.
____ 10. One who issues a check. ____ 11. Insurance protection against misappropriation of assets. ____ 12. An extensive network of approvals by authorized individuals. ____ 13. Document indicating the purpose of a petty cash expenditure. ____ 14. Issued checks that have not been paid by the bank. ____ 15. Highly liquid investments. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Answers to Matching 1. 2. 3. 4. 5.
B H E A K
6. 7. 8. 9. 10.
J G F C I
11. 12. 13. 14. 15.
D O M L N
SHORT-ANSWER ESSAY QUESTIONS S-A E 224 Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 224 The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money. S-A E 225 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business, affect the implementation of a system of internal controls. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 225 The implementation of a system of internal controls is affected by cost benefit considerations, the human element, and the size of the business. A company's system of internal control can provide reasonable assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. A very costly set of safeguards may produce something approaching absolute assurance, but the value of the benefits received would not come close to outweighing the costs. The human element can cause a good system of internal control to become ineffective due to employee fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed controls may significantly impair the effectiveness of the system. The size of a business impacts internal control because a smaller business may not have the necessary resources available to affect the implementation of desirable controls. S-A E 226 Your friend, Dean, has opened a movie theater. Dean states that he does not have time to develop and implement a system of internal controls. a. Provide Dean with the objectives of a system of internal controls. b. Explain to Dean why he should develop a system of internal controls. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 226 a. The objectives of a system of internal controls include: 1 safeguarding assets from employee theft, robbery, and unauthorized use 2. enhancing the accuracy and reliability of its accounting records by reducing the risk of errors and irregularities in the accounting process. b. Dean, here are some reasons why you must develop a system of internal controls: 1. You will not be able to oversee every function of your business. For this reason, you must establish policies and procedures for your employees to follow. By designing these policies and procedures around the principles of internal control, you have a foundation for safeguarding assets and enhancing the accuracy and reliability of the accounting records. 2. A good system of internal controls will help you attract investors and creditors because they will value the rewards of the system. 3. A good system of internal controls works to eliminate fraud. No business can assume that fraud will not take place. S-A E 227 (a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity. (b) When are journal entries required in the operation of a petty cash fund? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Fraud, Internal Control, and Cash
8 - 65
Solution 227 The activities in a petty cash system and the related principles are:
(a) (1)
Establishing the fund.
*
(2)
Making payments from the fund.
*
(3)
Replenishing the fund.
*
Establishment of responsibility for custody of fund. Documentation procedures because the custodian must use a prenumbered petty cash receipt. Independent internal verification because the request for replenishment must be approved before the check is written.
(b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased. S-A E 228 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 228 The cash balance per books will not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding checks, deposits-in-transit) or the company records a transaction in a period later than the bank records it (NSF check, collection of a note, etc.). A common error is transposition of amounts in the recording process. S-A E 229
(Ethics)
Moyer Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 229 Internal controls exist, not because most people can't be trusted, but to protect the company's assets from those few who can't be trusted. If it were a perfect world, and everyone could be trusted, internal controls would not be needed. However, it does not follow that internal controls indicate the opposite. It is true that anyone is capable of practically any action, if motivation and opportunity are both present. Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone to monitor changes in motivation, a company's best recourse is to prevent opportunity. Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them is dishonest. S-A E 230
(Communication)
Medaid is a medical office management franchise. There are currently twenty-five medical offices managed by a Medaid franchisee. One of the services provided to franchisees is assistance in training various staff members. Medaid is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 230 All the controls discussed in this manual may seem unnecessary to you. It may also seem that management trusts no one. However, these practices and procedures actually benefit you, the employee. First, internal control policies clearly outline who is to be responsible for various activities, such as making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did not follow correct procedures are held accountable for their actions. Also, strong internal controls discourage many opportunistic people, who find such opportunities to harm the company are extremely limited. Finally, all these systems, practices, and procedures result in a well-managed company that is less likely to suffer unnecessary losses, and a much better place for you to work and build a career.
FOR INSTRUCTOR USE ONLY
CHAPTER 9 ACCOUNTING FOR RECEIVABLES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 5 5 5 9 9 1 3
K AP K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
3 4 5 8 9
K C K K K
5 5 5 5 5 5 5 5 5 5 5 6 8 6 6 6 6 6 6 7 7 8 8 8 9 9 9 9 9
AP K K K C AP AP AP AP AP AP AP AP K K C K AP K K C C AN C AP K K AP AP
154. 155. sg 156. sg 157. st 158. sg 159. st 160. sg 161. st 162. sg 163. st 164. sg 165. st 166. sg 167. st 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179.
9 9 1 2 3 3 3 3 4 4 5 5 8 9 9 9 9 9 9 9 9 9 9 9 9 9
AP AP K K K K K AP K AP K AP K C K K K K K K K K K K K K
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 2 2 2 2 3
K C C K K K K C
9. 10. 11. 12. 13. 14. 15. 16.
3 3 3 3 3 3 3 3
C C C K K K C C
17. 18. 19. 20. 21. 22. 23. 24.
3 3 3 4 4 4 4 4
C K K K K K C K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. sg st
1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 2 3 2 2 3 3 3 3 3 3 3 3
K K K C K K K K K K C C AP C C AN C K AN C AP C C C C K AP C C
67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K C K C K K K K C C C K C C C K K AN K K C C C C C C C C C
96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124.
3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5
AP AP AP AP AP AP AP AP AP AP AP AP AP C AP C K K K K K C AP K K K AP AP AP
125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
9-2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Brief Exercises 180. 181. 182.
2 3 3
AN AN AN
183. 184. 185.
3 4 5
AN AP AP
186. 187. 188.
192. 193. 194. 195. 196. 197.
1 1,8 2 2 3 3
C AN AN AP AN AN
198. 199. 200. 201. 202. 203.
3 3 3 3 3 3
AN AN AN AN AP AN
204. 205. 206. 207. 208. 209.
5,6 5,8 6
AN AP AP
189. 190. 191.
8 8 9
AN AN K AN
Exercises 3,8 4 4 4 4 5
AN AN AP AP AP AP
210. 5 211. 5 212. 5,6 213. 5,6,8 214. 6,8 215. 6,8
AP AN AN AP AN AP
216. 217. 218.
8 9 9
AP AN AN
4 4 5
K K AP
231. 232.
8 8
K K
3 3
K K
Item
Type
203. 204. 222. 223. 224. 225. 226. 227. 234. 236. 240. 241.
Ex Ex C C C C C C SA SA SA SA
Completion Statements 219. 220. 221.
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K K K
222. 223. 224.
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K K K
225. 226. 227.
3 3 3
K K K
228. 229. 230.
Matching Statements 233.
1
K
Short-Answer Essay 234. 235.
3 1
K K
236. 237.
3 1
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238. 239.
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K K
240. 241.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
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1. 2. 3.
TF TF TF
31. 38. 39.
TF MC MC
40. 41. 42.
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44. 45. 46. 47.
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48. 49. 50. 51.
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TF TF TF TF TF TF TF TF TF TF TF TF TF
33. 54. 56. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.
TF MC MC MC MC MC MC MC MC MC MC MC MC
69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.
Type Item Type Item Type Study Objective 1 MC 43. MC 193. Ex MC 156. MC 219. C MC 192. Ex 233. MA Study Objective 2 MC 52. MC 58. MC MC 53. MC 157. MC MC 55. MC 180. BE MC 57. MC 194. Ex Study Objective 3 MC 82. MC 95. MC MC 83. MC 96. MC MC 84. MC 97. MC MC 85. MC 98. MC MC 86. MC 99. MC MC 87. MC 100. MC MC 88. MC 101. MC MC 89. MC 102. MC MC 90. MC 103. MC MC 91. MC 104. MC MC 92. MC 105. MC MC 93. MC 106. MC MC 94. MC 158. MC
FOR INSTRUCTOR USE ONLY
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Type
235. 237. 239.
SA SA SA
195. 220. 221.
Ex C C
159. 160. 161. 181. 182. 183. 196. 197. 198. 199. 200. 201. 202.
MC MC MC BE BE BE Ex Ex Ex Ex Ex Ex Ex
Accounting for Receivables
20. 21. 22. 23. 24.
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34. 107. 108. 109. 110.
TF MC MC MC MC
111. 112. 113. 114. 115.
25. 26. 27. 28. 35.
TF TF TF TF TF
121. 122. 123. 124. 125.
MC MC MC MC MC
126. 127. 128. 129. 130.
Study Objective 4 MC 116. MC 162. MC 117. MC 163. MC 118. MC 184. MC 119. MC 205. MC 120. MC 206. Study Objective 5 MC 131. MC 164. MC 132. MC 165. MC 133. MC 185. MC 134. MC 186. MC 135. MC 187.
MC MC BE Ex Ex
207. 208. 228. 229. 238.
Ex Ex C C SA
MC MC BE BE BE
209. 210. 211. 212. 213.
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9-3
230.
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217. 218.
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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 136. 138.
MC MC
139. 140.
MC MC
144.
MC
145.
MC
141. 142.
36. 137. 146.
TF MC MC
147. 148. 166.
MC MC MC
187. 189. 190.
29. 30. 37. 149.
TF TF TF MC
150. 151. 152. 153.
MC MC MC MC
154. 155. 167. 168.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 6 MC 143. MC 188. MC 186. BE 214. Study Objective 7 Study Objective 8 BE 193. Ex 214. BE 204. Ex 215. BE 213. Ex 216. Study Objective 9 MC 169. MC 173. MC 170. MC 174. MC 171. MC 175. MC 172. MC 176.
BE Ex
215.
Ex
Ex Ex Ex
231. 232.
C C
MC MC MC MC
177. 178. 179. 191.
MC MC MC BE
BE = Brief Exercise Ex = Exercise
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Identify the different types of receivables. Receivables are frequently classified as (1) accounts, (2) notes, and (3) other. Accounts receivable are amounts customers owe on account. Notes receivable are claims for which lenders issue formal instruments of credit as proof of debt. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. 2. Explain how companies recognize accounts receivable. Companies record accounts receivable at invoice price. They are reduced by sales returns and allowances. Cash discounts reduce the amount received on accounts receivable. When interest is charged on a past due receivable, the company adds this interest to the accounts receivable balance and recognizes it as interest revenue.
FOR INSTRUCTOR USE ONLY
9-4
Test Bank for Accounting Principles, Tenth Edition
3. Distinguish between the methods and bases companies use to value accounts receivable. There are two methods of accounting for uncollectible accounts: the allowance method and the direct write-off method. Companies use either the percentage-of-sales or the percentage-of-receivables basis may be used to estimate uncollectible accounts using the allowance method. The percentage of sales basis emphasizes the expense recognition principle. The percentage-of-receivables basis emphasizes the cash realizable value of the accounts receivable. An aging schedule is often used with this basis. 4. Describe the entries to record the disposition of accounts receivable. When a company collects an account receivable, it credits Accounts Receivable. When a company sells (factors) an account receivable, a service charge expense reduces the amount collected. 5. Compute the maturity date of and interest on notes receivable. For a note stated in months, the maturity date is found by counting the months from the date of issue. For a note stated in days, the number of days is counted, omitting the issue date and counting the due date. The formula for computing interest is Face value × Interest rate × Time. 6. Explain how companies recognize notes receivable. Companies record notes receivable at face value. In some cases, it is necessary to accrue interest prior to maturity. In this case, companies debit Interest Receivable and credit Interest Revenue. 7. Describe how companies value notes receivable. As with accounts receivable, companies report notes receivable at their cash (net) realizable value. The notes receivable allowance account is the Allowance for Doubtful Accounts. The computation and estimations involved in valuing notes receivable at cash realizable value, and in recording the proper amount of bad debts expense and related allowance are similar to those for accounts receivable. 8. Describe the entries to record the disposition of notes receivable. Notes can be held to maturity. At that time, the face value plus accrued interest is due, and the note is removed from the accounts. In many cases, the holder of the note speeds up the conversion by selling the receivable to another party (a factor). In some situations, the maker of the note dishonors the note (defaults), in which case the company transfers the note and accrued interest to an accounts receivable or writes off the note. 9. Explain the statement presentation and analysis of receivables. Companies should identify in the balance sheet or in the notes to the financial statements each major type of receivable. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debts and service charge expenses in the multiple-step income statement as operating (selling) expenses; interest revenue appears under other revenues and gains in the nonoperating activities section of the statement. Managers and investors evaluate accounts receivable for liquidity by computing a turnover ratio and an average collection period.
TRUE-FALSE STATEMENTS 1.
Trade receivables occur when two companies trade or exchange notes receivables.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
Other receivables include nontrade receivables such as loans to company officers.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 3.
9-5
Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
4.
Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
6.
Accounts receivable are the result of cash and credit sales.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
7.
If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivable is debited for the amount of the interest.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
8.
If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
9.
The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
11.
Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
12.
Allowance for Doubtful Accounts is a contra asset account.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
13.
Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
14.
Generally accepted accounting principles require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9-6 15.
Test Bank for Accounting Principles, Tenth Edition Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debts Expense being recognized than the percentage of receivables basis.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
18.
An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
20.
Sales resulting from the use of Visa and MasterCard are considered credit sales by the retailer.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
A factor purchases receivables from businesses for a fee and collects the remittances directly from customers.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
22.
A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
23.
Receivables may be sold because they may be the only reasonable source of cash.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 26.
9-7
The maturity date of a 1-month note receivable dated June 30 is July 30.
Ans: T, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
The two key parties to a note are the maker and the payee.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
28.
When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
29.
The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
32.
The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
33.
The account Allowance for Doubtful Accounts is closed out at the end of the year.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
35.
When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
36.
A note is dishonored when it is not fully paid at maturity.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
37.
Short-term receivables are reported in the current assets section before temporary investments.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9-8
Test Bank for Accounting Principles, Tenth Edition
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T T F F F
7. 8. 9. 10. 11. 12.
T T F T F T
13. 14. 15. 16. 17. 18.
F F F T F F
19. 20. 21. 22. 23. 24.
F F T F T F
25. 26. 27. 28. 29. 30.
T T T F F T
31. 32. 33. 34. 35. 36.
T F F T F T
37.
F
MULTIPLE CHOICE QUESTIONS 38.
Claims for which formal instruments of credit are issued as proof of the debt are a. accounts receivable. b. interest receivable. c. notes receivable. d. other receivables.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
40.
The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
41.
Which of the following receivables would not be classified as an "other receivable"? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 43.
9-9
The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
A cash discount is usually granted to all of the following except a. retail customers. b. retailers. c. wholesalers. d. All of these are granted discounts.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
45.
Which one of the following is not a primary problem associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Disposing of accounts receivable
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
46.
Trade accounts receivable are valued and reported on the balance sheet a. in the investment section. b. at gross amounts less sales returns and allowances. c. at net realizable value. d. only if they are not past due.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and disposing. d. accrual, bad debts, and disposing.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
48.
Which of the following would require a compound journal entry? a. To record merchandise returned that was previously purchased on account. b. To record sales on account. c. To record purchases of inventory when a discount is offered for prompt payment. d. To record collection of accounts receivable when a cash discount is taken.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
9 - 10 49.
Test Bank for Accounting Principles, Tenth Edition Which of the following would be considered as an unlikely occurrence? a. Manufacturer offers a cash discount to a wholesaler. b. Wholesaler offers a cash discount to a retailer. c. Retailer offers a cash discount to a customer. d. All of these are standard practices.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
50.
A customer charges a treadmill at Annie's Sport Shop. The price is $4,000 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account. What is the amount of the finance charge? a. $12 b. $30 c. $120 d. $360
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
51.
A customer charges a treadmill at Annie's Sport Shop. The price is $4,000 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account. The accounts affected by the journal entry made by Annie's Sport Shop to record the finance charge are a. Accounts Receivable Cash b. Cash Finance Receivable c. Accounts Receivable Interest Payable d. Accounts Receivable Interest Revenue
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Which of the following practices by a credit card company results in lower interest charges to the cardholder? a. The card company states interest as a monthly percentage rather than an annual percentage. b. The card company allows a grace period before interest is accrued. c. The card company allows cardholders to skip payments on their cards. d. The card company calculates finance charges from the date of purchase to the date the amount is paid.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 53.
9 - 11
If a department store fails to make the entry to accrue the finance charges due from customers, a. accounts receivable will be overstated. b. interest revenue will be understated. c. interest expense will be overstated. d. interest expense will be understated.
Ans: B, SO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
56.
If a company fails to record estimated bad debts expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated.
Ans: B, SO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Lifetime sells softball equipment. On November 14, they shipped $2,000 worth of softball uniforms to Palos Middle School, terms 2/10, n/30. On November 21, they received an order from Tinley High School for $1,200 worth of custom printed bats to be produced in December. On November 30, Palos Middle School returned $200 of defective merchandise. Lifetime has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the balance sheet as of November 30? a. $1,800 b. $2,000 c. $3,000 d. $3,200
Ans: A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9 - 12 58.
Test Bank for Accounting Principles, Tenth Edition Syfy Company on July 15 sells merchandise on account to Eureka Co. for $3,000, terms 2/10, n/30. On July 20 Eureka Co. returns merchandise worth $1,200 to Syfy Company. On July 24 payment is received from Eureka Co. for the balance due. What is the amount of cash received? a. $1,740 b. $1,764 c. $1,800 d. $3,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts expense in the a. direct write-off method. b. percentage of receivables basis. c. percentage of sales basis. d. percentage of receivables and percentage of sales basis.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
60.
When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectibles. d. a customer's account becomes past-due.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
When an account becomes uncollectible and must be written off, a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debts Expense should be credited. d. Sales should be debited.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
62.
The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
63.
The percentage of sales basis of estimating expected uncollectibles a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 64.
9 - 13
An aging of a company's accounts receivable indicates that $10,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debts Expense for $10,000. b. debit to Allowance for Doubtful Accounts for $8,900. c. debit to Bad Debts Expense for $8,900. d. credit to Allowance for Doubtful Accounts for $10,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account. b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. c. indicates that actual bad debt write-offs have been less than what was estimated. d. cannot occur if the percentage of sales method of estimating bad debts is used.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
67.
An alternative name for Bad Debts Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
A reasonable amount of uncollectible accounts is evidence a. that the credit policy is too strict. b. that the credit policy is too lenient. c. of a sound credit policy. d. of poor judgments on the part of the credit manager.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
69.
Bad Debts Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 14 70.
Test Bank for Accounting Principles, Tenth Edition The best managed companies will have a. no uncollectible accounts. b. a very strict credit policy. c. a very lenient credit policy. d. some accounts that will prove to be uncollectible.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
71.
Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
72.
The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. bad debts are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
Bad Debts Expense is reported on the income statement as a. part of cost of goods sold. b. reducing gross profit. c. an operating expense. d. a contra-revenue account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
75.
The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the a. aging accounts receivable method. b. direct write-off method. c. percentage of receivables method. d. percentage of sales method.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 76.
9 - 15
To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
77.
Under the allowance method of accounting for uncollectible accounts, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debts Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
78.
Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is offset against accounts receivable.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. cash realizable value of total accounts receivable will decrease. c. allowance account will increase. d. cash realizable value of total accounts receivable will stay the same.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
80.
If an account is collected after having been previously written off, a. the allowance account should be debited. b. only the control account needs to be credited. c. both income statement and balance sheet accounts will be affected. d. there will be both a debit and a credit to accounts receivable.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9 - 16 82.
Test Bank for Accounting Principles, Tenth Edition Two bases for estimating uncollectible accounts are: a. percentage of assets and percentage of sales. b. percentage of receivables and percentage of total revenue. c. percentage of current assets and percentage of sales. d. percentage of receivables and percentage of sales.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
83.
The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debts expense. c. income statement relationships. d. the relationship between sales and accounts receivable.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
Haven Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $600,000 and credit sales are $2,200,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Haven Company make to record the bad debts expense? a. Bad Debts Expense ..................................................... 28,000 Allowance for Doubtful Accounts ......................... 28,000 b. Bad Debts Expense ..................................................... 22,000 Allowance for Doubtful Accounts ......................... 22,000 c. Bad Debts Expense ..................................................... 22,000 Accounts Receivable ........................................... 22,000 d. Bad Debts Expense ..................................................... 28,000 Accounts Receivable ........................................... 28,000
Ans: B, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts a. is relevant when using the percentage of receivables basis. b. is relevant when using the percentage of sales basis. c. is relevant to both bases of adjusting for uncollectible accounts. d. will never show a debit balance at this stage in the accounting cycle.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
The direct write-off method of accounting for bad debts a. uses an allowance account. b. uses a contra-asset account. c. does not require estimates of bad debt losses. d. is the preferred method under generally accepted accounting principles.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 87.
9 - 17
Under the direct write-off method of accounting for uncollectible accounts a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debts expense is always recorded in the period in which the revenue was recorded.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
88.
An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $900 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debts Expense for $4,000. b. debit to Allowance for Doubtful Accounts for $3,100. c. debit to Bad Debts Expense for $3,100. d. credit to Allowance for Doubtful Accounts for $4,000.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
89.
An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $700 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debts Expense for $2,300. b. debit to Bad Debts Expense for $3,000. c. debit to Bad Debts Expense for $3,700. d. credit to Allowance for Doubtful Accounts for $700.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
90.
Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $27,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment, what is the amount of bad debts expense for that period? a. $8,000 b. $19,000 c. $27,000 d. $35,000
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
91.
Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $11,000. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment, what is the amount of bad debts expense for that period? a. $2,000 b. $9,000 c. $11,000 d. $13,000
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9 - 18 92.
Test Bank for Accounting Principles, Tenth Edition Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $11,000. If the balance of the Allowance for Doubtful Accounts is $2,000 debit before adjustment, what is the balance after adjustment? a. $2,000 b. $9,000 c. $11,000 d. $13,000
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
93.
Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $31,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debts expense for the period? a. $7,000 b. $24,000 c. $31,000 d. $38,000
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
94.
Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $31,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what is the amount of bad debts expense for the period? a. $7,000 b. $24,000 c. $31,000 d. $38,000
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
95.
In reviewing the accounts receivable, the cash realizable value is $14,000 before the write-off of a $1,500 account. What is the cash realizable value after the write-off? a. $1,500 b. $12,500 c. $14,000 d. $15,500
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
96.
In 2012, Warehouse 13 had net credit sales of $750,000. On January 1, 2012, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2012, $29,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2012? a. $20,000 b. $29,000 c. $33,000 d. $36,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 97.
9 - 19
A company has net credit sales of $950,000 for the year and it estimates that uncollectible accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of $2,000 prior to adjustment, its balance after adjustment will be a credit of a. $17,000. b. $19,000. c. $19,040. d. $21,000.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
98.
In 2012, Chandler Company had net credit sales of $1,125,000. On January 1, 2012, Allowance for Doubtful Accounts had a credit balance of $27,000. During 2012, $42,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $330,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2012? a. $18,000 b. $33,000 c. $48,000 d. $97,500
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
99.
Using the following information: 12/31/11 $525,000 (35,000) $490,000
Accounts receivable Allowance Cash realizable value
During 2012, sales on account were $145,000 and collections on account were $100,000. Also during 2012, the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000. The change in the cash realizable value from the balance at 12/31/11 to 12/31/12 was a a. $32,000 increase. b. $37,000 increase. c. $40,000 increase. d. $45,000 increase. Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
100.
Using the following information: Accounts receivable Allowance Cash realizable value
12/31/11 $525,000 (35,000) $490,000
During 2012, sales on account were $145,000 and collections on account were $100,000. Also during 2012, the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000.
FOR INSTRUCTOR USE ONLY
9 - 20
Test Bank for Accounting Principles, Tenth Edition
Multiple Choice 100. (Cont.) Bad debts expense for 2012 is a. $5,000. b. $8,000. c. $13,000 d. $40,000. Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
101.
During 2012, Alfred Inc. had sales on account of $132,000, cash sales of $54,000, and collections on account of $84,000. In addition, they collected $1,450 which had been written off as uncollectible in 2011. As a result of these transactions, the change in the accounts receivable balance indicates a a. $46,550 increase. b. $48,000 increase. c. $100,550 increase. d. $102,000 increase.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
102.
Kill Corporation’s unadjusted trial balance includes the following balances (assume normal balances): Accounts Receivable Allowance for Doubtful Accounts
$750,000 15,000
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense will the company record? a. $15,000 b. $30,000 c. $44,100 d. $45,000 Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
103.
Jack Company provides for bad debts expense at the rate of 2% of credit sales. The following data are available for 2012: Allowance for doubtful accounts, 1/1/12 (Cr.) ........................ Accounts written off as uncollectible during 2012 .................. Credit sales in 2012 ..............................................................
$ 12,000 9,000 1,500,000
The Allowance for Doubtful Accounts balance at December 31, 2012, should be a. $3,000. b. $27,000. c. $30,000. d. $33,000. Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 104.
9 - 21
In 2012, Boyle Company had credit sales of $900,000 and granted sales discounts of $20,000. On January 1, 2012, Allowance for Doubtful Accounts had a credit balance of $22,000. During 2012, $37,500 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2012? a. $10,900 b. $11,500 c. $26,400 d. $33,100
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
105.
An analysis and aging of the accounts receivable of Hugh Company at December 31 revealed the following data: Accounts Receivable ............................................................ Allowance for Doubtful Accounts per books before adjustment (Cr.) ....................................................... Amounts expected to become uncollectible ...........................
$800,000 50,000 56,000
The cash realizable value of the accounts receivable at December 31, after adjustment, is: a. $694,000. b. $744,000. c. $750,000. d. $794,000. Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
Herman Company has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Herman estimates that $60,000 of its receivables are uncollectible. The amount of bad debts expense which should be reported for the year is: a. $5,000. b. $55,000. c. $60,000. d. $65,000.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
On October 1, 2012, Milago Company sells (factors) $500,000 of receivables to Beanfield Factors, Inc. Beanfield assesses a service charge of 3% of the amount of receivables sold. The journal entry to record the sale by Milago will include a. a debit of $500,000 to Accounts Receivable. b. a credit of $515,000 to Cash. c. a debit of $515,000 to Cash. d. a debit of $15,000 to Service Charge Expense.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
9 - 22 108.
Test Bank for Accounting Principles, Tenth Edition On March 1, 2012, Dick Miles purchased a suit at Kenny's Fine Apparel Store. The suit cost $500 and Dick used his Kenny credit card. Kenny charges 2% per month interest if payment on credit charges is not made within 30 days. On April 30, 2012, Dick had not yet made his payment. What entry should Kenny make on April 30th? a. Uncollectible Account .................................................... 500 Accounts Receivable ............................................ 500 b. Bad Debts Expense ...................................................... 490 Interest Expense ........................................................... 10 Accounts Receivable ............................................ 500 c. Accounts Receivable..................................................... 510 Interest Revenue .................................................. 10 Sales Revenue ..................................................... 500 d. Accounts Receivable..................................................... 10 Interest Revenue .................................................. 10
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
Jeff Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Jeff Retailers will include a credit to Sales of $75,000 and a debit(s) to a. Cash $72,000 and Service Charge Expense $3,000. b. Accounts Receivable $72,000 and Service Charge Expense $3,000. c. Cash $72,000 and Interest Expense $3,000. d. Accounts Receivable $75,000.
Ans: A, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
110.
XYZ Company accepted a national credit card for a $3,000 purchase. The cost of the goods sold is $1,800. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,110 b. Increase by $1,164 c. Increase by $1,200 d. Increase by $2,910
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Major advantages of credit cards to the retailer include all of the following except the a. issuer does the credit investigation of customers. b. issuer undertakes the collection process. c. retailer receives more cash from the credit card issuer. d. All of these are advantages.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
112.
The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a factor. d. can be a quick way to generate cash for operating needs.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 113.
9 - 23
If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n) a. selling expense. b. interest expense. c. other expense. d. contra asset.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
114.
If a company sells its accounts receivables to a factor, a. the seller pays a commission to the factor. b. the factor pays a commission to the seller. c. there is a gain on the sale of the receivables. d. the seller defers recognition of sales revenue until the account is collected.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
115.
Retailers generally consider sales from the use of national credit card sales as a a. credit sale. b. collection of an accounts receivable. c. cash sale. d. collection of a note receivable.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
116.
Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
117.
A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables? a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold. c. Selling expenses will increase each time accounts are sold. d. The other expense section of the income statement will increase each time accounts are sold.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9 - 24 118.
Test Bank for Accounting Principles, Tenth Edition T’Pol Furniture factors $700,000 of receivables to Trip Factors, Inc. Trip Factors assesses a 2% service charge on the amount of receivables sold. T’Pol Furniture factors its receivables regularly with Trip Factors. What journal entry does T’Pol make when factoring these receivables? a. Cash ............................................................................. 686,000 Loss on Sale of Receivables ......................................... 14,000 Accounts Receivable ............................................ 700,000 b. Cash ............................................................................. 686,000 Accounts Receivable ............................................ 686,000 c. Cash ............................................................................. 700,000 Accounts Receivable ............................................ 686,000 Gain on Sale of Receivables ................................ 14,000 d. Cash ............................................................................. 686,000 Service Charge Expense .............................................. 14,000 Accounts Receivable ............................................ 700,000
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
119.
When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts. b. is not involved in the collection process. c. absorbs any losses from uncollectible accounts. d. receives cash equal to the full price of the merchandise sold from the credit card company.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
120.
The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
121.
The basic issues in accounting for notes receivable include each of the following except a. analyzing notes receivable. b. disposing of notes receivable. c. recognizing notes receivable. d. valuing notes receivable.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
A 60-day note receivable dated June 13 has a maturity date of a. August 13. b. August 12. c. August 11. d. August 10.
Ans: B, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 123.
9 - 25
The maturity value of a $60,000, 10%, 60-day note receivable dated July 3 is a. $60,000. b. $61,000. c. $66,000. d. $70,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
124.
A 90-day note dated June 14 has a maturity date of a. September 14. b. September 12. c. September 13. d. September 15.
Ans: B, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
125.
A 30-day note dated May 18 has a maturity date of a. June 18. b. June 17. c. June 19. d. June 16.
Ans: B, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
126.
A promissory note a. is not a formal credit instrument. b. may be used to settle an accounts receivable. c. has the party to whom the money is due as the maker. d. cannot be factored to another party.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
127.
Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
128.
The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 26 129.
Test Bank for Accounting Principles, Tenth Edition When calculating interest on a promissory note with the maturity date stated in terms of days, the a. maker pays more interest if 365 days are used instead of 360. b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365. d. payee receives less interest if 360 days are used instead of 365.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
130.
The maturity value of a $4,000, 9%, 60-day note receivable dated February 10th is a. $4,000. b. $4,030. c. $4,060. d. $4,360.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
131.
The interest on a $10,000, 10%, 1-year note receivable is a. $1,000. b. $10,000. c. $10,100. d. $11,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
132.
The maturity value of a $60,000, 8%, 3-month note receivable is a. $60,400. b. $60,480. c. $61,200. d. $64,800.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
133.
The interest on a $5,000, 6%, 60-day note receivable is a. $50. b. $100. c. $150. d. $300.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
134.
The interest on a $6,000, 6%, 90-day note receivable is a. $90. b. $180. c. $270. d. $360.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 135.
9 - 27
On November 1, Gentle Company received a $3,000, 10%, three-month note receivable. The cash to be received by Gentle Company when the note becomes due is: a. $3,000. b. $3,050. c. $3,075. d. $3,300.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
136.
On January 15, 2012, Craig Company received a two-month, 9%, $7,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on January 15, 2012 would include a: a. debit of $7,105 to Notes Receivable. b. debit of $7,000 to Notes Receivable. c. credit of $7,105 to Accounts Receivable. d. credit of $7,000 to Notes Receivable.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
137.
On January 15, 2012, Craig Company received a two-month, 9%, $7,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on March 15, 2012 if Pentel dishonors the note and collection is expected is: a. Accounts Receivable—W. Pentel ................................. Notes Receivable .................................................
7,000
b. Accounts Receivable—W. Pentel ................................. Notes Receivable ................................................. Interest Revenue..................................................
7,105
c. Accounts Receivable—W. Pentel ................................. Interest Lost .................................................................. Notes Receivable .................................................
6,895 105
d. Bad Debts Expense ...................................................... Notes Receivable .................................................
7,105
7,000 7,000 105
7,000 7,105
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
138.
Notes receivable are recognized in the accounts at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
139.
A note receivable is a negotiable instrument which a. eliminates the need for a bad debts allowance. b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm. d. can only be collected by a bank.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 28 140.
Test Bank for Accounting Principles, Tenth Edition A company that receives an interest bearing note receivable will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
141.
The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. that is identified on the formal instrument of credit. d. remaining after a service charge has been deducted.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
142.
Reck Company receives a $10,000, 3-month, 8% promissory note from Fey Company in settlement of an open accounts receivable. What entry will Reck Company make upon receiving the note? a. Notes Receivable .......................................................... Accounts Receivable—Fey Company ..................
10,200
b. Notes Receivable .......................................................... Accounts Receivable—Fey Company .................. Interest Revenue ..................................................
10,200
c. Notes Receivable .......................................................... Interest Receivable............................................... Accounts Receivable—Fey Company .................. Interest Revenue ..................................................
10,000 200
d. Notes Receivable .......................................................... Accounts Receivable—Fey Company ..................
10,000
10,200 10,000 200
10,000 200 10,000
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
143.
When a note is accepted to settle an open account, Notes Receivable is debited for the note's a. net realizable value. b. maturity value. c. face value. d. face value plus interest.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
144.
Short-term notes receivable are reported at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 145.
9 - 29
Short-term notes receivables a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. present the same valuation problems as long-term notes receivables.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
When a note receivable is dishonored, a. interest revenue is never recorded. b. bad debts expense is recorded. c. the maturity value of the note is written off. d. Accounts Receivable is debited if eventual collection is expected.
Ans: D, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
147.
Randie Company lends Luann Company $10,000 on April 1, accepting a four-month, 9% interest note. Randie Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable .......................................................... 10,000 Cash ................................................................... 10,000 b. Interest Receivable ...................................................... 75 Interest Revenue ................................................. 75 c. Cash ............................................................................ 75 Interest Revenue ................................................. 75 d. Interest Receivable ...................................................... 300 Interest Revenue ................................................. 300
Ans: B, SO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
148.
When a note receivable is honored, Cash is debited for the note's a. net realizable value. b. maturity value. c. gross realizable value. d. face value.
Ans: B, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
149.
Magneto Company had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000. The balance in accounts receivable at the beginning of the year was $180,000, and the end of the year it was $120,000. What was the accounts receivable turnover ratio? a. 5.0 b. 6.7 c. 8.0 d. 10.0
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
9 - 30 150.
Test Bank for Accounting Principles, Tenth Edition The average collection period for receivables is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover ratio.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
The average collection period is computed by dividing a. net credit sales by average gross accounts receivable. b. net credit sales by ending gross accounts receivable. c. the accounts receivable turnover ratio by 365 days. d. 365 days by the accounts receivable turnover ratio.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
The financial statements of Danielle Manufacturing Company report net sales of $600,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the receivables turnover ratio for Danielle? a. 4 times b. 6.67 times c. 8 times d. 10 times
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
153.
The financial statements of Danielle Manufacturing Company report net sales of $600,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 36.5 b. 45.6 c. 54.7 d. 91.3
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154.
The financial statements of Gervais Manufacturing Company report net sales of $400,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the receivables turnover ratio for Gervais? a. 5 times b. 6.7 times c. 8 times d. 10 times
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 155.
9 - 31
The financial statements of Gervais Manufacturing Company report net sales of $400,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 40 times b. 50 times c. 54.7 times d. 80 times
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
Which of the following are also called trade receivables? a. Accounts receivable b. Other receivables c. Advances to employees d. Income taxes refundable
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
157.
On February 1, 2012, Fugit Company sells merchandise on account to Armen Company for $6,500. The entry to record this transaction by Fugit Company is a. Sales Revenue ................................................................... Accounts Payable ........................................................
6,500
b. Cash ................................................................................... Sales Revenue ............................................................
6,500
c. Accounts Receivable .......................................................... Sales Revenue ............................................................
6,500
d. Notes Receivable................................................................ Accounts Receivable ...................................................
6,500
6,500 6,500 6,500 6,500
Ans: C, SO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
158.
Writing off an uncollectible account under the allowance method requires a debit to a. Accounts Receivable. b. Allowance for Doubtful Accounts. c. Bad Debts Expense. d. Uncollectible Accounts Expense.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
159.
When the allowance method of recognizing bad debts expense is used, the entry to recognize that expense a. increases net income. b. decreases current assets. c. has no effect on current assets. d. has no effect on net income.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
9 - 32 160.
Test Bank for Accounting Principles, Tenth Edition The direct write-off method a. is acceptable for financial reporting purposes. b. debits Allowance for Doubtful Accounts to record write-offs of accounts. c. shows only actual losses from uncollectible accounts receivable. d. estimates bad debt losses.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
161.
Deborah Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $35,000 (Cr.), respectively. An aging of accounts receivable indicated that $126,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is a. $91,000. b. $126,000. c. $161,000. d. $210,000.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
162.
In recording the sale of accounts receivable, the commission charged by a factor is recorded as a. Bad Debts Expense. b. Commission Expense. c. Loss on Sale of Receivables. d. Service Charge Expense.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
163.
Schwartzman Co., makes a credit card sale to a customer for $600. The credit card sale has a grace period of 30 days and then an interest charge of 1.5% per month is added to the balance. If the unpaid balance on the above sale is $480 at the end of the grace period, the interest charge is a. $4.80. b. $7.20. c. $8.00. d. $12.00.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
164.
The interest rate specified on any note is for a a. day. b. month. c. week. d. year.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 165.
9 - 33
On February 1, Ville Company received a $6,000, 10%, four-month note receivable. The cash to be received by Ville Company when the note becomes due is a. $200. b. $6,000. c. $6,200. d. $6,600.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
166.
The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to a. Notes Receivable. b. Cash. c. Allowance for Doubtful Accounts. d. Accounts Receivable.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
167.
Which of the following statements concerning receivables is incorrect? a. Notes receivable are often listed last under receivables. b. The contingent liability from selling notes receivable should be disclosed. c. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. d. Interest revenue and gain on sale of notes receivable are shown under other revenues and gains.
Ans: A, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
168.
The accounts receivable turnover ratio is computed by dividing a. total sales by average net accounts receivable. b. net credit sales by average net accounts receivable. c. total sales by ending net accounts receivable. d. net credit sales by ending net accounts receivable.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
169.
Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP? a. the use of allowance accounts and the allowance method. b. how to record discounts. c. how to record factoring. d. all of the above are essentially the same for IFRS and GAAP.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
170.
Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP? a. the use of allowance accounts and the allowance method. b. how to record discounts. c. how to record factoring. d. all of the above are essentially the same for IFRS and GAAP.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 34 171.
Test Bank for Accounting Principles, Tenth Edition IFRS requires loans and receivables to be recorded at a. amortized cost. b. amortized cost, adjusted for allowances for doubtful accounts. c. unamortized cost. d. unamortized cost, adjusted for allowances for doubtful accounts.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
172.
IFRS sometimes refers to allowances as a. revenues. b. discounts. c. provisions. d. reserves.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
173.
IFRS a. implies that receivables with different characteristics should be reported separately. b. requires that receivables with different characteristics should be reported separately. c. implies that receivables with different characteristics should be reported as one unsegregated amount. d. requires that receivables with different characteristics should be reported as one unsegregated amount.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
174.
Which board(s) has(have) worked to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
175.
Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
176.
Which is part of IFRS accounting for financial instruments? Disclosure of fair value information Optional recording of some financial for receivables in the notes instruments at fair value a. Yes Yes b. Yes No c. No Yes d. No No
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Receivables 177.
9 - 35
Which requires a two-tiered approach to test whether the value of loans and receivables are impaired? GAAP IFRS a. yes no b. yes yes c. no no d. no yes
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
178.
What criteria are used to determine how to record a factoring transaction? GAAP IFRS a. risks and rewards, and loss of control risks and rewards, and loss of control b. risks and rewards, and loss of control loss of control c. loss of control loss of control d. loss of control risks and rewards, and loss of control
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
179.
Which permits partial derecognition of receivables? GAAP IFRS a. yes no b. yes yes c. no no d. no yes
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 36
Test Bank for Accounting Principles, Tenth Edition
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.
c b b c c a a a c c d c b d b b a a b a b
59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.
b c b d a c b d b c c d d b c b d b c d b
80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.
d c d a b a c b c c d b d b d c c d c a c
101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.
b b d a b d d d a a c d a a c c c d b a a
122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
b b b b b a c c c a c a a c b b b b c c d
143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163.
c a c d b b c d d c b b c a c b b c a d b
164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179.
d c d a b d d b c a c c a d d d
BRIEF EXERCISES BE 180 Record the following transactions for Moon Company. 1. On August 4, Moon sold merchandise on account to Mullin Company for $610, terms 2/10, n/30. 2. On August 7, Moon granted Mullin a sales allowance and reduced the cost of the merchandise by $60 because some of the goods were slightly damaged. 3. On August 12, Mullin paid the account in full. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 180
(6 min.)
1. Accounts Receivable ....................................................................... Sales Revenue ......................................................................
610
2. Sales Returns and Allowances ....................................................... Accounts Receivable .............................................................
60
3. Sales Discounts .............................................................................. Cash ............................................................................................... Accounts Receivable .............................................................
11 539
FOR INSTRUCTOR USE ONLY
610
60
550
Accounting for Receivables
9 - 37
BE 181 At December 31, 2012, Bruce Company reported Accounts Receivable of $45,000 and Allowance for Doubtful Accounts of $3,500. On January 7, 2013, Robin Enterprises declares bankruptcy and it is determined that the receivable of $1,200 from Robin is not collectible. 1. What is the cash realizable value of Accounts Receivable at December 31, 2012? 2. What entry would Bruce make to write off the Robin account? 3. What is the cash realizable value of Accounts Receivable after the Robin account is written off? Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181
(5 min.)
1. Cash realizable value = $45,000 – $3,500 = $41,500 2. Allowance for Doubtful Accounts .................................................... Accounts Receivable—Robin ................................................
1,200 1,200
3. Cash realizable value = ($45,000 – $1,200) – ($3,500 – $1,200) = $41,500 BE 182 Ditka Company’s ledger at the end of the current year shows Accounts Receivable of $150,000. Instructions a. If Allowance for Doubtful Accounts has a credit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period. b.
If Allowance for Doubtful Accounts has a debit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period.
Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 182
(5 min.)
(a) Bad Debts Expense ...................................................................... 10,600 Allowance for Doubtful Accounts ($15,000 – $4,400).......... (To adjust the allowance account to total estimated uncollectible, $150,000 × .10 = $15,000) (b) Bad Debts Expense ...................................................................... Allowance for Doubtful Accounts ($15,000 + $4,400)..........
FOR INSTRUCTOR USE ONLY
10,600
19,400 19,400
9 - 38
Test Bank for Accounting Principles, Tenth Edition
BE 183 Patel Co. sells Christmas angels. Patel determines that at the end of December, it has the following aging schedule of Accounts Receivable: Customer
Total
Not Yet Due 1–30 31–60
DV Farmer
$500
JJ Joysen
300
NJ Bell
150
JC Net
200
200
?
300
300
250
200
100
1%
5%
10%
20%
50%
?
?
?
?
?
% uncollectible Total Estimated Uncollectible Amounts
?
$300
Number of Days Past Due 61–90 Over 90
$200
100
200 50
100
Compute the net receivables based on the above information at the end of December. (There was no beginning balance in the Allowance for Doubtful Accounts). Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 183
(5 min.)
Customer
Total
Not Yet Due 1–30 31–60
DV Farmer
$ 500
JJ Joysen
300
NJ Bell
150
JC Net
200
200
$1,150
300
300
250
200
100
1%
5%
10%
20%
50%
$3
$15
$25
$40
$50
% uncollectible Total Estimated Uncollectible Amounts
$133
$300
Number of Days Past Due 61–90 Over 90
$200
100
200 50
Net Receivables = ($1,150 – $133 = $1,017)
FOR INSTRUCTOR USE ONLY
100
Accounting for Receivables
9 - 39
BE 184 Picard Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15
25
Sold $15,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge. Made sales of $800 on VISA credit cards. The credit card service charge is 2%.
Instructions Journalize the transactions. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 184 Oct. 15
25
(5 min.)
Cash ...................................................................................... Service Charge Expense ($15,000 × 3%) ............................. Accounts Receivable .................................................
14,550 450
Cash ...................................................................................... Service Charge Expense ($800 × 2%) .................................. Sales Revenue ...........................................................
784 16
15,000
800
BE 185 Determine the interest on the following notes: (a) $2,000 at 6% for 90 days. (b) $900 at 9% for 5 months. (c) $3,000 at 8% for 60 days (d) $1,600 at 7% for 6 months Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 185
(5 min.)
(a) $30.00 ($2,000 × .06 × 90/360) (b) $33.75 ($900 × .09 × 5/12) (c) $40.00 ($3,000 × .08 × 60/360) (d) $56.00 ($1,600 × .07 × 6/12) BE 186 Dew Distributors has the following transactions related to notes receivable during the last two months of the year. Dec.
1
Loaned $15,000 cash to K. Flood on a 1-year, 6% note.
16
Sold goods to F. Kingsley, receiving a $4,800, 60-day, 7% note.
31
Accrued interest revenue on all notes receivable. FOR INSTRUCTOR USE ONLY
9 - 40
Test Bank for Accounting Principles, Tenth Edition
BE 186
(Cont.)
Instructions Journalize the transactions for Dew Distributors. Ans: N/A, SO: 5,6, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 186 Dec
1
Dec 16
Dec. 31
(6 min.)
Notes Receivable— K. Flood .............................................. Cash........................................................................... (To record loan made to K. Flood)
15,000
Notes Receivable— F. Kingsley .......................................... Sales Revenue ........................................................... (To record sale to F. Kingsley)
4,800
Interest Receivable ............................................................. Interest Revenue*....................................................... (To record accrued interest)
89
15,000
4,800
89
*Calculation of interest revenue Flood note: $15,000 × 6% × 30/360 = $75 Kingsley note: 4,800 × 7% × 15/360 = 14 Total accrued interest $89 BE 187 Compute the maturity value for each of the following notes receivable. 1. A $5,000, 6%, 3-month note dated July 20. Maturity value $____________. 2. A $12,000, 9%, 150-day note dated August 5. Maturity value $____________. Ans: N/A, SO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 187
(5 min.)
1. Maturity value: $5,075 $5,000 × 6% × 3/12 = $75 + $5,000 = $5,075 2. Maturity value: $12,450 $12,000 × 9% × 150/360 = $450 + $12,000 = $12,450
FOR INSTRUCTOR USE ONLY
Accounting for Receivables
9 - 41
BE 188 On February 7, Millard Company sold goods on account to Fillmore Enterprises for $5,200, terms 2/10, n/30. On March 9, Fillmore gave Millard a 60-day, 12% promissory note in settlement of the account. Record the sale and the acceptance of the promissory note on the books of Millard Company. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 188 February 7
March 9
(4 min.) Accounts Receivable .................................................... Sales Revenue .....................................................
5,200
Notes Receivable .......................................................... Accounts Receivable ............................................
5,200
5,200
5,200
BE 189 On March 9, Fillmore gave Millard Company a 60-day, 12% promissory note for $5,200. Fillmore honors the note on May 9. Record the collection of the note and interest by Millard assuming that no interest has been accrued. Ans: N/A, SO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189 May 9
(3 min.)
Cash ...................................................................................... Interest Revenue........................................................ Note Receivable.........................................................
5,304 104 5,200
BE 190 On March 9, Fillmore gave Millard Company a 60-day, 12% promissory note for $5,200. Fillmore dishonors the note on May 9. Record the entry that Millard would make when the note is dishonored, assuming that no interest has been accrued. Ans: N/A, SO: 8, Bloom: AN, K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 190 May 9
(3 min.)
Accounts Receivable—Fillmore ............................................ Interest Revenue........................................................... Note Receivable ...........................................................
5,304 104 5,200
BE 191 The following data exists for Data Company.
Accounts Receivable Net Sales
2012 $ 50,000 500,000
2011 $ 70,000 410,000
Calculate the receivables turnover ratio and the average collection period for accounts receivable in days for 2012. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 42
Test Bank for Accounting Principles, Tenth Edition
Solution 191 (5 min.) Receivables turnover ratio =
$500,000 = 8.3 times ($50,000 + $70,000/2)
Average collection period =
365 days = 44 days 8.3
EXERCISES Ex. 192 Presented below are various receivable transactions entered into by Akron Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. b. c. d. e. f. g.
Loaned a company officer $5,000. Accepted a $3,000 promissory note from a customer as payment on account. Determined that a $10,000 income tax refund is due from the IRS. Sold goods to a customer on account for $4,000. Recorded $500 accrued interest on a note receivable due next year. Made an American Express credit card sale for $2,800. Advanced $1,400 to a trusted employee.
Ans: N/A, SO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 192 a. b. c. d. e. f.
(10 min.)
Other Receivables Note Receivable Other Receivables Accounts Receivable Other Receivables Other Receivables
Ex. 193 Prepare journal entries to record the following transactions entered into by Valente Company: 2012 June 1
Received a $10,000, 12%, 1-year note from Doreen Borke as full payment on her account.
Nov.
1
Sold merchandise on account to Lyleen, Inc. for $12,000, terms 2/10, n/30.
Nov.
5
Lyleen, Inc. returned merchandise worth $500.
Nov.
9
Received payment in full from Lyleen, Inc.
Dec. 31
Accrued interest on Borke's note.
FOR INSTRUCTOR USE ONLY
Accounting for Receivables Ex. 193 2013 June 1
9 - 43
(Cont.) Doreen Borke honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2013.
Ans: N/A, SO: 1,8, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193 2012 June 1 Nov. Nov. Nov.
1 5 9
Dec. 31
2013 June 1
(15 min.)
Notes Receivable................................................................ Accounts Receivable—D. Borke ................................
10,000
Accounts Receivable—Lyleen, Inc...................................... Sales Revenue...........................................................
12,000
Sales Returns and Allowances ........................................... Accounts Receivable—Lyleen, Inc. ............................
500
Cash .................................................................................. Sales Discounts ($11,500 × .02) ......................................... Accounts Receivable—Lyleen, Inc. ............................
11,270 230
Interest Receivable ............................................................. Interest Revenue........................................................ ($10,000 × 12% × 7 ÷ 12 = $700)
700
Cash ................................................................................... Notes Receivable ....................................................... Interest Receivable .................................................... Interest Revenue........................................................ ($10,000 × 12% × 5/12 = $500)
11,200
10,000 12,000 500
11,500 700
10,000 700 500
Ex. 194 Record the following transactions for Hockey Company. 1. On April 12, sold $11,000 of merchandise to Hauser Inc., terms 2/10, n/30. 2. On April 15, Hauser returned $2,000 of merchandise. 3. On April 22, Hauser paid for the merchandise. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 194
(7 min.)
1. Accounts Receivable ...................................................................... Sales Revenue ...................................................................
11,000
2. Sales Returns and Allowances ....................................................... Accounts Receivable ..........................................................
2,000
3. Cash ($9,000 – $180)..................................................................... Sales Discounts ($9,000 × 2%) ...................................................... Accounts Receivable ($11,000 – $2,000) ...........................
8,820 180
FOR INSTRUCTOR USE ONLY
11,000 2,000
9,000
9 - 44
Test Bank for Accounting Principles, Tenth Edition
Ex. 195 (a) On January 6, Stegner Co. sells merchandise on account to Molina Inc. for $7,000, terms 2/10, n/30. On January 16, Molina Inc. pays the amount due. Prepare the entries on Stegner's books to record the sale and related collection. (b) On January 10, Jill Flynn uses her Calhoun Co. credit card to purchase merchandise from Calhoun Co. for $9,000. On February 10, Flynn is billed for the amount due of $9,000. On February 12, Flynn pays $4,000 on the balance due. On March 10, Flynn is billed for the amount due, including interest at 2% per month on the unpaid balance as of February 12. Prepare the entries on Calhoun Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 195
(12 min.)
(a) Jan.
Accounts Receivable—Molina .................................... Sales Revenue ..................................................
7,000
Cash ($7,000 – $140) ................................................. Sales Discounts (2% $7,000) .................................. Accounts Receivable—Molina ...........................
6,860 140
Accounts Receivable—Flynn ...................................... Sales Revenue ..................................................
9,000
Cash ......................................................................... Accounts Receivable—Flynn .............................
4,000
Accounts Receivable—Flynn ...................................... Interest Revenue ............................................... [2% ($9,000 – $4,000)]
100
6 16
(b) Jan. 10 Feb. 12 Mar. 10
7,000
7,000
9,000 4,000 100
Ex. 196 Bullfrog Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2011, and December 31, 2012, appear below: Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts
12/31/11 $400,000 60,000 5,200
12/31/12 $500,000 80,000 ?
Instructions (a) Record the following events in 2012. Aug. 10 Determined that the account of Sue Lang for $800 is uncollectible. Sept. 12 Determined that the account of Tom Woods for $3,700 is uncollectible. Oct. 10 Received a check for $500 as payment on account from Sue Lang, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November. Nov. 15 Received a check for $300 from Sue Lang as payment on her account.
FOR INSTRUCTOR USE ONLY
Accounting for Receivables Ex. 196
9 - 45
(Cont.)
(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2012. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2012? Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196
(20 min.)
(a) Aug. 10
Allowance for Doubtful Accounts ................................ Accounts Receivable—Sue Lang ...................... (To write off Sue Lang account)
800
Allowance for Doubtful Accounts ................................ Accounts Receivable—Tom Woods .................. (To write off Tom Woods account)
3,700
Accounts Receivable— Sue Lang .............................. Allowance for Doubtful Accounts ....................... (To reinstate Sue Lang account previously written off)
800
Cash .......................................................................... Accounts Receivable— Sue Lang ..................... (To record collection on account)
500
Cash .......................................................................... Accounts Receivable— Sue Lang ..................... (To record collection on account)
300
Bad Debts Expense ($500,000 × 1%) ........................ Allowance for Doubtful Accounts ....................... (To record estimate of uncollectible accounts)
5,000
Sept. 12
Oct. 10
Nov. 15
(b) Dec. 31
800
3,700
800
500
300
5,000
(c) Balance of Allowance for Doubtful Accounts at December 31, 2012, is $6,500 ($5,200 – $800 – $3,700 + $800 + $5,000). Ex. 197 Minquo Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2012, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $120,000 1% 1–30 days past due 20,000 3% 31–60 days past due 10,000 6% 61–90 days past due 10,000 12% Over 90 days past due 8,000 30% Total Accounts Receivable $168,000
FOR INSTRUCTOR USE ONLY
9 - 46 Ex. 197
Test Bank for Accounting Principles, Tenth Edition (Cont.)
Instructions (a) Prepare the adjusting entry on December 31, 2012, to recognize bad debts expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. (c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales, that sales for 2012 were $550,000, and that Allowance for Doubtful Accounts had a $650 credit balance before adjustment. Prepare the adjusting entry for the current year's provision for bad debts. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197
(20 min.)
(a) Bad Debts Expense ...................................................................... 5,300 Allowance for Doubtful Accounts ($6,000 – $700) ............... (To adjust the allowance account to total estimated uncollectible)
5,300
(b) Bad Debts Expense ...................................................................... 6,500 Allowance for Doubtful Accounts ($6,000 + $500) ............... (To adjust the allowance account to total estimated uncollectible)
6,500
(c) Bad Debts Expense ($550,000 × 1%) ........................................... Allowance for Doubtful Accounts ......................................... (To record estimated bad debts for year)
5,500
5,500
Ex. 198 Compute bad debts expense based on the following information: (a) FPU Company estimates that 2% of net credit sales will become uncollectible. Sales are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful accounts has a $6,000 credit balance. (b) FPU Company estimates that 10% of accounts receivable will become uncollectible. Accounts receivable are $100,000 at the end of the year, and the allowance for doubtful accounts has a $500 debit balance. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 198
(4 min.)
(a) Bad debts expense = $11,400 [($600,000 – $30,000) × .02] (b) Bad debts expense = $10,500 [($100,000 × .10) + $500]
FOR INSTRUCTOR USE ONLY
Accounting for Receivables
9 - 47
Ex. 199 The December 31, 2011 balance sheet of Sauron Company had Accounts Receivable of $400,000 and a credit balance in Allowance for Doubtful Accounts of $32,000. During 2012, the following transactions occurred: sales on account $1,500,000; sales returns and allowances, $50,000; collections from customers, $1,250,000; accounts written off $36,000; previously written off accounts of $6,000 were collected. Instructions (a) Journalize the 2012 transactions. (b) If the company uses the percentage of sales basis to estimate bad debts expense and anticipates 3% of net sales to be uncollectible, what is the adjusting entry at December 31, 2012? (c) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 8% of accounts receivable, what is the adjusting entry at December 31, 2012? (d) Which basis would produce a higher net income for 2012 and by how much? Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 199
(20–30 min.)
(a) Accounts Receivable .................................................................... 1,500,000 Sales Revenue ................................................................... (To record credit sales) Sales Returns and Allowances ..................................................... Accounts Receivable .......................................................... (To record credits to customers)
50,000 50,000
Cash ........................................................................................... 1,250,000 Accounts Receivable .......................................................... (To record collection of receivables) Allowance for Doubtful Accounts .................................................. Accounts Receivable .......................................................... (To write off specific accounts)
36,000
Accounts Receivable .................................................................... Allowance for Doubtful Accounts ........................................ (To reverse write-off of account)
6,000
Cash ........................................................................................... Accounts Receivable .......................................................... (To record collection of account)
6,000
FOR INSTRUCTOR USE ONLY
1,500,000
1,250,000
36,000
6,000
6,000
9 - 48
Test Bank for Accounting Principles, Tenth Edition
Solution 199
(cont.)
(b) Percentage of sales basis: Sales ........................................................................................... Less: Sales Returns and Allowances............................................ Net Sales ............................................................................ Bad debt percentage ..................................................................... Bad debt provision ........................................................................ Dec. 31 Bad Debts Expense ....................................................... Allowance for Doubtful Accounts ....................................
$1,500,000 50,000 1,450,000 .03 $ 43,500 43,500 43,500
(c) Percentage of receivables basis: ACCOUNTS RECEIVABLE 400,000 1,500,000 6,000 Bal.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
50,000 1,250,000 36,000 6,000
36,000 Bal.
564,000
Required balance ($564,000 × .08) ............................................................. Balance before adjustment.......................................................................... Adjustment required .................................................................................... Dec. 31
32,000 6,000 2,000
Bad Debts Expense....................................................... Allowance for Doubtful Accounts ..........................
$45,120 2,000 $43,120
43,120
(d) Percentage of sales basis ........................................................................... Percentage of receivables basis.................................................................. Net income higher with percentage of receivables basis by ........................
43,120 $43,500 43,120 $ 380
Ex. 200 Nikki's Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2012, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,800,000 during 2012. An aging analysis of the accounts receivable indicated that $40,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible. Instructions Prepare the adjusting entries to record estimated bad debts expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Receivables Solution 200
9 - 49
(15 min.)
(1) Percentage of sales basis: The following adjusting entry would be the same regardless of the balance in the Allowance for Doubtful Accounts. Bad Debts Expense ($3,800,000 × .01) ........................................ Allowance for Doubtful Accounts ........................................
38,000 38,000
(2) Percentage of receivables basis: (a) Bad Debts Expense ($40,000 – $3,200) ................................ Allowance for Doubtful Accounts...................................
36,800
(b) Bad Debts Expense ($40,000 + $730) ................................... Allowance for Doubtful Accounts...................................
40,730
36,800 40,730
Ex. 201 The income statement approach to estimating uncollectible accounts expense is used by Landis Company. On February 28, the firm had accounts receivable in the amount of $437,000 and Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts expense would amount to 1% of net credit sales made during February. On March 10, an accounts receivable from Kathy Brown for $6,100 was determined to be uncollectible and written off. However, on March 31, Brown received an inheritance and immediately paid her past due account in full. Instructions (a) Prepare the journal entries made by Landis Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 201
(15 min.)
(a) 1. Feb. 28 Bad Debts Expense ($3,000,000 × .01)................... Allowance for Doubtful Accounts .................... (To record the bad debts expense for February)
30,000
2. Mar. 10 Allowance for Doubtful Accounts ............................. Accounts Receivable—K. Brown .................... (To write off K. Brown account deemed uncollectible)
6,100
3. Mar. 31 Accounts Receivable—K. Brown ............................. Allowance for Doubtful Accounts .................... (To reinstate an account previously written off)
6,100
FOR INSTRUCTOR USE ONLY
30,000
6,100
6,100
9 - 50
Test Bank for Accounting Principles, Tenth Edition
Solution 201
(cont.)
Mar. 31 Cash ....................................................................... Accounts Receivable—K. Brown .................... (To record payment on account in full)
6,100 6,100
(b) $2,140 + $30,000 – $6,100 + $6,100 = $32,140. Ex. 202 Handel Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions: January 5 Sold merchandise to Miles Winston for $2,000, terms n/15. April
15 Received $600 from Miles Winston on account.
August 21 Wrote off as uncollectible the balance of the Miles Winston account when she declared bankruptcy. October 5 Unexpectedly received a check for $300 from Miles Winston. It is not felt any more will be received from Winston Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 202
(10 min.)
January 5 Accounts Receivable—M. Winston .................................. Sales Revenue ........................................................ April
2,000 2,000
15 Cash ................................................................................ Accounts Receivable—M. Winston ..........................
600
August 21 Allowance for Doubtful Accounts ...................................... Accounts Receivable—M. Winston ..........................
1,400
October 5 Accounts Receivable—M. Winston .................................. Allowance for Doubtful Accounts .............................
300
Cash ................................................................................ Accounts Receivable—M. Winston ..........................
300
FOR INSTRUCTOR USE ONLY
600
1,400
300 300
Accounting for Receivables
9 - 51
Ex. 203 Avett Furniture Store has credit sales of $400,000 in 2012 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2012, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule of accounts receivable and estimates that $7,000 will prove to be uncollectible. On March 4, 2013, the credit manager authorizes a write-off of the $1,200 balance owed by B. Crawford. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2012. (b) Show the balance sheet presentation of accounts receivable on December 31, 2012. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $160,000 and the balance of Allowance for Doubtful Accounts is a credit of $3,000. Make the appropriate entry to record the write-off of the Crawford account. Also show the balance sheet presentation of accounts receivable before and after the write-off. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203
(20 min.)
(a) Bad Debts Expense ($7,000 + $600) ............................................ Allowance for Doubtful Accounts ........................................
7,600 7,600
(b) Accounts Receivable .................................................................... $130,000 Less: Allowance for Doubtful Accounts ........................................ 7,000 (c) Allowance for Doubtful Accounts .................................................. Accounts Receivable—B. Crawford .................................... Accounts Receivable Less: Allowance for Doubtful Accounts Cash Realizable Value
Before Write-off $160,000 3,000 $157,000
$123,000
1,200 1,200 After Write-off $158,800 1,800 $157,000
Ex. 204 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Dec. 17
20
Cash ...................................................................................... Sales Discounts ..................................................................... Accounts Receivable..................................................... (To record collection of 12/4 sales, terms 2/10, n/30)
2,940 60
Cash ...................................................................................... 18,360 Notes Receivable ......................................................... Interest Revenue .......................................................... (Collection of $18,000, 8%, 90 day note dated Sept. 21. Interest had been accrued through Nov. 30.)
FOR INSTRUCTOR USE ONLY
3,000
18,000 360
9 - 52
Test Bank for Accounting Principles, Tenth Edition
Ex. 204 27
31
(Cont.) Cash ...................................................................................... Bad Debts Expense....................................................... (Collection of account previously written off as uncollectible under allowance method) Bad Debts Expense ............................................................... Allowance for Doubtful Accounts ................................... (To recognize estimated bad debts based on 1% of net sales of $600,000)
1,000 1,000
600 600
Instructions Prepare the correcting entries. Ans: N/A, SO: 3,8, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204 Dec. 17
20
27
31
(15 min.)
Accounts Receivable........................................................... Sales Discounts.......................................................... (To correct accounts for granting sales discount when discount period had lapsed)
60
Interest Revenue................................................................. Interest Receivable..................................................... [To recognize collection of interest accrued through November 30 ($18,000 × 8% × 70/360 = $280)]
280
Bad Debts Expense ............................................................ Allowance for Doubtful Accounts ................................ (To correct erroneous collection entry)
1,000
Bad Debts Expense ............................................................ Allowance for Doubtful Accounts ................................ [To adjust balance in Bad Debts Expense to $6,000 (1% × $600,000)]
5,400
60
280
1,000
5,400
Ex. 205 Prepare the necessary journal entry for the following transaction. Francis Company sold $270,000 of its accounts receivables to a factor. The factor charges a 3% fee. Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 205
(3 min.)
Cash ($270,000 – $8,100) .................................................................... Service Charge Expense ($270,000 × 3%)........................................... Accounts Receivable ................................................................
FOR INSTRUCTOR USE ONLY
261,900 8,100 270,000
Accounting for Receivables
9 - 53
Ex. 206 Wine Company has accounts receivable of $40,000 in its general ledger at July 31: During August, the following transactions occurred. Aug. 1
Added 1% finance charges to $13,000 of credit card balances for not paying within the 30 day grace period.
15
Sold $21,000 of accounts receivable to Iron Factors Inc. who charge a 4% commission.
28
Collected $8,000 from Horton credit card customers including $400 of finance charges previously billed.
Instructions (a) Journalize the transactions. (b) Indicate the statement presentation of finance and service charges. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206 (a) Aug. 1
15
28
(12 min.) Accounts Receivable ......................................................... Interest Revenue ...................................................... (To recognize finance charges—1% × $13,000)
130
Cash.................................................................................. Service Charge Expense ($21,000 × 4%).......................... Accounts Receivable ................................................ (To record sale of receivables to Iron Factors)
20,160 840
Cash.................................................................................. Accounts Receivable ................................................ (To record collection of Horton receivables)
8,000
130
21,000
8,000
(b) Service Charge Expense is a selling expense. Interest Revenue is classified under Other Revenues and Gains. Ex. 207 Listed below are two independent situations involving the disposition of receivables. 1.
Gonzalez Company sells $320,000 of its receivables to Instant Factors, Inc. Instant Factors assesses a finance charge of 3% of the amount of receivables sold.
Instructions Prepare the journal entry to record the sale of the receivables on Gonzalez Company's books. 2.
A restaurant is the site for a large company party. The bill totals $3,400 and is charged by the patron on a Visa credit card.
FOR INSTRUCTOR USE ONLY
9 - 54
Test Bank for Accounting Principles, Tenth Edition
Ex. 207
(Cont.)
Instructions Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the restaurant's books. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 207
(7 min.)
1. Cash ............................................................................................... Service Charge Expense ($320,000 × .02) ..................................... Accounts Receivable .............................................................
310,400 9,600
2. Cash ............................................................................................... Service Charge Expense ($3,400 × .03) ......................................... Sales Revenue ..............................................................
3,298 102
320,000
3,400
Ex. 208 Lamontague Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred. Jan. 15 20 Feb. 10 15
Made Lamontague credit card sales totaling $24,000. (There were no balances prior to January 15.) Made Visa credit card sales (service charge fee 2%) totaling $7,000. Collected $14,000 on Lamontague credit card sales. Added finance charges of 1% to Lamontague credit card balance.
Instructions (a) Journalize the transactions for Lamontague Stores. (b) Indicate the statement presentation of the financing charges and the credit card service charge expense for Lamontague Stores. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208
(7 min.)
(a) Jan. 15
Accounts Receivable .................................................... Sales Revenue ........................................................
24,000
Cash ($7,000 – $140) ................................................... Service Charge Expense .............................................. ($7,000 2%) Sales Revenue ........................................................
6,860 140
Cash ............................................................................. Accounts Receivable ...............................................
14,000
20 Accounts Receivable ($10,000 1%) .................................... Interest Revenue .....................................................
100
20
(b) Feb. 10
FOR INSTRUCTOR USE ONLY
24,000
7,000
14,000
100
Accounting for Receivables
9 - 55
Solution 208 (Cont.) (b)
Interest Revenue is reported under other revenues and gains. Service Charge Expense is a selling expense.
Ex. 209 Compute the maturity date and the maturity value associated with each of the following notes receivables. 1. A $15,000, 6%, 3-month note dated April 20. Maturity date ___________, Maturity value $____________. 2. A $25,000, 8%, 72-day note dated June 10. Maturity date ___________, Maturity value $____________. 3. An $8,000, 9%, 30-day note dated September 20. Maturity date ___________, Maturity value $____________. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 209
(10 min.)
1. Maturity date: July 20 Maturity value: $15,225 $15,000 × 6% × 3/12 = $225 + $15,000 = $15,225 2. Maturity date:
Term of note June (30–10) July Maturity date, August
72 days 20 31
51 21
Maturity value: $25,400 $25,000 × 8% × 72/360 = $400 + $25,000 = $25,400 3. Maturity date:
Term of note September (30–20) Maturity date, October
30 days 10 20
Maturity value: $8,060 $8,000 × 9% × 30/360 = $60 + $8,000 = $8,060 Ex. 210 Compute the maturity date and interest for the following notes. (a) (b)
Dates of Notes April 17 August 11
Terms 60 days 3 months
Principal $60,000 80,000
Interest Rate 6% 8%
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
9 - 56
Test Bank for Accounting Principles, Tenth Edition
Solution 210
(3 min.)
Maturity Date (a) June 16 (b) November 11
Interest $600 ($60,000 × .06 × 60/360) $1,600 ($80,000 × .08 × 3/12)
Ex. 211 Compute the missing amount for each of the following notes: Principal Annual Interest Rate Time Total Interest ——————————————————————————————————————— (a) $40,000 10% 2.5 years ? ——————————————————————————————————————— (b) $120,000 ? 9 months $7,200 ——————————————————————————————————————— (c) ? 10% 90 days $1,500 ——————————————————————————————————————— (d) $40,000 9% ? $1,200 ——————————————————————————————————————— Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 211
(10 min.)
(a)
$10,000
($40,000 × .10 × 2.5 years) = $10,000
(b)
8%
($120,000 × ? × 9 ÷ 12 = $7,200; ? = 8%)
(c)
$60,000
(? × .10 × 90 ÷ 360 = $1,500; ? = $60,000)
(d)
4 months
($40,000 × .09 × ? = $1,200; ? = 4 ÷ 12)
Ex. 212 Cal's Supply Co. has the following transactions related to notes receivable during the last 2 months of 2012. Nov. 1 Dec. 11 16 31
Loaned $20,000 cash to Zoey Deschanel on a 1-year, 12% note. Sold goods to Phair, Inc., receiving a $11,700, 90-day, 8% note. Received an $12,000, 6-month, 9% note in exchange for Grace Potter's outstanding accounts receivable. Accrued interest revenue on all notes receivable.
Instructions (a) Journalize the transactions for Cal's Supply Co. (b) Record the collection of the Deschanel note at its maturity in 2013. Ans: N/A, SO: 5,6, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Receivables Solution 212 (10 min.) (a) 2012 Nov. 1 Notes Receivable..................................................... Cash .................................................................... Dec. 11 16 31
9 - 57
20,000 20,000
Notes Receivable..................................................... Sales Revenue ....................................................
11,700
Notes Receivable..................................................... Accounts Receivable—Potter ..............................
12,000
Interest Receivable .................................................. Interest Revenue* ................................................
497
11,700 12,000 497
*Calculation of interest revenue: Deschanel's note: $20,000 12% 2/12 = $400 Phair's note: 11,700 8% 20/360 = 52 Potter's note: 12,000 9% 15/360 = 45 Total accrued interest $497
(b) Nov. 1
2011 Cash ........................................................................ Interest Receivable .............................................. Interest Revenue* ................................................ Notes Receivable ................................................. *($20,000 12% 10/12)
22,400 400 2,000 20,000
Ex. 213 Lissie Company had the following select transactions. Apr.
1, 2012
July 1, 2012 Dec. 31, 2012 Apr. 1, 2013 Apr. 1, 2013
Accepted Goulding Company's 1-year, 12% note in settlement of a $25,000 account receivable. Loaned $15,000 cash to Jenny Lewis on a 9-month, 10% note. Accrued interest on all notes receivable. Received principal plus interest on the Goulding note. Jenny Lewis dishonored its note: Lissie expects it will eventually collect.
Instructions Prepare journal entries to record the transactions. Lissie prepares adjusting entries once a year on December 31. Ans: N/A, SO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
9 - 58
Test Bank for Accounting Principles, Tenth Edition
Solution 213 4/1/12
(12 min.)
Notes Receivable ................................................. Accounts Receivable—Goulding ....................
25,000
Notes Receivable ................................................. Cash ..............................................................
15,000
12/31/12 Interest Receivable .............................................. Interest Revenue............................................ ($25,000 12% 9/12)
2,250
Interest Receivable .............................................. Interest Revenue............................................ ($15,000 10% 6/12)
750
Cash .................................................................... Notes Receivable ........................................... Interest Receivable ........................................ Interest Revenue............................................ ($25,000 12% 3/12 = $750)
28,000
Accounts Receivable............................................ Notes Receivable ........................................... Interest Receivable ........................................ Interest Revenue............................................ ($15,000 10% 3/12 = $375)
16,125
7/1/12
4/1/13
25,000
15,000
2,250
750
25,000 2,250 750
15,000 750 375
Ex. 214 Prepare the necessary journal entries for the following transactions for Natasha Co. May 25 Natasha Co. received a $30,000, 2-month, 6% note from Khan Company in settlement of an account receivable. July 25 Natasha Co. received payment on the Khan note. Ans: N/A, SO: 6,8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 214 May 25 July 25
(5 min.)
Notes Receivable ............................................................. Accounts Receivable ...............................................
30,000
Cash ................................................................................ Notes Receivable .................................................... Interest Revenue ($30,000 × .06 × 2/12) .................
30,300
FOR INSTRUCTOR USE ONLY
30,000 30,000 300
Accounting for Receivables
9 - 59
Ex. 215 Record the following transactions in general journal form for Karen Elson Company. July
1
Received a $20,000, 8%, 3-month note, dated July 1, from Laura Marling in payment of her open account.
Oct.
1
Received notification from Laura Marling that she was unable to honor her note at this time. It is expected that Marling will pay at a later date.
Nov. 15
Received full payment from Laura Marling for her note receivable previously dishonored.
Ans: N/A, SO: 6,8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 215 July
Oct.
1
1
Nov. 15
(15 min.)
Notes Receivable................................................................ Accounts Receivable—Laura Marling ........................ (To record acceptance of Laura Marling note as payment on account)
20,000
Accounts Receivable— Laura Marling ................................ Notes Receivable ....................................................... Interest Revenue ($20,000 × 8% × 3/12) ................... (To record dishonored note, $20,000, plus interest)
20,400
Cash ................................................................................... Accounts Receivable—Laura Marling ........................ (To record payment on account)
20,400
20,000
20,000 400
20,400
Ex. 216 Pine Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Pine Boat Company. Feb. 12
Accepted a $25,000, 6%, 60-day note from Bob Weiss for a 24-foot motorboat built to his specifications.
April 14
Received notification from Bob Weiss that he was unable to honor his promissory note but that he expects to pay the amount owed in May.
May 26
Received a check from Bob Weiss for the total amount owed.
June 10
Received notification by the bank that Bob Weiss check was being returned "NSF" and that Mr. Weiss had declared personal bankruptcy.
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
9 - 60
Test Bank for Accounting Principles, Tenth Edition
Solution 216 Feb. 12
April 14
May 26
June 10
(15 min.)
Notes Receivable ................................................................ Sales Revenue ...........................................................
25,000
Accounts Receivable—B. Weiss ......................................... Notes Receivable ....................................................... Interest Revenue ($25,000 × 6% × 1/6) ......................
25,250
Cash ................................................................................... Accounts Receivable—B. Weiss ................................
25,250
Accounts Receivable—B. Weiss ......................................... Cash...........................................................................
25,250
Allowance for Doubtful Accounts ......................................... Accounts Receivable— B. Weiss ...............................
25,250
25,000
25,000 250
25,250
25,250
25,250
Ex. 217 The following information is available for Sharon Jones Company. Beginning accounts receivable Ending accounts receivable Net sales
$
70,000 110,000 990,000
Instructions Compute the receivables turnover ratio and the average collection period. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217
(5 min.)
Receivables turnover = 11 times $990,000 [($70,000 + $110,000) 2] Average collection period = 33.2 days (365 11) Ex. 218 Scully Company had accounts receivable of $100,000 on January 1, 2012. The only transactions that affected accounts receivable during 2012 were net credit sales of $1,200,000, cash collections of $1,000,000, and accounts written off of $30,000. Instructions (a) Compute the ending balance of accounts receivable. (b) Compute the accounts receivable turnover ratio for 2012. (c) Compute the average collection period in days. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Receivables Solution 218
9 - 61
(5 min.)
(a)
Beginning accounts receivable .................................. Net credit sales.......................................................... Cash collections ........................................................ Accounts written off ................................................... Ending accounts receivable .......................................
(b)
$1,200,000/[($100,000 + $270,000)/2] = 6.49
(c)
365/6.49 = 56.2 days
$
100,000 1,200,000 (1,000,000) (30,000) $ 270,000
COMPLETION STATEMENTS 219. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
220. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
221. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
222. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
223. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
224. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
225. When the allowance method is used to account for uncollectible accounts, the ______________ is credited when an account is determined to be uncollectible. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
226. The _____________ basis of estimating uncollectibles provides a better _____________ of bad debt expense with sales revenue and therefore emphasizes income statement relationships. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
227. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes balance sheet relationships. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
228. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
229. A finance company or bank that purchases receivables from businesses is known as a ______________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
230. A 75-day note receivable dated June 10 would mature on ______________. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
231. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
232. A note which is not paid on the maturity date is said to be ______________. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 219. trade 220. recognizing, valuing, disposing 221. cash discounts 222. Bad Debts 223. allowance, direct write-off 224. contra asset, deducted 225. Accounts Receivable
226. 227. 228. 229. 230. 231. 232.
percentage of sales, matching percentage of receivables, cash realizable cash sales factor August 24 Notes Receivable, Interest Revenue dishonored
FOR INSTRUCTOR USE ONLY
Accounting for Receivables
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MATCHING 233. Match the items below by entering the appropriate code letter in the space provided. A. Aging of receivables B. Direct write-off method C. Promissory note D. Trade receivables E. Percentage of sales basis
F. G. H. I. J.
Percentage of receivables basis Factoring Dishonored note Average collection period Credit card sales
____
1. A written promise to pay a specified amount on demand or at a definite time.
____
2. Sales that involve the customer, the retailer, and the credit card issuer.
____
3. Emphasizes the matching of costs and revenues in the same period.
____
4. Amounts owed by customers from the sale of goods and services.
____
5. A note which is not paid in full at maturity.
____
6. Analysis of customer account balances by length of time they have been unpaid.
____
7. Emphasizes expected cash realizable value of accounts receivable.
____
8. Generally not acceptable for financial reporting purposes.
____
9. The amount of time that a receivable is outstanding.
____ 10. Sale of accounts receivable to a factor. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
C J E D H
6. 7. 8. 9. 10.
A F B I G
SHORT-ANSWER ESSAY QUESTIONS S-A E 234 Management can choose between two bases in calculating the estimated uncollectible accounts under the allowance method. One basis emphasizes an income statement viewpoint whereas the other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two approaches. How do the different points of view affect the amount recognized as Bad Debts Expense during the accounting period? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
Solution 234 The two bases available to calculate the estimated uncollectibles under the accrual based allowance method are: (a) percentage of sales basis and (b) percentage of receivables basis. The percentage of sales basis emphasizes the income statement while the percentage of receivables basis emphasizes the balance sheet. Under the percentage of sales basis the bad debts expense for the period is calculated directly as a percentage of net credit sales without regard to any balance in the allowance account. Under the percentage of receivables basis, the emphasis is on establishing the proper amount to carry as a balance in the allowance account; bad debts expense is indirectly determined to be the amount necessary to create the proper balance in the allowance account. S-A E 235 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa, MasterCard). Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 235 The advantages of a retail store using its own credit card are the avoidance of a 2 to 6 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation the retailer earns the interest on the unpaid balances. The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation. S-A E 236 Your friend Ellie has opened an office supply store. She will extend open credit to local businesses and is concerned about potential bad debts. What can Ellie do to reduce potential bad debts? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 236 1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately. 2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances. 3. The company should evaluate the relationship among sales, accounts receivable, and cash collections to monitor trends and watch for potential problems. 4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts. FOR INSTRUCTOR USE ONLY
Accounting for Receivables
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S-A E 237 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
Solution 237 1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services. 2. Bad debts are absorbed by the credit card company. 3. The company receives its cash (less the fees) immediately. 4. The company does not have to hire employees to approve credit and make collections for these sales. S-A E 238 An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why are companies selling their receivables? Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 238 The reasons companies are selling their receivables are: (1) Receivables may be sold because they may be the only reasonable source of cash. (2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters. S-A E 239 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 239 A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
S-A E 240
(Ethics)
Pierce Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Pierce Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Pierce Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Pierce Books act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Problem Solving, IMA: Business Economics
Solution 240 Yes, it is ethical to reinstate the debt of The Learning Center, especially since there was no evidence given that The Learning Center attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Pierce Books. Pierce Books' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the state, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Pierce Books can collect also because they apparently did not include interest in earlier bills sent to these clients, and because they stopped sending bills for some period of time. Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Center become bankrupt, Pierce Books could not have legally reinstated the debt, even if The Learning Center became solvent at some time in the future. S-A E 241 (Communication) Morrison Company received a letter from Mary Furman, a customer. Mary had purchased $425 worth of clothing from Morrison on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Morrison. Her total debt presently, with interest and late fees, is $351.13. Mary sent a letter to Morrison in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Morrison certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Morrison write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Morrison were among the best she had ever owned, and that she "told everybody" that Morrison was definitely the best place to get clothes.
FOR INSTRUCTOR USE ONLY
Accounting for Receivables S-A E 241
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(Cont.)
Required: You are the accounting manager for Morrison. Write a short letter to Mary explaining why her debt cannot be written off. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Business Economics
Solution 241 (letterhead) (Date) Ms. Mary Furman 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Furman: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Morrison clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) is $351.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Morrison extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Morrison or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Betty in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely, Jill Gates Accounting Manager
FOR INSTRUCTOR USE ONLY
CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
7 7 8 8 8 8 8 9 9 9 10 10
C K K K K K K K K K K K
49. 10 50. 1 sg 51. 2 sg 52. 3 sg 53. 7 sg 54. 8 sg 55. 8 sg,a 56. 10
K C K K K K K K
6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7
C C AP K K C C C AP AP K AP C C C AP AP AP K K K K K K C AP K AP K
173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.
K C K C K C K AP K C K K K K K K K K AP AP C AP AP AP K K K K AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
1 1 1 1 1 1 2 2 2 2 2 3
K K K K K C C K C K K C
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.
3 3 3 3 4 4 4 5 5 5 5 6
K K K K K K K K K K K K
25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.
6 6 6 6 6 6 6 7 7 7 7 7
C C C K C K C K K K K K
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. a 47. a 48.
a
sg
Multiple Choice Questions 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. sg st a
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3
K AP C C K C AP AP AP AP K C C AP K C AP AP K K K K K C K C K K K
86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
AP AP AP AP K AP K AP AP K K K K AP AP K AP C K AP AP AP AN AP AP AP AP C AP
115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143.
3 3 3 3 3 3 3 3 3 6 3 3 4 4 4 4 4 4 4 4 4 5 5 5 5 5 6 6 6
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K K K AN K K K C C C K K
144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9
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Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
202. a 203. a 204. a 205. a 206.
10 10 10 10 10
AP K K C K
a
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
8 9 9 10 3
K C K K K
222. 223. 224. 225. 226.
3 3 4 4 4
AP AP K K K
233. 234.
6 7
AP AP
235. 236.
8 9
AP AP
264. 265. 266. 267. 268. 269. 270. 271. 272.
7 7 8 8 8 8 8 9 9
AP AP AP AP AP AP C AN AP
273. 274. a 275. a 276. a 277. a 278.
9 9 10 10 10 10
AP C AP AP AP AP
6 6 7 8 8
K AP K K K
299. 300. a 301. a 302.
8 9 10 10
K K K AP
6 8
K K
313.
6
K
Multiple Choice Questions (Cont.) a
207. 10 st 208. 1 sg 209. 1 sg 210. 2 st 211. 3
sg
K K K K K
212. st 213. sg 214. st 215. sg 216.
4 5 5 6 7
AP st217. K sg218. st K 219. sg,a K 220. C 221.
Brief Exercises 227. 228.
1 1
K C
229. 230.
3 3
AP AP
231. 232.
237. 1,3 238. 1 239. 1 240. 1 241. 3 242. 3 243. 3 244. 3 245. 3
AP AN AP AP AP AP AP AP AP
246. 3 247. 4 248. 3,4 249. 4 250. 4 251. 4 252. 5 253. 3,5 254. 5
E AP AP AN AN AN C AN C
255. 256. 257. 258. 259. 260. 261. 262. 263.
3 4
AP AP
Exercises 5 6 6 6 6 6 6 7 7
AN AP AP AP AP AP AP AP AP
Completion Statements 279. 280. 281. 282. 283.
1 1 1 1 1
K K K K AP
284. 285. 286. 287. 288.
2 2 2 3 3
K K K K K
303.
5
K
304.
8
K
305. 306.
2 5
K K
307. 308.
9 1
K K
289. 290. 291. 292. 293.
3 5 5 6 6
K K K K K
294. 295. 296. 297. 298.
Matching Statements Short-Answer Essay 309. 310.
2 8
K K
311. 312.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 6.
TF TF TF TF TF TF
50. 57. 58. 59. 60. 61.
TF MC MC MC MC MC
62. 63. 64. 65. 66. 67.
Type Item Type Item Type Study Objective 1 MC 68. MC 74. MC MC 69. MC 208. MC MC 70. MC 209. MC MC 71. MC 227. BE MC 72. MC 228. BE MC 73. MC 237. Ex
FOR INSTRUCTOR USE ONLY
Item
Type
Item
Type
238. 239. 240. 279. 280. 281.
Ex Ex Ex C C C
282. 283. 308.
C C SA
Plant Assets, Natural Resources, and Intangible Assets
7. 8. 9. 10.
TF TF TF TF
11. 51. 75. 76.
TF TF MC MC
77. 78. 79. 80.
12. 13. 14. 15. 16. 52. 85. 86. 87. 88.
TF TF TF TF TF TF MC MC MC MC
89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
MC MC MC MC MC MC MC MC MC MC
99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
17. 18. 19. 127.
TF TF TF MC
128. 129. 130. 131.
MC MC MC MC
132. 133. 134. 135.
20. 21. 22.
TF TF TF
23. 136. 137.
TF MC MC
138. 139. 140.
24. 25. 26. 27. 28. 29. 30.
TF TF TF TF TF TF TF
31. 124. 141. 142. 143. 144. 145.
TF MC MC MC MC MC MC
146. 147. 148. 149. 150. 151. 152.
32. 33. 34. 35.
TF TF TF TF
36. 37. 38. 53.
TF TF TF TF
162. 163. 164. 165.
39. 40. 41. 42. 43. 54. 55.
TF TF TF TF TF TF TF
173. 174. 175. 176. 177. 178. 179.
MC MC MC MC MC MC MC
180. 181. 182. 183. 184. 185. 186.
Study Objective 2 MC 81. MC 210. MC 82. MC 284. MC 83. MC 285. MC 84. MC 286. Study Objective 3 MC 109. MC 119. MC 110. MC 120. MC 111. MC 121. MC 112. MC 122. MC 113. MC 123. MC 114. MC 125. MC 115. MC 126. MC 116. MC 211. MC 117. MC 221. MC 118. MC 222. Study Objective 4 MC 212. MC 232. MC 224. MC 247. MC 225. MC 248. MC 226. MC 249. Study Objective 5 MC 213. MC 253. MC 214. MC 254. MC 252. Ex 255. Study Objective 6 MC 153. MC 160. MC 154. MC 161. MC 155. MC 215. MC 156. MC 233. MC 157. MC 256. MC 158. MC 257. MC 159. MC 258. Study Objective 7 MC 166. MC 170. MC 167. MC 171. MC 168. MC 172. MC 169. MC 216. Study Objective 8 MC 187. MC 194. MC 188. MC 217. MC 189. MC 235. MC 190. MC 266. MC 191. MC 267. MC 192. MC 268. MC 193. MC 269.
MC C C C
305. 309.
SA SA
MC MC MC MC MC MC MC MC MC MC
223. 229. 230. 231. 237. 241. 242. 243. 244. 245.
MC BE BE BE Ex Ex Ex Ex Ex Ex
BE Ex Ex Ex
250. 251.
Ex Ex
Ex Ex Ex
290. 291. 303.
MC MC MC BE Ex Ex Ex
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246. 248. 253. 287. 288. 289.
Ex Ex Ex C C C
C C MA
306.
SA
259. 260. 261. 292. 293. 294. 295.
Ex Ex Ex C C C C
311. 313.
SA SA
MC MC MC MC
234. 262. 263. 264.
BE Ex Ex Ex
265. 296.
Ex C
MC MC BE Ex Ex Ex Ex
270. 297. 298. 299. 304. 310. 312.
Ex C C C MA SA SA
FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
44. 45. 46.
TF TF TF
195. 196. 197.
MC MC MC
47. a 48. a 49.
TF TF TF
a
TF MC MC
a
56. a 202. a 203.
198. 199. 200. a
204. a 205. a 206.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 9 MC 201. MC 236. MC 218. MC 271. MC 219. MC 272. a Study Objective 10 MC a207. MC a276. MC a220. MC a277. MC a275. Ex a278.
BE Ex Ex Ex Ex Ex
BE = Brief Exercise Ex = Exercise
273. 274. 300.
Ex Ex C
301. 302.
C C
a a
307.
SA
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1.
Describe how the cost principle applies to plant assets. The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Cost is measured by the cash or cash equivalent price paid.
2.
Explain the concept of depreciation. Depreciation is the allocation of the cost of a plant asset to expense over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, nor is it a process that results in an accumulation of cash.
3.
Compute periodic depreciation using different methods. There are three depreciation methods: Effect on Method Annual Depreciation Formula Straight-line Constant amount Depreciable cost ÷ Useful life (in years) Units-of-activity Varying amount Depreciation cost per unit × Units of activity during the year Declining-balance Decreasing amount Book value at beginning of year × Declining-balance rate
4. Describe the procedure for revising periodic depreciation. Companies make revisions of periodic depreciation in present and future periods, not retroactively. They determine the new annual depreciation by dividing the depreciable cost at the time of the revision by the remaining useful life. 5. Distinguish between revenue and capital expenditures, and explain the entries for each. Companies incur revenue expenditures to maintain the operating efficiency and productive life of the asset. They debit these expenditures to Repair Expense as incurred. Capital expenditures increase the operating efficiency, productive capacity, or expected useful life of the asset. Companies generally debit these expenditures to the plant asset affected. 6. Explain how to account for the disposal of a plant asset. The accounting for disposal of a plant asset through retirement or sale is as follows: (a) Eliminate the book value of the plant asset at the date of disposal. (b) Record cash proceeds, if any. (c) Account for the difference between the book value and the cash proceeds as a gain or loss on disposal. 7. Compute periodic depletion of natural resources. Companies compute depletion cost per unit by dividing the total cost of the natural resource minus salvage value by the number of units estimated to be in the resource. They then multiply the depletion cost per unit by the number of units extracted and sold. 8. Explain the basic issues related to accounting for intangible assets. The term to describe the write-off of an intangible asset is amortization. The accounting for intangible assets and plant assets is much the same. Companies normally use the straight-line method for amortizing intangible assets.
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 5
9. Indicate how plant assets, natural resources, and intangible assets are reported. Companies usually combine plant assets and natural resources under property, plant, and equipment; they show intangibles separately under intangible assets. Either within the balance sheet or in the notes, companies should disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They also should describe the depreciation and amortization methods used and should disclose the amount of depreciation and amortization expense for the period. The asset turnover ratio measures the productivity of a company’s assets in generating sales. a10.
Explain how to account for the exchange of plant assets. Ordinarily companies record a gain or loss on the exchange of plant assets. The rationale for recognizing a gain or loss is that most exchanges have commercial substance. An exchange has commercial substance if the future cash flows change as a result of the exchange.
TRUE-FALSE STATEMENTS 1.
All plant assets (fixed assets) must be depreciated for accounting purposes.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
Land improvements are generally charged to the Land account.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
The book value of a plant asset is always equal to its fair market value.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
Recording depreciation on plant assets affects the balance sheet and the income statement.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
The depreciable cost of a plant asset is its original cost minus obsolescence.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Recording depreciation each period is an application of the expense recognition principle.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 6 10.
Test Bank for Accounting Principles, Tenth Edition The Accumulated Depreciation account represents a cash fund available to replace plant assets.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11.
In calculating depreciation, both plant asset cost and useful life are based on estimates.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
12.
Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straightline method had been used.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13.
Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
14.
The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
15.
Under the double-declining-balance method, the depreciation rate used each year remains constant.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
To determine a new depreciation amount after a change in estimate of a plant asset's useful life, the asset's remaining depreciable cost is divided by its remaining useful life.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 21.
10 - 7
Capital expenditures are expenditures that increase the company's investment in productive facilities.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
22.
Ordinary repairs should be recognized when incurred as revenue expenditures.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
The fair market value of a plant asset is always the same as its book value.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset's book value.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
30.
A plant asset must be fully depreciated before it can be removed from the books.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 8 33.
Test Bank for Accounting Principles, Tenth Edition The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
38.
Natural resources include standing timber and underground deposits of oil, gas, and minerals.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
41.
Research and development costs which result in a successful product which is patentable are charged to the Patent account.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
42.
The cost of a patent must be amortized over a 20-year period.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
43.
The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 44.
10 - 9
The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
The asset turnover ratio is calculated as total sales divided by ending total assets.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
47.
An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
48.
Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
49.
When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.
Ans: F, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Recognition of depreciation permits the accumulation of cash for the replacement of the asset.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
Depletion expense is reported in the income statement as an operating expense.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
Goodwill is not recognized in accounting unless it is acquired from another business enterprise.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
Research and development costs should be charged to expense when incurred.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 10 Test Bank for Accounting Principles, Tenth Edition a
56.
A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6. 7. 8.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F F F F F F T F
9. 10. 11. 12. 13. 14. 15. 16.
T F F F T F T T
17. 18. 19. 20. 21. 22. 23. 24.
T F T F T T F T
25. 26. 27. 28. 29. 30. 31. 32.
F T T F T F F F
33. 34. 35. 36. 37. 38. 39. 40.
T T T F T T T F
41. 42. 43. 44. 45. 46. a 47. a 48.
F F T T F F T T
a
F T F F F T T T
49. 50. 51. 52. 53. 54. 55. a 56.
MULTIPLE CHOICE QUESTIONS 57.
The cost of a purchased building includes all of the following except a. closing costs. b. real estate broker's commission. c. remodeling costs. d. All of these are included.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
A company purchased land for $80,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at a. $97,000. b. $80,000. c. $85,000. d. $92,000.
Ans: D, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax b. Truck license c. Freight charges d. Cost of lettering on side of truck
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 60.
10 - 11
Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment b. Furnishings c. Land d. Fixtures
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
61.
The four subdivisions for plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
62.
The cost of land does not include a. real estate brokers' commission. b. annual property taxes. c. accrued property taxes assumed by the purchaser. d. title fees.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Gagner Clinic purchases land for $150,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land? a. $132,200 b. $150,000 c. $154,700 d. $132,500
Ans: C, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
64.
Carey Company buys land for $50,000 on 12/31/11. As of 3/31/12, the land has appreciated in value to $50,700. On 12/31/12, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2012? a. $0 b. $700 c. $1,100 d. $1,800
Ans: A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 12 Test Bank for Accounting Principles, Tenth Edition 65.
Hull Company acquires land for $96,000 cash. Additional costs are as follows: Removal of shed Filling and grading Salvage value of lumber of shed Broker commission Paving of parking lot Closing costs
$
300 1,500 120 1,130 10,000 560
Hull will record the acquisition cost of the land as a. $86,000. b. $97,690. c. $99,610. d. $99,370. Ans: D, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66.
Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $20,000. Which of the following statements is true with respect to these additions? a. $40,000 should be debited to the Land account. b. $20,000 should be debited to Land Improvements. c. $60,000 should be debited to the Land account. d. $60,000 should be debited to Land Improvements.
Ans: D, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
68.
Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 69.
10 - 13
A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof. c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. d. The wiring is part of the computer costs, not the building cost.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
70.
Engler Company purchases a new delivery truck for $60,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck? a. $66,050 b. $65,890 c. $64,000 d. $65,600
Ans: B, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
All of the following factors in computing depreciation are estimates except a. cost. b. residual value. c. salvage value. d. useful life.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
72.
Presto Company purchased equipment and these costs were incurred: Cash price Sales taxes Insurance during transit Installation and testing Total costs
$45,000 3,600 640 860 $50,100
Presto will record the acquisition cost of the equipment as a. $45,000. b. $48,600. c. $49,240. d. $50,100. Ans: D, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 14 Test Bank for Accounting Principles, Tenth Edition 73.
Angie’s Blooms purchased a delivery van for $30,000. The company was given a $3,000 cash discount by the dealer, and paid $1,500 sales tax. Annual insurance on the van is $750. As a result of the purchase, by how much will Angie’s Blooms increase its van account? a. $30,000 b. $27,000 c. $29,250 d. $28,500
Ans: D, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
Yocum Company purchased equipment on January 1 at a list price of $100,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yocum was given a $2,000 cash discount. Yocum paid $5,000 sales tax on the equipment, and paid installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $104,760 b. $108,760 c. $110,760 d. $101,000
Ans: B, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit. c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
76.
The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
77.
Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? a. Salvage value b. Estimated useful life c. Cash needed to replace the plant asset d. Cost
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 78.
10 - 15
Depreciation is the process of allocating the cost of a plant asset over its service life in a. an equal and equitable manner. b. an accelerated and accurate manner. c. a systematic and rational manner. d. a conservative market-based manner.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
79.
The book value of an asset is equal to the a. asset's fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset's cost less accumulated depreciation.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
80.
Accountants do not attempt to measure the change in a plant asset's market value during ownership because a. the assets are not held for resale. b. plant assets cannot be sold. c. losses would have to be recognized. d. it is management's responsibility to determine fair values.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
81.
Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
82.
Recording depreciation each period is necessary in accordance with the a. going concern principle. b. cost principle. c. expense recognition principle. d. asset valuation principle.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
83.
In computing depreciation, salvage value is a. the fair value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plant asset's depreciable cost. c. an estimate of a plant asset's value at the end of its useful life. d. ignored in all the depreciation methods.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 16 Test Bank for Accounting Principles, Tenth Edition 84.
When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. obsolescence factors. c. expected repairs and maintenance. d. the intended use of the asset.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
85.
Useful life is expressed in terms of use expected from the asset under the a. declining-balance method. b. straight-line method. c. units-of-activity method. d. none of these.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $35,400. b. $29,400. c. $24,600. d. $24,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
87.
A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is a. 20%. b. 2%. c. 8%. d. 25%.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
88.
A company purchased factory equipment on April 1, 2012 for $80,000. It is estimated that the equipment will have an $10,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2012 is a. $8,000. b. $7,000. c. $5,250. d. $6,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 89.
10 - 17
A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 4-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 20%. b. 25%. c. 50%. d. 5%.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
90.
The declining-balance method of depreciation produces a. a decreasing depreciation expense each period. b. an increasing depreciation expense each period. c. a declining percentage rate each period. d. a constant amount of depreciation expense each period.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
91.
A company purchased factory equipment for $350,000. It is estimated that the equipment will have a $35,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a. $140,000. b. $84,000. c. $126,000. d. $60,480.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
The units-of-activity method is generally not suitable for a. airplanes. b. buildings. c. delivery equipment. d. factory machinery.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
93.
A plant asset cost $192,000 and is estimated to have an $24,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be a. $16,080. b. $27,000. c. $23,624. d. $18,380.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 18 Test Bank for Accounting Principles, Tenth Edition 94.
A factory machine was purchased for $125,000 on January 1, 2012. It was estimated that it would have a $25,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2012. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2012 would be a. $12,500. b. $20,000. c. $25,000. d. $10,000.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
95.
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which a. is used for tax purposes. b. must be used for financial statement purposes. c. is required by the SEC. d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
96.
Which of the following methods of computing depreciation is production based? a. Straight-line b. Declining-balance c. Units-of-activity d. None of these
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97.
Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset's market value over its useful life. c. best measures the plant asset's contribution to revenue over its useful life. d. has been used most often in the past by the company.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
98.
The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. declining-balance. d. none of these.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 99.
10 - 19
On October 1, 2012, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for 2012 if Holt Company uses the straight-line method of depreciation? a. $3,000 b. $16,000 c. $4,000 d. $8,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
100.
On October 1, 2012, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2012, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation? a. $52,000 b. $60,000 c. $72,000 d. $76,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
101.
Which depreciation method is most frequently used in businesses today? a. Straight-line b. Declining-balance c. Units-of-activity d. Double-declining-balance
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
102.
Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation cost per unit? a. $3.30 b. $3.60 c. $.33 d. $.36
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
103.
Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset's use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 20 Test Bank for Accounting Principles, Tenth Edition 104.
The calculation of depreciation using the declining balance method, a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year's depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
105.
Farr Company purchased a new van for floral deliveries on January 1, 2012. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2012? a. $9,600 b. $7,200 c. $14,400 d. $19,200
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
Farr Company purchased a new van for floral deliveries on January 1, 2012. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2013? a. $7,680 b. $23,040 c. $30,720 d. $11,520
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
Moreno Company purchased equipment for $675,000 on January 1, 2011, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $30,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2013 will be a. $75,000. b. $45,000. c. $81,660. d. $51,660.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year's Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years.
Ans: D, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 109.
10 - 21
Equipment was purchased for $90,000. Freight charges amounted to $4,200 and there was a cost of $12,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $18,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $21,240. b. $17,640. c. $14,760. d. $14,400.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
Equipment was purchased for $51,000 on January 1, 2012. Freight charges amounted to $2,100 and there was a cost of $6,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $9,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used? a. $20,040 b. $10,020 c. $8,580 d. $17,160
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
A company purchased factory equipment on June 1, 2012, for $80,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2012, is a. $7,500. b. $4,375. c. $3,750. d. $3,125.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 22 Test Bank for Accounting Principles, Tenth Edition 113.
Sargent Corporation bought equipment on January 1, 2012. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is a. $180,000. b. $150,000. c. $100,000. d. $25,000.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
114.
Sargent Corporation bought equipment on January 1, 2012. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is a. $35,000. b. $36,000. c. $25,000. d. none of the above.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
Sargent Corporation bought equipment on January 1, 2012. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The book value of the equipment at the beginning of the third year would be a. $180,000. b. $150,000. c. $130,000. d. $50,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
Tomko Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Tomko uses straight-line depreciation, annual depreciation will be a. $2,050. b. $2,036. d. $3,050. d. $1,880.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
117.
Drago Company purchased equipment on January 1, 2012, at a total invoice cost of $800,000. The equipment has an estimated salvage value of $20,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used? a. $160,000 b. $320,000 c. $156,000 d. $312,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 118.
10 - 23
On January 1, a machine with a useful life of five years and a residual value of $25,000 was purchased for $75,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $18,000 b. $30,000 c. $24,000 d. $14,400
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
A machine with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-ofactivity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $75,000 b. $45,000 c. $65,000 d. $80,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
120.
Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? a. $60,000 b. $67,800 c. $49,500 d. $56,250
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
121.
Eckman Company purchased equipment for $80,000 on January 1, 2011, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $4,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2013 will be a. $11,520. b. $18,240. c. $19,200. d. $10,944.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
Grimwood Trucking purchased a tractor trailer for $147,000. Interline uses the units-ofactivity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record? a. $10,500 b. $13,230 c. $11,340 d. $12,250
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 24 Test Bank for Accounting Principles, Tenth Edition 123.
On May 1, 2012, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2005. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What depreciation expense should be recorded on this asset in 2012? a. $11,250. b. $12,500. c. $16,875. d. $33,750.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
On May 1, 2012, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2005. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What gain should be recognized on the sale? a. $11,250. b. $22,500. c. $23,750. d. $45,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
125.
Mather Company purchased equipment on January 1, 2012 at a total invoice cost of $224,000; additional costs of $4,000 for freight and $20,000 for installation were incurred. The equipment has an estimated salvage value of $8,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2013 if the straightline method of depreciation is used is: a. $86,400. b. $88,000. c. $96,000. d. $99,200.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
126.
Kingston Company purchased a piece of equipment on January 1, 2012. The equipment cost $120,000 and had an estimated life of 8 years and a salvage value of $15,000. What was the depreciation expense for the asset for 2013 under the double-declining-balance method? a. $13,000. b. $22,500. c. $30,000. d. $23,438.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 127.
10 - 25
Able Towing Company purchased a tow truck for $90,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $18,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,500. What was the depreciation expense for 2014? a. $9,000. b. $7,200. c. $22,500. d. $18,275.
Ans: D, SO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
Nicholson Company purchased equipment on January 1, 2010, for $40,000 with an estimated salvage value of $10,000 and estimated useful life of 8 years. On January 1, 2012, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $10,000. Using the straight-line method the new annual depreciation will be: a. $2,250. b. $2,500. c. $3,000. d. $3,333.
Ans: A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
129.
An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. $18,000. b. $13,200. c. $9,000. d. $12,600.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
Equipment costing $40,000 with a salvage value of $8,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be a. $4,800. b. $10,667. c. $8,000. d. $6,400.
Ans: C, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 26 Test Bank for Accounting Principles, Tenth Edition 131.
Ron's Quik Shop bought machinery for $50,000 on January 1, 2012. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2013, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2013? a. $8,000 b. $4,000 c. $6,667 d $10,000
Ans: A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Each of the following is used in computing revised annual depreciation for a change in estimate except a. book value. b. cost. c. depreciable cost. d. remaining useful life.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
133.
A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
134.
Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? a. Revisions in useful life are permitted if approved by the IRS. b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision. d. Both current and future years will be affected by the revision.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
135.
Don's Copy Shop bought equipment for $150,000 on January 1, 2011. Don estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2012, Don decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2012? a. $50,000 b. $20,000 c. $25,000 d. $37,500
Ans: C, SO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 136.
10 - 27
Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as a. capital expenditures. b. expense expenditures. c. ordinary repairs. d. revenue expenditures.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
138.
Which of the following is not true of ordinary repairs? a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures. c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
139.
The paneling of the body of an open pickup truck would be classified as a(n) a. revenue expenditure. b. addition. c. improvement. d. ordinary repair.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
140.
Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
141.
If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs. b. a loss on disposal occurs. c. either a gain or a loss can occur. d. neither a gain nor a loss occurs.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 28 Test Bank for Accounting Principles, Tenth Edition 142.
A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset's original cost. b. book value of the asset with the asset's original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
143.
The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
144.
If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur. b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
145.
If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset's book value, a. a gain on disposal occurs. b. a loss on disposal occurs. c. there is no gain or loss on disposal. d. additional depreciation expense must be recorded.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
A company sells a plant asset which originally cost $240,000 for $80,000 on December 31, 2012. The Accumulated Depreciation account had a balance of $96,000 after the current year's depreciation of $24,000 had been recorded. The company should recognize a a. $160,000 loss on disposal. b. $64,000 gain on disposal. c. $64,000 loss on disposal. d. $40,000 loss on disposal.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
147.
If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 148.
10 - 29
If a fully depreciated plant asset is still used by a company, the a. estimated remaining useful life must be revised to calculate the correct revised depreciation. b. asset is removed from the books. c. accumulated depreciation account is removed from the books but the asset account remains. d. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
149.
Which of the following statements is not true when a fully depreciated plant asset is retired? a. The plant asset's book value is equal to its estimated salvage value. b. The accumulated depreciation account is debited. c. The asset account is credited. d. The plant asset's original cost equals its book value.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received, a. a gain on disposal will be recorded. b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded. d. no gain or loss on disposal will be recorded.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
The book value of an asset will equal its fair market value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
A truck costing $88,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $40,000. An insurance check for $100,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a a. Gain on Disposal of $12,000. b. credit to the Truck account of $48,000. c. credit to the Accumulated Depreciation account for $40,000. d. Gain on Disposal of $52,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 30 Test Bank for Accounting Principles, Tenth Edition 153.
On July 1, 2012, Hale Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The accumulated depreciation account had a balance of $175,000 on January 1, 2012, using the straight-line method. The gain or loss on disposal is a. $15,000 gain. b. $10,000 loss. c. $15,000 loss. d. $10,000 gain.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154.
A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet. d. as a direct decrease to the capital account on the balance sheet.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
155.
Yanik Company's delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500. The company received $40,000 reimbursement from its insurance company. The gain or loss as a result of the fire was a. $30,000 loss. b. $17,500 loss. c. $30,000 gain. d. $17,500 gain.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
Equipment that cost $210,000 and on which $100,000 of accumulated depreciation has been recorded was disposed of for $90,000 cash. The entry to record this event would include a a. gain of $20,000. b. loss of $20,000. c. credit to the Equipment account for $110,000. d. credit to Accumulated Depreciation for $100,000.
Ans: B, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
157.
A truck that cost $48,000 and on which $40,000 of accumulated depreciation has been recorded was disposed of for $12,000 cash. The entry to record this event would include a a. gain of $4,000. b. loss of $4,000. c. credit to the Truck account for $8,000. d. credit to Accumulated Depreciation for $40,000.
Ans: A, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 158.
10 - 31
Orr Corporation sold equipment for $18,000. The equipment had an original cost of $54,000 and accumulated depreciation of $27,000. As a result of the sale, a. net income will increase $18,000. b. net income will increase $9,000. c. net income will decrease $9,000. d. net income will decrease $18,000.
Ans: C, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
159.
Powell’s Courier Service recorded a loss of $6,000 when it sold a van that originally cost $56,000 for $10,000. Accumulated depreciation on the van must have been a. $52,000. b. $16,000. c. $50,000. d. $40,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
160.
A plant asset cost $45,000 when it was purchased on January 1, 2005. It was depreciated by the straight-line method based on a 9-year life with no salvage value. On June 30, 2012, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement? a. No gain or loss. b. $10,000 loss. c. $7,500 loss. d. $5,000 gain.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
161.
Nicklaus Company has decided to sell one of its old machines on June 30, 2012. The machine was purchased for $160,000 on January 1, 2008, and was depreciated on a straight-line basis for 10 years with no salvage value. If the machine was sold for $52,000, what was the amount of the gain or loss recorded at the time of the sale? a. $36,000. b. $108,000. c. $44,000. d. $92,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
162.
On a balance sheet, natural resources may be described more specifically as all of the following except a. land improvements. b. mineral deposits. c. oil reserves. d. timberlands.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 32 Test Bank for Accounting Principles, Tenth Edition 163.
Natural resources are a. depreciated using the units-of-activity method. b. physically extracted in operations and are replaceable only by an act of nature. c. reported at their market value. d. amortized over a period no longer than 40 years.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
164.
Depletion is a. a decrease in market value of natural resources. b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense. d. the method used to record unsuccessful patents.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
165.
To qualify as natural resources in the accounting sense, assets must be a. underground. b. replaceable. c. of a mineral nature. d. physically extracted in operations.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
The method most commonly used to compute depletion is the a. straight-line method. b. double-declining-balance method. c. units-of-activity method. d. effective interest method.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
167.
In computing depletion, salvage value is a. always immaterial. b. ignored. c. impossible to estimate. d. included in the calculation.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
168.
If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, a. total depletion on the mine is based on the 1,200,000 tons. b. depletion expense is recognized on the 1,500,000 tons extracted. c. depletion expense is recognized on the 1,200,000 tons extracted and sold. d. a separate accumulated depletion account is set up to record depletion on the 300,000 tons extracted but not sold.
Ans: C, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 169.
10 - 33
A coal company invests $12 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year? a. $600,000 b. $240,000 c. $60,000 d. Cannot be determined from the information provided.
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
170.
Accumulated Depletion a. is used by all companies with natural resources. b. has a normal debit balance. c. is a contra-asset account. d. is never shown on the balance sheet.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
171.
On July 4, 2012, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,200,000. It is estimated that the recoverable granite will be 400,000 tons. During 2012, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2012 would be a. $150,000. b. $90,000. c. $180,000. d. $300,000.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
Depletion expense is computed by multiplying the depletion cost per unit by the a. total estimated units. b. total actual units. c. number of units extracted. d. number of units sold.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173.
Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depletable natural resources. c. have been exchanged at a gain. d. do not have physical substance.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
174.
Identify the item below where the terms are not related. a. Equipment—depreciation b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion
Ans: B, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 34 Test Bank for Accounting Principles, Tenth Edition 175.
A patent should a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
176.
The entry to record patent amortization usually includes a credit to a. Amortization Expense. b. Accumulated Amortization. c. Accumulated Depreciation. d. Patents.
Ans: D, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
177.
The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses. b. deducted from the book value of the patent. c. added to the cost of the patent. d. recognized as a loss in the current period.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
178.
An asset that cannot be sold individually in the market place is a. a patent. b. goodwill. c. a copyright. d. a trade name.
Ans: B, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179.
Goodwill can be recorded a. when customers keep returning because they are satisfied with the company's products. b. when the company acquires a good location for its business. c. when the company has exceptional management. d. only when there is an exchange transaction involving the purchase of an entire business.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
180.
On July 1, 2012, Jenks Company purchased the copyright to Jackson Computer tutorials for $216,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $16,000. The amount of Amortization Expense recognized for the year 2012 would be a. $43,200. b. $20,000. c. $40,000. d. $21,600.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 181.
10 - 35
All of the following intangible assets are amortized except a. copyrights. b. limited-life franchises. c. patents. d. trademarks.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182.
Which of the following is not an intangible asset arising from a government grant? a. Goodwill b. Patent c. Trademark d. Trade name
Ans: A, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
183.
The amortization period for a patent cannot exceed a. 50 years. b. 40 years. c. 20 years. d. 10 years.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
184.
Cost allocation of an intangible asset is referred to as a. amortization. b. depletion. c. accretion. d. capitalization.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
185.
A patent a. has a legal life of 40 years. b. is nonrenewable. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
186.
If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a. Legal Expense. b. an Intangible Loss account. c. the Patent account. d. a revenue expenditure account.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 36 Test Bank for Accounting Principles, Tenth Edition 187.
Copyrights are granted by the federal government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
188.
Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
189.
In recording the acquisition cost of an entire business, a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller's book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.
Ans: A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
190.
Research and development costs a. are classified as intangible assets. b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 40 years.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
191.
A computer company has $2,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,000,000. What is the amount of net income or loss after these R & D costs are accounted for? a. $500,000 loss b. $2,000,000 net income c. $0 d. Cannot be determined from the information provided.
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
192.
Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $80,000 in legal fees for a patent granted on January 2, 2012. On July 31, 2012, Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2012? a. $600,000 b. $140,000 c. $740,000 d. Some other amount
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 193.
10 - 37
Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises. Cash Accounts Receivable Trademarks Goodwill Research & Development Costs a. b. c. d.
$1,500,000 4,000,000 1,000,000 2,500,000 2,000,000
$9,500,000 $5,500,000 $3,500,000 $7,500,000
Ans: C, SO: 8, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
194.
Rooney Company incurred $420,000 of research and development cost in its laboratory to develop a patent granted on January 1, 2012. On July 31, 2012, Rooney paid $63,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2012, should be: a. $420,000. b. $63,000. c. $483,000. d. $357,000.
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
195.
Mehring Company reported net sales of $360,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company's asset turnover ratio? a. 50 b. 24 c. 1.20 d. 0.83
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
196.
During 2012, Rathke Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Rathke’s asset turnover ratio is a. 2 times. b. 1.6 times. c. 1.3 times. d. .96 times.
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 38 Test Bank for Accounting Principles, Tenth Edition 197.
During 2012, Stein Corporation reported net sales of $3,500,000 and net income of $2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover ratio is a. 3.5 times. b. 2.8 times. c. 2.3 times. d. 1.7 times.
Ans: B, SO: 9, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
198.
Natural resources are generally shown on the balance sheet under a. Intangibles. b. Investments. c. Property, Plant, and Equipment. d. Owner's Equity.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
199.
Which of the following statements concerning financial statement presentation is not a true statement? a. Intangibles are reported separately under Intangible Assets. b. The balances of major classes of assets may be disclosed in the footnotes. c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
200.
Intangible assets a. should be reported under the heading Property, Plant, and Equipment. b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet. d. should be reported as a separate classification on the balance sheet.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
201.
A company has the following assets: Buildings and Equipment, less accumulated depreciation of $2,000,000 Copyrights Patents Timberlands, less accumulated depletion of $2,800,000
$7,600,000 960,000 4,000,000 4,800,000
The total amount reported under Property, Plant, and Equipment would be a. $17,360,000. b. $12,400,000. c. $16,400,000. d. $13,360,000. Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 39
a
202. A company decides to exchange its old machine and $154,000 cash for a new machine. The old machine has a book value of $126,000 and a fair value of $140,000 on the date of the exchange. The cost of the new machine would be recorded at a. $280,000. b. $294,000. c. $266,000. d. cannot be determined.
Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
203. A company exchanges its old office equipment and $60,000 for new office equipment. The old office equipment has a book value of $42,000 and a fair value of $30,000 on the date of the exchange. The cost of the new office equipment would be recorded at a. $102,000. b. $90,000. c. $72,000. d. cannot be determined.
Ans: B, SO: 10, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
204. In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is a. recorded as a gain or loss. b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss.
Ans: A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
205. Gains on an exchange of plant assets that has commercial substance are a. deducted from the cost of the new asset acquired. b. deferred. c. not possible. d. recognized immediately.
Ans: D, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
206. Losses on an exchange of plant assets that has commercial substance are a. not possible. b. deferred. c. recognized immediately. d. deducted from the cost of the new asset acquired.
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
207. The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the a. book value of the old asset. b. fair value of the old asset. c. book value of the asset acquired. d. fair value of the new asset.
Ans: B, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 40 Test Bank for Accounting Principles, Tenth Edition 208.
The cost of land includes all of the following except a. real estate brokers’ commissions. b. closing costs. c. accrued property taxes. d. parking lots.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
209.
A term that is not synonymous with property, plant, and equipment is a. plant assets. b. fixed assets. c. intangible assets. d. long-lived tangible assets.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210.
The factor that is not relevant in computing depreciation is a. replacement value. b. cost. c. salvage value. d. useful life.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
211.
Depreciable cost is the a. book value of an asset less its salvage value. b. cost of an asset less its salvage value. c. cost of an asset less accumulated depreciation. d. book value of an asset.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
212.
Santayana Company purchased a machine on January 1, 2010, for $20,000 with an estimated salvage value of $5,000 and an estimated useful life of 8 years. On January 1, 2012, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $5,000. Using the straight-line method, the new annual depreciation will be a. $1,125. b. $1,250. c. $1,500. d. $1,667.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
213.
Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as a. capital expenditures. b. expense expenditures. c. improvements. d. revenue expenditures.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 214.
10 - 41
Improvements are a. revenue expenditures. b. debited to an appropriate asset account when they increase useful life. c. debited to accumulated depreciation when they do not increase useful life. d. debited to an appropriate asset account when they do not increase useful life.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
215.
A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the a. salvage value of the asset sold. b. market value of the asset sold. c. book value of the asset sold. d. accumulated depreciation on the asset sold.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
216.
The entry to record depletion expense a. decreases owner's equity and assets. b. decreases net income and increases liabilities. c. decreases assets and liabilities. d. decreases assets and increases liabilities.
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
217.
All of the following are intangible assets except a. copyrights. b. goodwill. c. patents. d. research and development costs.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
218.
A purchased patent has a legal life of 20 years. It should be a. expensed in the year of acquisition. b. amortized over 20 years regardless of its useful life. c. amortized over its useful life if less than 20 years. d. not amortized.
Ans: C, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
219.
The asset turnover ratio is computed by dividing a. net income by average total assets. b. net sales by average total assets. c. net income by ending total assets. d. net sales by ending total assets.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 42 Test Bank for Accounting Principles, Tenth Edition a
220. In an exchange of plant assets that has commercial substance a. neither gains nor losses are recognized immediately. b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately.
Ans: D, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
221.
As a recent graduate of State University you’re aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.
Ans: B, SO: 3, Bloom: K, Difficulty: Hard, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
222.
Salem Company hired Kirk Construction to construct an office building for £8,000,000 on land costing £2,000, 000, which Salem Company owned. The building was complete and ready to be used on January 1, 2011 and it has a useful life of 40 years. The price of the building included land improvements costing £600,000 and personal property costing £750,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2011? a. £335,000 b. £200,000 c. £426,250 d. £376,250
Ans: D, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
223.
Salem Company hired Kirk Construction to construct an office building for £8,000,000 on land costing £2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2011 and it has a useful life of 40 years. The price of the building included land improvements costing £600,000 and personal property costing £750,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company’s December 31, 2011 statement of financial position? a. £7,665,000 b. £7,573,750 c. £6,483,750 d. £7,800,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets 224.
10 - 43
IFRS allows companies to revalue plant assets to fair value. Which of the following statements is true regarding revaluation? a. At the time a company purchases an asset it must decide whether to follow revaluation procedures for the asset; once the election is made, it must be followed for the remainder of the asset’s useful life. b. Assets that are experiencing rapid price changes must be revalued quarterly, other assets can be revalued on an annual basis. c. The journal entry to record a revaluation when the asset’s price has increased includes a credit to the account revaluation surplus. d. All of the choices are correct regarding revaluation of plant assets.
Ans: C, SO: 4, Bloom: K, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
225.
IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value, where is the account “Revaluation Surplus” reported? a. On the income statement as part of income from continuing operations (other revenues and gains). b. On the income statement as part of discontinued operations (discontinuing historical cost). c. On the statement of financial position as part of accumulated comprehensive income (equity). d. All of the choices are acceptable methods for the reporting of “Revaluation Surplus”.
Ans: C, SO: 4, Bloom: K, Difficulty: Hard, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
226.
Which of the following statements concerning IFRS and U.S. GAAP is true? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of the choices are true regarding IFRS and U.S. GAAP.
Ans: B, SO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 44 Test Bank for Accounting Principles, Tenth Edition
Answers to Multiple Choice Questions Item
57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.
Ans.
d d b c a b c a d d d c b b a d d b a d c c d a c
Item
82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
Ans.
c c a c b d c c a b b b d a c c a a c a c c a d c
Item
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131.
Ans.
b d b a b d b c c a d a a c a c a b c b d a b c a
Item
132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156.
Ans.
b c d c a a d b c b d c c b c c d d c b d d b d b
Item
157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181.
Ans.
a c d c a a b c d c d c a c c d d b d d c b d b d
FOR INSTRUCTOR USE ONLY
Item
182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. a 202. a 203. a 204. a 205. a 206.
Ans.
a c a b c b c a b a b c b c b b c d d b b b a d c
Item a
207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. a 220. 221. 222. 223. 224. 225. 226. a
Ans.
b d c a b a d d c a d c b d b d c c c b
Plant Assets, Natural Resources, and Intangible Assets
10 - 45
BRIEF EXERCISES BE 227 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Parking lots _____ 2. Electricity used by a machine _____ 3. Excavation costs _____ 4. Interest on building construction loan _____ 5. Cost of trial runs for machinery _____ 6. Drainage costs _____ 7. Cost to install a machine _____ 8. Fences _____ 9. Unpaid (past) property taxes assumed _____10. Cost of tearing down a building when land and a building on it are purchased Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 227 1. 2. 3. 4. 5.
LI X B B E
(5 min.) 6. 7. 8. 9. 10.
L E LI L L
BE 228 DeLong Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $70,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account. Ans: N/A, SO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 228
(3 min.)
Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Land acquisition cost
$70,000 6,000 5,000 5,700 1,200 $87,900
FOR INSTRUCTOR USE ONLY
10 - 46 Test Bank for Accounting Principles, Tenth Edition BE 229 Hadicke Company purchased a delivery truck for $45,000 on January 1, 2012. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2012 and 2013. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 229 (4 min.) Double the straight-line rate: 1 ÷ 5 = 20%; 20% × 2 = 40% 2012: Book value ($45,000 – 0) × 40% = $18,000 depreciation expense 2013: Book value ($45,000 – $18,000) × 40% = $10,800 depreciation expense BE 230 Hadicke Company purchased a delivery truck for $45,000 on January 1, 2012. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2012 and 22,000 miles in 2013. Compute depreciation expense using the units-of-activity method for the years 2012 and 2013. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230
(4 min.)
Depreciation expense per mile: ($45,000 – $10,000) ÷ 100,000 miles = $.35 per mile Depreciation expense for 2012: Depreciation expense for 2013:
18,000 miles ($.35 per mile) = $6,300 22,000 miles ($.35 per mile) = $7,700
BE 231 Karnes Company purchased a truck for $66,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity
$
Double-declining-balance
$
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 231
(6 min.)
Units-of-activity [($66,000 – $6,000) ÷ 100,000] × 27,000 = $16,200
$_
16,200
Double-declining-balance $_ year 1— [$66,000 × (1 ÷ 4 × 2)] = $33,000 year 2— [($66,000 – $33,000) × (1 ÷ 4 × 2)] = $16,500
16,500
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 47
BE 232 On January 1, 2010, Reyes Company purchased a computer system for $30,500. The system had an estimated useful life of 5 years and no salvage value. At January 1, 2012, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2012 and 2013? Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 232
(4 min.)
Original depreciation: $30,500 ÷ 5 = $6,100 per year Book value at January 1, 2012: $30,500 – ($6,100 + $6,100) = $18,300 Depreciation for 2012 and 2013: $18,300 ÷ 2 = $9,150 per year BE 233 Miley Enterprises sold equipment on January 1, 2012 for $10,000. The equipment had cost $48,000. The balance in Accumulated Depreciation at January 1 is $40,000. What entry would Miley make to record the sale of the equipment? Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 233
(4 min.)
Calculate gain or loss on sale: Proceeds Book value Gain on Sale
$10,000 8,000 ($48,000 – $40,000) $2,000
Entry to record sale: Cash .............................................................................................. Accumulated Depreciation—Equipment ......................................... Gain on Sale.......................................................................... Equipment .............................................................................
10,000 40,000 2,000 48,000
BE 234 On January 1, 2012, Lakeside Enterprises purchased natural resources for $1,800,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion expense for the month? Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 234
(3 min.)
(1) Depletion cost per unit: $1,800,000 ÷ 12,000,000 units = $.15 per unit (2) Depletion expense for January: $.15 × 20,000 = $3,000 BE 235 On January 2, 2012, Harlan Company purchased a patent for $48,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2012 to record amortization expense on the patent? Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 48 Test Bank for Accounting Principles, Tenth Edition Solution 235 (3 min.) Amortization Expense ($48,000 ÷ 20)................................................... Patents ........................................................................................
2,400 2,400
BE 236 Using the following data for Notson, Inc., compute its asset turnover ratio. Notson, Inc. Net Income 2012 Total Assets 12/31/12 Total Assets 12/31/11 Net Sales 2012
$ 123,000 2,443,000 1,880,000 2,135,000
Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 236
(3 min.)
Asset Turnover: =
Net Sales Avg. Total Assets
=
$2,135,000 ($2,443,000 + $1,880,000) ÷ 2
= .99 times
EXERCISES Ex. 237 Kemp Company purchased factory equipment with an invoice price of $90,000. Other costs incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be __________. Ans: N/A, SO: 1,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 237
(10 min.)
(a)
Invoice cost Freight costs Installation wiring and foundation Material and labor costs in testing Acquisition cost
(b)
If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be 25% (8 years = 12.5% 2).
FOR INSTRUCTOR USE ONLY
$90,000 1,100 2,200 700 $94,000
Plant Assets, Natural Resources, and Intangible Assets
10 - 49
Ex. 238 For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required." (a) The $60 cost of repairing a printer was charged to Equipment. (b) The $5,000 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck. (c) The $6,000 closing costs associated with the acquisition of land were debited to Legal Expense. (d) A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 238 (a)
(b)
(c)
(d)
(10 min.)
Maintenance and Repairs Expense ............................................. Equipment ..........................................................................
60
Truck ........................................................................................... Maintenance and Repairs Expense ....................................
5,000
Land ........................................................................................... Legal Expense ....................................................................
6,000
Equipment ................................................................................... Freight-In ............................................................................
500
60
5,000
6,000
500
Ex. 239 Lewallen Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land. Debits 1. Cost of real estate purchased as a plant site (land and building). 2. Accrued real estate taxes paid at the time of the purchase of the real estate. 3. Cost of demolishing building to make land suitable for construction of a new building. 4. Architect's fees on building plans. 5. Excavation costs for new building. 6. Cost of filling and grading the land. 7. Insurance and taxes during construction of building. 8. Cost of repairs to building under construction caused by a small fire. 9. Interest paid during the year, of which $54,000 pertains to the construction period. 10. Full payment to building contractor. 11. Cost of parking lots and driveways. 12. Real estate taxes paid for the current year on the land. Total Debits
FOR INSTRUCTOR USE ONLY
$ 250,000 4,000 15,000 14,000 24,000 5,000 6,000 7,000 64,000 780,000 46,000 4,000 $1,219,000
10 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 239
(Cont.)
Credits 13. Insurance proceeds for fire damage. 14. Proceeds from salvage of demolished building Total Credits
$3,000 3,500 $6,500
Instructions Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns. Item
Land
Buildings
Other
Account Title
Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA
Solution 239 Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Totals
(15 min.) Land $250,000 4,000 15,000
Buildings
Other
Account Title
$ 7,000 10,000
Fire Loss Interest Expense
46,000 4,000 (3,000)
Land Improvements Taxes Expense Fire Loss
$ 14,000 24,000 5,000 6,000 54,000 780,000
(3,500) $270,500
$878,000
$64,000
Ex. 240 On March 1, 2012, Joyner Company acquired real estate on which it planned to construct a small office building. The company paid $90,000 in cash. An old warehouse on the property was razed at a cost of $7,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney's fee for work concerning the land purchase, $4,000 real estate broker's fee, $7,800 architect's fee, and $14,000 to put in driveways and a parking lot. Instructions Determine the amount to be reported as the cost of the land. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Solution 240
10 - 51
(4 min.)
Cost of land Cash paid .............................................................. Net cost of removing warehouse ($7,600 – $1,700) Attorney's fee ......................................................... Real estate broker's fee ....................................... Total .........................................................
$90,000 5,900 1,100 4,000 $101,000
Ex. 241 Conroy Company purchased a machine at a cost of $80,000. The machine is expected to have a $5,000 salvage value at the end of its 5-year useful life. Instructions Compute annual depreciation for the first and second years using the (a) straight-line method. (b) double-declining-balance method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 241
(8 min.)
(a) Straight-line method: Years 1 and 2 depreciation = $15,000/yr. ($80,000 – $5,000) 5 (b) Double-declining-balance method: Year 1 depreciation = $32,000 ($80,000 – 0) × *40% Year 2 depreciation = $19,200 ($80,000 – $32,000) × 40% *(1/5 × 2) Ex. 242 Guardado Company purchased a new machine for $400,000. It is estimated that the machine will have a $40,000 salvage value at the end of its 5-year useful service life. The double-decliningbalance method of depreciation will be used. Instructions Prepare a depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 52 Test Bank for Accounting Principles, Tenth Edition Solution 242
(10 min.) Declining-balance rate = 2 ÷ 5 = 40%
Book Value Beginning Depreciation Year of Year × Rate = 1 $400,000 × 40% 2 240,000 × 40% 3 144,000 × 40% 4 86,400 × 40% 5 51,840 × 40%
Annual Depreciation Expense $160,000 96,000 57,600 34,560 11,840*
End of Year Accumulated Book Value Depreciation End of Year $160,000 $240,000 256,000 144,000 313,600 86,400 348,160 51,840 360,000 40,000
*Adjusted to $8,880 because ending book value should not be less than expected salvage value. Ex. 243 Marlow Company purchased equipment on January 1, 2011 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life. Instructions Answer the following independent questions. 1. Compute the amount of depreciation expense for the year ended December 31, 2011, using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2011 and 24,000 units are produced in 2012, what is the book value of the equipment at December 31, 2012? The company uses the units-ofactivity depreciation method. 3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2013? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 243
(15 min.) C–S Years
1.
Straight-line method: =
2.
Units-of-activity method: =
=
C–S Units
($90,000 – $5,000) 5
=
2011 16,000 units × $.85 2012 24,000 units × $.85 Accumulated depreciation
= $13,600 = 20,400 = $34,000
Cost of asset Less: Accumulated Depreciation Book value
$90,000 34,000 $56,000
= $17,000 per year
($90,000 – $5,000) 100,000 units
FOR INSTRUCTOR USE ONLY
= $0.85 per unit
Plant Assets, Natural Resources, and Intangible Assets Solution 243
10 - 53
(Cont.)
3. Double-declining-balance method:
2011 2012 2013
Book Value Beginning of Year × $90,000 54,000 32,400
Declining Balance Rate 40% 40% 40%
=
Depreciation Expense $36,000 21,600 12,960
Accumulated Depreciation $36,000 57,600 70,560
Ex. 244 A plant asset acquired on October 1, 2012, at a cost of $400,000 has an estimated useful life of 10 years. The salvage value is estimated to be $40,000 at the end of the asset's useful life. Instructions Determine the depreciation expense for the first two years using: (a) the straight-line method. (b) the double-declining-balance method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 244 (a)
(10 min.)
Straight-line method Year 1 =
($400,000 – $40,000) 10 years
= $36,000 × 3 ÷ 12 = $9,000
Year 2 $36,000 (b)
Double-declining-balance method Constant rate — 2 ÷ 10 = 20% Year 1 $400,000 × 20% × 3 ÷ 12 = $20,000 Year 2 $380,000 × 20% = $76,000
Ex. 245 Andy’s, a popular pizza hang-out, has a thriving delivery business. Andy’s has a fleet of three delivery automobiles. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows: Accumulated Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year 1 $21,000 $3,000 75,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 23,500 2,500 70,000 2,000 19,000 Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the Depreciation Expense for each car for the current year. (c) Make one compound journal entry to record the annual Depreciation Expense for the fleet. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 245
(a)
(10 min.)
Car 1 =
($21,000 – $3,000) 75,000 miles
= $0.24 per mile
Car 2 =
($18,000 – $2,400) 60,000 miles
= $0.26 per mile
Car 3 =
($23,500 – $2,500) 70,000 miles
= $0.30 per mile
(b)
Car 1 — Car 2 — Car 3 —
(c)
Depreciation Expense.................................................................. Accumulated Depreciation—Car 1 ...................................... Accumulated Depreciation—Car 2 ...................................... Accumulated Depreciation—Car 3 ......................................
20,000 miles × $0.24 = $4,800 22,000 miles × $0.26 = $5,720 19,000 miles × $0.30 = $5,700 16,220 4,800 5,720 5,700
Ex. 246 The Nichols Clinic purchased a new surgical laser for $90,000. The estimated salvage value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5. Instructions (a) Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity. (b)
If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.
(c)
Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?
Ans: N/A, SO: 3, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Solution 246
(10 min.) ($90,000 – $5,000) 5 years
(a) (1) Straight-line method: =
(2) Units-of-activity method: =
Year 1 2 3 4 5
Year 1 Year 2 Year 3 Year 4 Year 5 Total
10 - 55
1,600 2,200 2,400 1,800 2,000
× × × × ×
$8.50 8.50 8.50 8.50 8.50
Straight-line $17,000 17,000 17,000 17,000 17,000 $85,000
= $17,000 per year
($90,000 – $5,000) 10,000 hours
= $8.50/hour
= $13,600 = 18,700 = 20,400 = 15,300 = 17,000 Units-of-Activity $13,600 18,700 20,400 15,300 7,000 $85,000
(b)
The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life.
(c)
The straight-line method provides the highest depreciation expense for the first year, and therefore the lowest first year income. Over the five-year period, both methods result in the same total depreciation expense ($85,000) and, therefore, the same total income.
Ex. 247 The December 31, 2011 balance sheet of Cooper Company showed Equipment of $76,000 and Accumulated Depreciation of $18,000. On January 1, 2012, the company decided that the equipment has a remaining useful life of 6 years with a $4,000 salvage value. Instructions Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 247
(5 min.)
(a) Book value, 1/1/12 ($76,000 – $18,000) Less salvage value Depreciable cost
$58,000 4,000 $54,000
(b) Revised annual depreciation = $9,000 ($54,000 6)
FOR INSTRUCTOR USE ONLY
10 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 248 Northeast Airlines purchased a 747 aircraft on January 1, 2011, at a cost of $35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On January 1, 2014 the airline revises the total estimated useful life to 15 years with a revised salvage value of $3,500,000. Instructions (a) Compute the depreciation and book value at December 31, 2013 using the straight-line method and the double-declining-balance method. (b)
Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2014.
Ans: N/A, SO: 3 and 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 248 (a)
(20 min.)
Year 2011 2012 2013
Straight-line Depreciable Depreciation Annual Cost × Rate = Depreciation $30,000,000 5% $1,500,000
Accumulated Depreciation $1,500,000 3,000,000 4,500,000
Book Value $33,500,000 32,000,000 30,500,000
Year 2011 2012 2013
Double-declining-balance Book Value Depreciation Annual Beginning Year × Rate = Depreciation $35,000,000 10% $3,500,000 31,500,000 3,150,000 28,500,000 2,835,000
Accumulated Depreciation $ 3,500,000 6,650,000 9,485,000
Book Value $31,500,000 28,350,000 25,515,000
(b)
Book value, January 1, 2014 Less: Revised salvage value Depreciable cost
$30,500,000 3,500,000 $27,000,000
Remaining useful life
12 yrs.
Revised annual depreciation
$2,250,000
Ex. 249 Payton Company purchased a machine on January 1, 2012, at a cost of $90,000. It is expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2012 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the doubledeclining-balance method. Net income for the year ended December 31, 2012 was $55,000 as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.) Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Solution 249
10 - 57
(10 min.)
Depreciation taken: ($90,000 – 0) × .40 = Correct depreciation: ($90,000 – $5,000) ÷ 5 yrs. = Overstatement of depreciation =
$36,000 17,000 $19,000
Accumulated Depreciation ............................................................. Depreciation Expense ........................................................... Correct net income: Net income as reported Add: Overstatement of depreciation expense Correct net income
19,000 19,000
$55,000 19,000 $74,000
Ex. 250 Equipment was acquired on January 1, 2009, at a cost of $90,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2012, using the straight-line method. On January 1, 2013, the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2013. Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 250
(5 min.)
Calculate the book value at the time of the revision: $90,000 – $5,000 10 years
= $8,500 annual depreciation expense
4 years have been depreciated: $8,500 × 4 = $34,000 Book value at the time of the revision: $90,000 – $34,000 = $56,000 Calculate the revised annual depreciation: $56,000 – $6,000 4 years remaining
= $12,500 revised annual depreciation
The depreciation expense for 2013 is $12,500.
FOR INSTRUCTOR USE ONLY
10 - 58 Test Bank for Accounting Principles, Tenth Edition Ex. 251 Steve White the new controller of Weinberg Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2012. His findings are as follows.
Type of Asset Building Warehouse
Date Acquired 1/1/06 1/1/07
Cost $1,600,000 207,000
Accumulated Depreciation 1/1/12 $228,000 40,000
Useful Life in Years Old Proposed 40 50 25 20
Salvage Value Old Proposed $80,000 $52,000 7,000 5,000
All assets are depreciated by the straight-line method. Weinberg Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Steve's proposed changes. Instructions (a) Compute the revised annual depreciation on each asset in 2012. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2012. Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 251 (a)
(10 min.)
Type of Asset Book value, 1/1/12 Less: Salvage value Depreciable cost
Building $1,372,000 52,000 $ 1,320,000
Warehouse $167,000 5,000 $162,000
44
15
30,000
$ 10,800
Revised useful life in years Revised annual depreciation (b)
Dec. 31
$
Depreciation Expense—Building .................. Accumulated Depreciation— Building ................................................
30,000 30,000
Ex. 252 Kennett Company purchased a machine on January 1, 2012. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring.
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Ex. 252
10 - 59
(Cont.)
Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)_____________
(b)______________
(c)______________
(d)______________
(e)_____________
(f)______________
(g)______________
(h)______________
Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 252
(5 min.)
(a) Capital
(b) Capital
(c) Capital
(d) Revenue
(e) Capital
(f)
(g) Revenue
(h) Capital
Capital
Ex. 253 Eckan Word Processing Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2011
July
1
Nov. 3 Dec. 31
Purchased a computer from the Computer Center for $1,900 cash plus sales tax of $150, and shipping costs of $50. Incurred ordinary repairs on computer of $140. Recorded 2011 depreciation on the basis of a four year life and estimated salvage value of $500.
2012
Dec. 31
Recorded 2012 depreciation.
2013
Jan.
Paid $300 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.
1
Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 253 2011
July
Nov.
(15 min.) 1
3
Dec. 31
Equipment ............................................................... Cash ...............................................................
2,100
Maintenance and Repairs Expense ......................... Cash ...............................................................
140
Depreciation Expense ............................................. Accumulated Depreciation—Equipment ......... [($2,100 – $500) ÷ 4 × 1/2]
200
FOR INSTRUCTOR USE ONLY
2,100
140
200
10 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 253 2012
2013
(Cont.)
Dec. 31
Jan.
1
Depreciation Expense ............................................. Accumulated Depreciation—Equipment .......... ($1,600 ÷ 4)
400
Equipment ............................................................... Cash ...............................................................
300
400
300
Ex. 254 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Replacing a Pentium II computer chip with a Pentium IV chip, which increases productive capacity. No extension of useful life expected. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. (h) Painting and lettering of a used truck upon acquisition of the truck. Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 254 (a) (b) (c) (d)
revenue capital revenue revenue
(5 min.) (e) (f) (g) (h)
capital capital revenue capital
Ex. 255 On January 1, 2010 Marsh Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2011 more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Marsh Company uses the straight-line method of depreciation. Instructions Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2011 through the useful life of the new equipment.
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Ex. 255
10 - 61
(Cont.)
Telephone Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) ___________________________________________________________________________ 2011 2012 2013 2014 Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 255
(25 min.)
Telephone Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) ———————————————————————————————————————— 2011 $10,000 $(2,500) $(7,500) 2012 (2,500) 2,500 2013 (2,500) 2,500 2014 (2,500) 2,500 Total $10,000 $(10,000) -0Ex. 256 Gurney Company sold equipment on July 31, 2012 for $75,000. The equipment had cost $210,000 and had $120,000 of accumulated depreciation as of January 1, 2012. Depreciation for the first 6 months of 2012 was $12,000. Instructions Prepare the journal entry to record the sale of the equipment. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 256
(6 min.)
Cash .................................................................................................... Accumulated Depreciation—Equipment ($120,000 + $12,000) ............ Loss on Disposal [$75,000 – ($210,000 – $132,000)] .......................... Equipment ...................................................................................
75,000 132,000 3,000 210,000
Ex. 257 (a)
Payne Company purchased equipment in 2005 for $150,000 and estimated a $10,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2011, there was $98,000 in the Accumulated Depreciation account for this equipment using the straightline method of depreciation. On March 31, 2012, the equipment was sold for $40,000. Prepare the appropriate journal entries to remove the equipment from the books of Payne Company on March 31, 2012. FOR INSTRUCTOR USE ONLY
10 - 62 Test Bank for Accounting Principles, Tenth Edition Ex. 257 (b)
(Cont.)
Judson Company sold a machine for $15,000. The machine originally cost $35,000 in 2009 and $8,000 was spent on a major overhaul in 2012 (charged to Machine account). Accumulated Depreciation on the machine to the date of disposal was $28,000. Prepare the appropriate journal entry to record the disposition of the machine.
(c)
Donahue Company sold office equipment that had a book value of $12,000 for $16,000. The office equipment originally cost $40,000 and it is estimated that it would cost $50,000 to replace the office equipment. Prepare the appropriate journal entry to record the disposition of the office equipment.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 257 (a)
(b)
(c)
(15 min.)
Depreciation Expense.................................................................. Accumulated Depreciation—Equipment .............................. (To record depreciation expense for the first 3 months of 2012. $14,000 × 1/4 = $3,500)
3,500
Cash ............................................................................................ Loss on Disposal ......................................................................... Accumulated Depreciation—Equipment ($98,000 + $3,500) ........ Equipment........................................................................... (To record sale of equipment at a loss)
40,000 8,500 101,500
Cash ............................................................................................ Accumulated Depreciation—Machine .......................................... Machine .............................................................................. (To record disposition of machine at book value)
15,000 28,000
Cash ............................................................................................ Accumulated Depreciation—Office Equipment ............................ Office Equipment ................................................................ Gain on Disposal................................................................. (To record disposal of office equipment at a gain)
16,000 28,000
FOR INSTRUCTOR USE ONLY
3,500
150,000
43,000
40,000 4,000
Plant Assets, Natural Resources, and Intangible Assets
10 - 63
Ex. 258 Hanshew's Lumber Mill sold two machines in 2013. The following information pertains to the two machines: Purchase Useful Salvage Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $66,000 7/1/09 5 yrs. $6,000 Straight-line 7/1/13 $15,000 #2 $50,000 7/1/12 5 yrs. $5,000 Double-declining12/31/13 $30,000 balance Instructions (a) Compute the depreciation on each machine to the date of disposal. (b)
Prepare the journal entries in 2013 to record 2013 depreciation and the sale of each machine.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 258
(20 min.)
(a) Machine #1 Year Depreciable Cost 2009 $60,000 2010 2011 2012 2013 *One-half a year.
Depreciation Rate = 20%
Annual Depreciation $ 6,000* 12,000 12,000 12,000 6,000*
Accumulated Depreciation $ 6,000 18,000 30,000 42,000 48,000
Machine #2 Year 2012 2013
Book Value Beginning of Year $50,000 40,000
DDB Rate 40% 40%
Annual Depreciation $ 10,000* 16,000
Accumulated Depreciation $ 10,000 26,000
*One-half a year. (b)
Machine 1 Depreciation Expense 6,000 Accumulated Depreciation—Equip. 6,000
Machine 2 16,000 16,000
Cash Loss on Sale of Equipment Accumulated Depreciation—Equip. Equipment Gain on Sale of Equipment
30,000 -026,000
15,000 3,000* 48,000 66,000 -0-
*$66,000 – $48,000 = $18,000; $18,000 – $15,000 = $3,000. **$30,000 – ($50,000 – $26,000) = $6,000.
FOR INSTRUCTOR USE ONLY
50,000 6,000**
10 - 64 Test Bank for Accounting Principles, Tenth Edition Ex. 259 Presented below are selected transactions for Corbin Company for 2012. Jan.
1
Received $9,000 scrap value on retirement of machinery that was purchased on January 1, 2002. The machine cost $90,000 on that date, and had a useful life of 10 years with no salvage value.
April 30
Sold a machine for $34,000 that was purchased on January 1, 2009. The machine cost $90,000, and had a useful life of 5 years with no salvage value.
Dec. 31
Discarded a business automobile that was purchased on April 1, 2008. The car cost $27,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.
Instructions Journalize all entries required as a result of the above transactions. Corbin Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2011. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 259 Jan.
1
April 30
Dec. 31
(15 min.)
Cash ................................................................................... Accumulated Depreciation—Machinery .............................. Machinery................................................................... Gain on Disposal ........................................................
9,000 90,000
Depreciation Expense ......................................................... Accumulated Depreciation—Machinery ...................... ($90,000 × 1/5 × 4/12 = $6,000)
6,000
Cash ................................................................................... Accumulated Depreciation—Machinery ($18,000 × 3 1/3)... Machine ..................................................................... Gain on Disposal ($34,000 – $30,000) .......................
34,000 60,000
Depreciation Expense ......................................................... Accumulated Depreciation—Auto ...............................
5,000
Accumulated Depreciation—Auto ($5,000 × 4 3/4).............. Loss on Disposal................................................................. Automobile .................................................................
23,750 3,250
FOR INSTRUCTOR USE ONLY
90,000 9,000
6,000
90,000 4,000
5,000
27,000
Plant Assets, Natural Resources, and Intangible Assets
10 - 65
Ex. 260 Tidwell Company sold the following two machines in 2012:
Cost Purchase date Useful life Salvage value Depreciation method Date sold Sales Price
Machine A $76,000 7/1/08 8 years $4,000 Straight-line 7/1/12 $35,000
Machine B $80,000 1/1/09 5 years $4,000 Double-declining-balance 8/1/12 $16,000
Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2012. The company has recorded depreciation on the machine through December 31, 2011. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 260
(20 min.)
July 1 Depreciation Expense .............................................................. Accumulated Depreciation—Machine A ........................... ($76,000 – $4,000) × 1/8 × 6/12 = $4,500
4,500
Cash ......................................................................................... Accumulated Depreciation—Machine A* .................................. Loss on Disposal ($40,000 – $35,000) ..................................... Machine A........................................................................
35,000 36,000 6,000
4,500
76,000
*2008 ($76,000 – $4,000) × 1/8 × 6/12 = $4,500 2009 ($76,000 – $4,000) × 1/8 = $9,000 2010 $9,000 2011 $9,000 2012 ($76,000 – $4,000) × 1/8 × 6/12 = $4,500 Total accumulated depreciation at date of disposal = $36,000 Aug. 1 Depreciation Expense .............................................................. Accumulated Depreciation—Machine B. .......................... ($80,000 – $62,720) .40 7/12 = $4,032
4,032
Cash ......................................................................................... Accumulated Depreciation—Machine B** ................................. Machine B........................................................................ Gain on Disposal ($16,000 – $13,248).............................
16,000 66,752
**2009 2010 2011 2012
($80,000 – 0) × .40 = $32,000 ($80,000 – $32,000) × .40 = $19,200 ($80,000 – $51,200) × .40 = $11,520 ($80,000 – $62,720) × .40 × 7/12 = $4,032 Total accumulated depreciation at date of disposal = $66,752
FOR INSTRUCTOR USE ONLY
4,032
80,000 2,752
10 - 66 Test Bank for Accounting Principles, Tenth Edition Ex. 261 Koch Company owns equipment that cost $120,000 when purchased on January 1, 2009. It has been depreciated using the straight-line method based on estimated salvage value of $15,000 and an estimated useful life of 5 years. Instructions Prepare Koch Company's journal entries to record the sale of the equipment in these four independent situations. (a) (b) (c) (d)
Sold for $58,000 on January 1, 2012. Sold for $58,000 on May 1, 2012. Sold for $32,000 on January 1, 2012. Sold for $32,000 on October 1, 2012.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 261 (a)
(b)
(c)
(d)
(12 min.)
Cash ......................................................................... Accumulated Depreciation—Equipment .................... [($120,000 – $15,000) 3/5] Equipment ....................................................... Gain on Disposal ...............................................
58,000 63,000
Depreciation Expense ................................................ [($120,000 – $15,000) 1/5 4/12] Accumulated Depreciation—Equipment..............
7,000
Cash ............................................................................. Accumulated Depreciation—Equipment ........................ ($63,000 + $7,000) Equipment ....................................................... Gain on Disposal ...............................................
58,000 70,000
Cash ............................................................................. Accumulated Depreciation—Equipment ........................ Loss on Disposal ........................................................... Equipment ..............................................................
32,000 63,000 25,000
Depreciation Expense ................................................. [($120,000 – $15,000) 1/5 9/12] Accumulated Depreciation—Equipment............
15,750
Cash ............................................................................. Accumulated Depreciation—Equipment ........................ ($63,000 + $15,750) Loss on Disposal ............................................................ Equipment .........................................................
32,000 78,750
FOR INSTRUCTOR USE ONLY
120,000 1,000
7,000
120,000 8,000
120,000
15,750
9,250 120,000
Plant Assets, Natural Resources, and Intangible Assets
10 - 67
Ex. 262 On July 1, 2012, Jenner Inc. invested $560,000 in a mine estimated to have 800,000 tons of ore of uniform grade. During the last 6 months of 2012, 100,000 tons of or were mined and sold. Instructions (a) Prepare the journal entry to record depletion expense. (b) Assume that the 100,000 tons of ore were mined, but only 85,000 units were sold. How are the costs applicable to the 15,000 unsold units reported? Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 262 (a)
Dec. 31
(6 min.) Depletion Expense ....................................... Accumulated Depletion............................ (100,000 $.70)
Cost Units estimated Depletion cost per unit [(a) (b)] (b)
70,000 70,000
(a) $560,000 (b) 800,000 tons $0.70
The costs pertaining to the unsold units are reported in current assets as part of inventory (15,000 $.70 = $10,500).
Ex. 263 Neosho Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no salvage value. During the first year, 200,000 tons of ore were mined and sold. Instructions Prepare the journal entry to record depletion expense. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 263
(5 min.)
Depletion Expense ............................................................................... Accumulated Depreciation ($960,000 1,200,000) × 200,000 ...
160,000 160,000
Ex. 264 Lowe Mining Company purchased a mine for $60 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million. (a)
In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion expense for the first year.
(b)
In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Prepare the journal entry to record depletion expense for the second year.
(c)
What amount and in what account are the tons of ore not sold reported?
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 68 Test Bank for Accounting Principles, Tenth Edition Solution 264 (a)
(10 min.)
Calculation of the depletion expense/ton of coal: ($60,000,000 – $10,000,000) ÷ 250,000 tons = $200 per ton First Year: 50,000 tons × $200 = $10,000,000 Depletion Expense .................................................................... 10,000,000 Accumulated Depletion ..................................................... 10,000,000
(b)
Second Year: 125,000 tons × $200 = $25,000,000 Depletion Expense .................................................................... 25,000,000 Accumulated Depletion ..................................................... 25,000,000 Note: Only expense the ore that is extracted and sold.
(c)
The ore that is extracted and not sold is reported in the current asset section of the balance sheet in an Inventory account. In this case, $5,000,000 (25,000 × $200) should be reported as inventory.
Ex. 265 Dayton Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $4,200,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 12 years. Buildings costing $600,000 are erected on the site and are expected to last for 25 years. Equipment costing $300,000 with an estimated life of 15 years is installed. The buildings and the equipment possess no salvage value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore. Instructions (a) Compute the depletion charge per ton. (b) Compute the depletion expense for the first year. (c) Compute the appropriate first year's depreciation expense for the buildings. (d) Compute the appropriate first year's depreciation expense for the equipment. (e) Prepare journal entries to record depletion and depreciation expenses for the year. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 265
(20 min.)
(a)
Depletion charge per ton: ($4,200,000 – $600,000) ÷ 15 million tons of ore = $.24 per ton
(b)
2,000,000 tons × $.24 = $480,000
(c)
The appropriate useful life is the shorter of the life of the mine or the life of the buildings. In this case, 10 years is the appropriate useful life ($600,000 ÷ 12 years = $50,000).
(d)
Same reasoning as (c). $300,000 ÷ 12 years = $25,000
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Solution 265 (e)
10 - 69
(Cont.)
Depletion Expense ...................................................................... Accumulated Depletion ....................................................... Depreciation Expense ................................................................. Accumulated Depreciation—Buildings ................................ Accumulated Depreciation—Equipment..............................
480,000 480,000 75,000 50,000 25,000
Ex. 266 (a)
A company purchased a patent on January 1, 2012, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2012, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2012.
(b)
Clark Company purchased a franchise from Tastee Food Company for $400,000 on January 1, 2012. The franchise is for an indefinite time period and gives Clark Company the exclusive rights to sell Tastee Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2012.
(c)
Hulse Company incurred research and development costs of $500,000 in 2012 in developing a new product. Prepare the necessary journal entries during 2012 to record these events and any adjustments at year end on December 31, 2012.
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 266 (a)
(b)
(15 min.)
December 31, 2012 Amortization Expense ................................................................. Patents ............................................................................... (To record patent amortization) $2,500,000 ÷ 5 years $500,000 $135,000 ÷ 54 months = $2,500 × 6 15,000 $515,000 January 1, 2012 Franchises................................................................................... Cash ................................................................................... (To record acquisition of Tastee Food franchise)
515,000 515,000
400,000 400,000
December 31, 2012 No amortization of the franchise is required since its life is indefinite. (c)
2012 Research and Development Expense ......................................... Cash ................................................................................... (To record research and development expense for the current year) December 31—no entry.
FOR INSTRUCTOR USE ONLY
500,000 500,000
10 - 70 Test Bank for Accounting Principles, Tenth Edition Ex. 267 On January 2, 2012, Milroy Company purchased a patent for $240,000. The patent has an 8-year estimated useful life and a legal life of 20 years. Instructions Prepare the journal entry to record patent amortization. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 267
(3 min.)
Amortization Expense .......................................................................... Patents ($240,000 8) ................................................................
30,000 30,000
Ex. 268 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization D—Depreciation
P—Depletion N—None of these
____ 1. Goodwill
____
7. Timberlands
____ 2. Land
____
8. Franchises (indefinite life)
____ 3. Buildings
____
9. Licenses (limited life)
____ 4. Patents
____ 10. Land Improvements
____ 5. Copyrights
____ 11. Oil Deposits
____ 6. Research and development costs
____ 12. Equipment
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 268 1. 2. 3. 4.
N N D A
(10 min.) 5. 6. 7. 8.
A N P N
9. 10. 11. 12.
A D P D
Ex. 269 For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end. (1)
Timber rights were purchased on a tract of land for $480,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold.
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets Ex. 269 (2)
10 - 71
(Cont.)
Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 269 (1)
(10 min.)
Calculation of depletion/board ft.: $480,000 ÷ 1,200,000 = $.40/board ft. 75,000 × $.40 = $30,000 Depletion Expense ...................................................................... Accumulated Depletion .......................................................
(2)
30,000 30,000
Legal costs to successfully defend a patent are capitalized. Amortization Expense ................................................................. Patents ............................................................................... ($30,000 ÷ 12 years = $2,500)
2,500 2,500
Ex. 270 During the current year, Penny Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer. (a)
Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.
(b)
Purchased a trademark from another company. The trademark can be renewed indefinitely. Penny Company expects the trademark to contribute to revenue indefinitely.
(c)
Penny Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.
(d)
Penny Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Penny Company is very confident they will obtain this patent in the next few years.
Ans: N/A, SO: 8, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 270
(10 min.)
(a)
Operating Expense. Only successful patent defense costs can be capitalized.
(b)
Intangible Asset. Trademarks are renewable. Since Penny Company expects to use the trademark indefinitely, it will be recorded as an intangible asset, but it will not be amortized.
(c)
Intangible Asset. The patent cost of $2,000,000 should be amortized over its remaining useful life of 15 years since this is shorter than the maximum allowable period of 20 years.
(d)
Operating Expense. Research and development costs are required by GAAP to be expensed. FOR INSTRUCTOR USE ONLY
10 - 72 Test Bank for Accounting Principles, Tenth Edition Ex. 271 Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2012, for Rangel Company: Buildings Goodwill Patents Coal Mine Accumulated Depreciation—Bldg. Accumulated Depletion
$1,280,000 650,000 480,000 440,000 670,000 275,000
Instructions Prepare a partial balance sheet for Rangel Company that shows how the above listed items would be presented. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 271
(10 min.) RANGEL COMPANY Balance Sheet (Partial) December 31, 2012
Property, Plant, and Equipment Buildings $1,280,000 Less: Accumulated depreciation—Bldg. 670,000 Coal Mine 440,000 Less: Accumulated depletion 275,000 Total Property, Plant, and Equipment Intangibles Goodwill Patents Total Intangibles
$610,000 165,000 $775,000 $650,000 480,000 1,130,000
Ex. 272 Compute the asset turnover ratio based on the following: Beginning total assets Ending total assets Net income Net sales
$ 800,000 1,200,000 300,000 2,500,000
Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 272
(3 min.)
Asset turnover ratio = $2,500,000 [($800,000 + $1,200,000) 2] = 2.5 times
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 73
Ex. 273 During 2012 Perez Corporation reported net sales of $3,200,000 and net income of $1,200,000. Its balance sheet reported average total assets of $1,600,000. Instructions Calculate the asset turnover ratio. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 273
(3 min.)
Asset turnover ratio =
$3,200,000 $1,600,000
= 2.0 times
Ex. 274 Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer: PPE I O N/A ____ 1.
Property, Plant, and Equipment Intangibles Other Not on the balance sheet
Goodwill
____ 7. Timberlands
____ 2. Land Improvements
____ 8. Franchises
____ 3. Buildings
____ 9. Licenses
____ 4. Accumulated Depreciation
____ 10. Equipment
____ 5. Trademarks
____ 11. Oil Deposits
____ 6. Research and development costs
____ 12. Land
Ans: N/A, SO: 9, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 274 1. 2. 3. 4. 5. 6.
I PPE PPE PPE I N/A
(5 min.)
Goodwill Land Improvements Buildings Accumulated Depreciation Trademarks Research and development costs
7. 8. 9. 10. 11. 12.
PPE I I PPE PPE PPE
Timberlands Franchises Licenses Equipment Oil Deposits Land
*Ex. 275 Presented below are two independent situations: (a)
Waner Company exchanged an old machine (cost $150,000 less $90,000 accumulated depreciation) plus $10,000 cash for a new machine. The old machine had a fair value of $54,000. Prepare the entry to record the exchange of assets by Waner Company.
FOR INSTRUCTOR USE ONLY
10 - 74 Test Bank for Accounting Principles, Tenth Edition *Ex. 275 (b)
(Cont.)
Fisher Company trades old equipment (cost $90,000 less $54,000 accumulated depreciation) for new equipment. Fisher paid $36,000 cash in the trade. The old equipment that was traded had a fair value of $54,000. Prepare the entry to record the exchange of assets by Fisher Company. The transaction has commercial substance.
Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 275 (a)
(b)
(10 min.)
Machine (new) ($54,000 + $10,000) ............................................ Accumulated Depreciation—Machine .......................................... Loss on Disposal ($60,000 – $54,000) ........................................ Machine .............................................................................. Cash ...................................................................................
64,000 90,000 6,000
Equipment (new) ......................................................................... Accumulated Depreciation—Equipment....................................... Equipment (old)................................................................... Cash ................................................................................... Gain on Disposal.................................................................
90,000 54,000
Fair value of old equipment Book value of old equipment Gain recognized
$54,000 36,000 $18,000
FV of asset exchanged Plus: Cash Cost of new equipment
$54,000 36,000 $90,000
150,000 10,000
90,000 36,000 18,000
*Ex. 276 Colaw Company exchanges equipment with Eaton Company and Mantle Company exchanges equipment with Fiero Company. The following information pertains to the exchanges: Equipment (cost) Accumulated depreciation Fair market value of the equipment Cash paid
Colaw Company $228,000 100,000 150,000 90,000
Mantle Company $192,000 90,000 84,000 -0-
Instructions Prepare the journal entries to record the exchanges on the books of Colaw Company and Mantle Company. The transaction has commercial substance. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets *Solution 276
10 - 75
(15 min.)
Colaw Company: Cost of equipment: Fair value of the old equipment Plus: Cash paid Cost Fair market value Book value of old equipment Gain on disposal
$150,000 90,000 $240,000 150,000 128,000 $22,000
Equipment (new) .................................................................................. Accumulated Depreciation—Equipment ............................................... Cash............................................................................................ Equipment (old) ........................................................................... Gain on Disposal .........................................................................
240,000 100,000 90,000 228,000 22,000
Mantle Company: Fair market value of the old equipment Book value of old equipment Loss on disposal
$84,000 102,000 $ (18,000)
Equipment (new) .................................................................................. Loss on Disposal.................................................................................. Accumulated Depreciation—Equipment ............................................... Equipment (old) ...........................................................................
84,000 18,000 90,000 192,000
Ex. 277 Dodd Company and Hess Company exchanged trucks on January 1, 2012. Dodd's truck cost $140,000, had accumulated depreciation of $115,000, and has a fair value of $15,000. Hess's truck cost $105,000, had accumulated depreciation of $90,000, and has a fair value of $15,000. Instructions (a) Journalize the exchange for Dodd Company. (b) Journalize the exchange for Hess Company. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 277 (a)
(10 min.)
Dodd Company: Cost Less: Accumulated Depreciation Book value Fair value of old truck Loss on disposal
$140,000 115,000 25,000 15,000 $ 10,000
Truck (new) ................................................................................. Accumulated Depreciation—Truck .............................................. Loss on Disposal ......................................................................... Truck (old) ..........................................................................
FOR INSTRUCTOR USE ONLY
15,000 115,000 10,000 140,000
10 - 76 Test Bank for Accounting Principles, Tenth Edition Solution 277 (b)
(Cont.)
Hess Company: Cost Less: Accumulated Depreciation Book value Fair value of old truck Gain (Loss)
$105,000 90,000 15,000 15,000 $ -0-
Truck (new) ................................................................................. Accumulated Depreciation—Truck............................................... Truck (old)...........................................................................
15,000 90,000 105,000
a
Ex. 278
Prepare the journal entries to record the following transactions for Eklund Company which has a calendar year end and uses the straight-line method of depreciation. a)
On September 30, 2012, the company exchanged old delivery equipment and $36,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2010, for $126,000 and was estimated to have a $18,000 salvage value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2011. It is estimated that the fair value of the old delivery equipment is $54,000 on September 30, 2012.
(b)
On June 30, 2012, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair market value of the old office equipment on June 30 was $60,000. The transaction has commercial substance.
Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 278
(15 min.)
(a) September 30, 2012 Depreciation Expense .................................................................. Accumulated Depreciation—Equipment .............................. (To record depreciation expense for the first 9 months of 2012. $108,000 ÷ 5 years = $21,600 × 9/12 = $16,200) Equipment (new) .............................................................................. Accumulated Depreciation—Equipment ($43,200 + $16,200) .......... Loss on Disposal ($66,400 – $54,000) ............................................. Equipment (old) ................................................................... Cash ................................................................................... (To record exchange of old delivery equipment for new delivery equipment at a loss) Fair value of old delivery equipment Cash paid Cost of new delivery equipment
$54,000 36,000 $90,000
FOR INSTRUCTOR USE ONLY
16,200 16,200
90,000 59,400 12,600 126,000 36,000
Plant Assets, Natural Resources, and Intangible Assets a
Solution 278
10 - 77
(Cont.)
(b) June 30, 2012 Equipment (new) ......................................................................... Accumulated Depreciation—Equipment (old) .............................. Equipment (old) .................................................................. Cash ................................................................................... Gain on Disposal ................................................................ (To record exchange of old office equipment for new office equipment) Fair value of old office equipment Cash paid Cost of new office equipment
100,000 35,000 80,000 40,000 15,000
$ 60,000 40,000 $100,000
COMPLETION STATEMENTS 279. With the exception of land, plant assets experience a ______________ in service potential over their useful lives. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
280. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
281. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
282. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
283. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
284. ______________ is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
285. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 78 Test Bank for Accounting Principles, Tenth Edition 286. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
287. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
288. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
289. The declining-balance method of computing depreciation is known as an _____________ depreciation method. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
290. Ordinary repairs which maintain operating efficiency and expected productive life are called _______________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
291. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as __________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
292. If disposal of a plant asset occurs at any time during the year, ___________________ for the fraction of the year to the date of disposal must be recorded. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
293. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry to record the retirement requires a debit to the ___________________________ account and a credit to the _____________________ account. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
294. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
295. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 79
296. Natural resources have two distinguishing characteristics (1) they are physically _______________ in operations, and (2) they are _________________ only by an act of nature. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
297. In recording the purchase of a business, goodwill should be recorded for the excess of ______________ over the _______________ of the net assets acquired. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
298. The allocation of the cost of an asset to expense over its useful life is called _________________ for tangible plant assets, ________________ for natural resources, and _________________ for intangible assets. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
299. The cost of a patent should be amortized over its ____________ life or its ____________ life, whichever is shorter. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
300. The ___________________ ratio is calculated by dividing net sales by average total assets. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
301. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the ______________ of the asset given up plus any cash paid by the purchaser.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
302. A company exchanged an old machine, which originally cost $22,000 and has accumulated depreciation to date of $12,000, for a new machine. The old machine had a fair value of $14,000. The cost of the new machine should be recorded at $_____________.
Ans: N/A, SO: 10, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 80 Test Bank for Accounting Principles, Tenth Edition
Answers to Completion Statements 279. 280. 281. 282. 283. 284. 285. 286. 287. 288. 289. 290. 291. 292. 293.
decline 294. book value Land 295. loss, 16,000 Land 296. extracted, replaceable Land Improvement 297. cost, fair value $20,900 298. depreciation, depletion, amortization Depreciation 299. legal, useful (or useful, legal) accumulated depreciation, cost 300. asset turnover a cost, salvage value, useful life 301. fair value a straight-line 302. 14,000 declining, constant accelerated revenue expenditures capital expenditures depreciation Accumulated Depreciation—Equipment, Equipment
MATCHING 303. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Plant assets Depreciation Book value Salvage value Straight-line method
F. G. H. I. J.
Units-of-activity method Double-declining-balance method MACRS Revenue expenditure Capital expenditure
____
1. Small expenditures which primarily benefit the current period.
____
2. Cost less accumulated depreciation.
____
3. An accelerated depreciation method used for financial statement purposes.
____
4. Tangible resources that are used in operations and are not intended for resale.
____
5. Equal amount of depreciation each period.
____
6. Expected cash value of the asset at the end of its useful life.
____
7. Allocation of the cost of a plant asset to expense over its useful life.
____
8. Material expenditures which increase an asset's operating efficiency, productive capacity, or useful life.
____
9. An accelerated depreciation method used for tax purposes.
____ 10. Useful life is expressed in terms of units of production or expected use. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 81
Answers to Matching 303. 1. 2. 3. 4. 5.
I C G A E
6. 7. 8. 9. 10.
D B J H F
304. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Gain on disposal Loss on disposal Trademark Depletion Useful life
F. G. H. I. J.
Asset turnover ratio Goodwill Amortization Intangible asset Research and development costs
_____
1. Process of allocating the cost of an intangible asset to expense over its useful life.
_____
2. Is only recorded when an exchange has commercial substance.
_____
3. Examples are franchises and licenses.
_____
4. The allocation of the cost of a natural resource to expense over its useful life.
_____
5. Can be identified only with a business as a whole.
_____
6. A symbol that identifies a particular enterprise or product.
_____
7. When book value of asset is greater than the proceeds received from its sale.
_____
8. Must be expensed when incurred.
_____
9. Indicates how efficiently a company is able to generate sales with its assets.
_____ 10. An estimate of the expected productive life of an asset. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching 304. 1. 2. 3. 4. 5.
H A I D G
6. 7. 8. 9. 10.
C B J F E
FOR INSTRUCTOR USE ONLY
10 - 82 Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 305 The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 305 An accelerated depreciation method is a method which produces higher depreciation expense in the early years than in the later years. The choice of an accelerated method can be justified if the asset being depreciated contributes more to the revenue-earning process in the earlier years and less in the later years. In such a situation, an accelerated method would properly match expense to revenue. S-A E 306 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 306 An expenditure is classified as a revenue expenditure if it maintains the operating efficiency and expected productive life of the asset and primarily benefits the current accounting period. Revenue expenditures are usually small amounts that occur frequently throughout the life of the asset and are often called ordinary repairs. An expenditure is classified as a capital expenditure if it increases (rather than maintains) operating efficiency, productive capacity, or expected useful life, and therefore benefits more than one accounting period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset. Capital expenditures can be further classified as either additions or improvements. The distinction between a capital expenditure and a revenue expenditure is not always clear-cut. The purchase of an asset with a relatively insignificant cost (for example, the purchase of a $10 wastebasket with a 5 year useful life) may meet the criteria for classification as a capital expenditure, even though it is similar in many ways to a revenue expenditure (small amount, more frequent occurrence). The accounting constraint of materiality would indicate that this item could be recorded as an expense (more expedient) since it is not material enough to influence the decision of a reasonably prudent creditor or investor. S-A E 307 What are the similarities and differences between the terms depreciation, depletion, and amortization? Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 83
Solution 307 The terms depreciation, depletion, and amortization are all concerned with allocating the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense, depletion to recognizing the cost of a natural resource as expense, and amortization to allocating the cost of an intangible asset to expense. S-A E 308 In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 308 The acquisition cost of property, plant, and equipment would include all expenditures deemed reasonable and necessary to prepare the asset for its intended purpose (use) and place. This includes getting an asset to its proper place, acquiring legal title, and getting the asset ready for its intended use. S-A E 309 Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.” Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 309 Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that has been charged to expense to date; it is not a cash fund. S-A E 310 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 310 Goodwill is the value of all favorable attributes that relate to a business enterprise. As goodwill is the product of these attributes, and would not exist apart from them, goodwill cannot be separated from the company and then sold. This is different from a copyright or patent which can exist independent of a company, and can be sold apart from any other assets.
FOR INSTRUCTOR USE ONLY
10 - 84 Test Bank for Accounting Principles, Tenth Edition S-A E 311 How is a gain or loss on the sale of a plant asset computed? Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 311 In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs. S-A E 312 (Ethics) Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services. PRS's accountant, Mary Linsey, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Jack Grand, the controller, instructed Mary to create an intangible asset, named "Goodwill" and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway." Required: 1. What are the ethical issues? 2. What should Mary do? Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Plant Assets, Natural Resources, and Intangible Assets
10 - 85
Solution 312 1. The following are some of the ethical issues: a. Whether PRS should continue to obtain its information by deception b. Whether PRS makes a practice of pirating software c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS. 2. Mary should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year. She cannot allow her integrity to be compromised by misrecording these economic events. She could also point out that Mr. Grand's attempt to delay recognition of the losses will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more scrutiny than would otherwise be the case. S-A E 313 (Communication) The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Dan Carlin, does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?" Required: Write a short memo to Mr. Carlin explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
10 - 86 Test Bank for Accounting Principles, Tenth Edition Solution 313
MEMO TO:
Dan Carlin, President
FROM: Mary Martin, Accountant RE:
Loss on Pittsburg showcase
I understand that you are concerned about the loss on the Pittsburg showcase house. You have said that a loss is not possible, since we sold the house for more than we paid for it. Ordinarily, it would not be possible for any fixed asset to generate a loss if sold for more than the original purchase price. Accounting rules allow for writing down impaired assets, and depreciation also reduces the cost basis. In our case, however, we had added enough costs that it was almost like we purchased the house twice. Thus, we had a book value of $185,000 at the time of the sale, even though we had taken three years' depreciation. All in all, I think that the Pittsburg house was still an excellent investment—we got far more benefit from the $10,000 "loss" than we would have had spending ten times that much in advertising. To prevent the problem in the future, however, you could have the Accounting Department calculate the book value before you negotiate a sales contract. That way, you'll know the effect of the transaction on our income—though you should remember that book value is not a substitute for market value; we'll still have to rely on real estate agents for that. Let me know if you have further questions. (signature)
FOR INSTRUCTOR USE ONLY
CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
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SO
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7 8 8 8 8 9 1 2
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33. 34. sg 35. sg 36. sg 37. sg,a 38.
3 5 6 7 8 9
K C K K K K
117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
6 6 6 6 6 6 6 6 6 6 6 6 7 7 6 6 7 6 6 7 7 7 7 7 7 7
K K K K K K K K C C C C C C AP AP C C C C C C C K K AP
143. 8 144. 8 a 145. 9 a 146. 9 a 147. 9 a 148. 9 st 149. 1 sg 150. 1 sg 151. 2,3 st 152. 4 sg 153. 5 st 154. 5 sg 155. 6 st 156. 6 sg 157. 6 st 158. 7 sg 159. 7 st,a 160. 9 161. 9 162. 9 163. 9 164. 9 165. 9 166. 9
K K K AP C K K K K K C K AP K K K K K K K K K K K
173. 174.
6 6
AP AP
175. 176.
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 2 2 2 2
C K C C K K C AP
9. 10. 11. 12. 13. 14. 15. 16.
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39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64.
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K C K K K C C C C K K K C AP AN AP C C AN AN AP C C K K AN
65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.
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C K C K K C AP C
17. 18. 19. 20. 21. 22. 23. 24.
3 4 4 5 5 5 6 6
K AP K K K C K K
25. 26. 27. 28. 29. a 30. sg 31. sg 32.
sg
Multiple Choice Questions AN AP AP AP AP AP AP AP AP C C AP C C AP AP AP C K AP K K K K C AP
91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.
3 3 3 3 3 3 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 6
AP AP K AP C C K AP C AP C AP C K K K K K C K AP AP K K K K
Brief Exercises 167. 168. sg st a
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169. 170.
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171. 172.
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AP AN
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
a
7 9
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Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 177. 178. 179. 180. 181. 182.
1,4 2 2 2 3 3
AP AP AP AN AN AN
183. 184. 185. 186. 187. 188.
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AP AP AP AN S AP
189. 190. 191. 192. 193. 194.
3 5 5,9 6 6 6
AP AP AP AP AP AP
195. 196. 197. 198. 199. 200.
6 6,7 6,7 6,7 6,7 7
AP AN AP AP AP AP
201. 202. 203.
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212. 213.
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Completion Statements 204. 205.
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206. 207.
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208. 209.
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210. 211.
Matching Statements 214.
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Short-Answer Essay 217. 218.
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219. 220.
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13. 14. 15. 16. 17. 33. 61.
TF TF TF TF TF TF MC
62. 63. 72. 73. 74. 75. 76.
MC MC MC MC MC MC MC
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97. 98.
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Study Objective 1 MC 43. MC 46. MC 44. MC 47. MC 45. MC 149. Study Objective 2 MC 57. MC 65. MC 58. MC 66. MC 59. MC 67. MC 60. MC 68. MC 63. MC 69. MC 64. MC 70. Study Objective 3 MC 84. MC 91. MC 85. MC 92. MC 86. MC 93. MC 87. MC 94. MC 88. MC 95. MC 89. MC 96. MC 90. MC 151. Study Objective 4 MC 115. MC 177. MC 152. MC 186.
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MC MC MC
150. 167. 168.
MC BE BE
177. 204. 205.
Ex C C
MC MC MC MC MC MC
71. 151. 169. 178. 179. 180.
MC MC BE Ex Ex Ex
206. 207.
C C
MC MC MC MC MC MC MC
170. 171. 181. 182. 183. 184. 185.
BE BE Ex Ex Ex Ex Ex
189. 208.
Ex C
Ex Ex
187. 209.
Ex C
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
20. TF 21. TF 22. TF 34. TF 101. MC
102. 103. 104. 105. 106.
MC MC MC MC MC
107. 108. 109. 110. 111.
23. TF 24. TF 35. TF 108. MC 116. MC 117. MC
118. 119. 120. 121. 122. 123.
MC MC MC MC MC MC
124. 125. 126. 127. 128. 131.
25. TF 36. TF 129. MC 130. MC
133. 136. 137. 138.
MC MC MC MC
139. 140. 141. 142.
26. 27.
28. 29.
TF TF
37. 143.
146. 147. a 148.
MC MC MC
TF TF
a
a
a
a
30. TF 38. TF a 145. MC
a
160. 161. 162.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 5 MC 112. MC 172. MC 113. MC 185. MC 114. MC 188. MC 153. MC 190. MC 154. MC 191. Study Objective 6 MC 132. MC 173. MC 134. MC 174. MC 135. MC 192. MC 155. MC 193. MC 156. MC 194. MC 157. MC 195. Study Objective 7 MC 158. MC 197. MC 159. MC 198. MC 175. BE 199. MC 196. Ex 200. Study Objective 8 TF 144. MC 219. MC 203. Ex Study Objective a9 MC 163. MC 166. MC 164. MC a176. MC 165. MC a191.
BE Ex Ex Ex Ex
210. 215. 216.
C SA SA
BE BE Ex Ex Ex Ex
196. 197. 198. 199. 211. 217.
Ex Ex Ex Ex C SA
Ex Ex Ex Ex
201. 202. 212. 213.
Ex Ex C C
218. 220.
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SA SA
SA
MC BE Ex
BE = Brief Exercise Ex = Exercise
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Explain a current liability, and identify the major types of current liabilities. A current liability is a debt that a company can reasonably expect to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. 2. Describe the accounting for notes payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note. Interest expense accrues over the life of the note. At maturity, the amount paid equals the face value of the note plus accrued interest.
FOR INSTRUCTOR USE ONLY
11 - 4
Test Bank for Accounting Principles, Tenth Edition
3. Explain the accounting for other current liabilities. Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies initially record unearned revenues in an Unearned Revenue account. As the company earns the revenue, a transfer from unearned revenue to earned revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet. 4. Explain the financial statement presentation and analysis of current liabilities. Companies should report the nature and amount of each current liability in the balance sheet or in schedules in the notes accompanying the statements. The liquidity of a company may be analyzed by computing working capital and the current ratio. 5. Describe the accounting and disclosure requirements for contingent liabilities. If the contingency is probable (likely to occur) and the amount is reasonably estimable, the company should record the liability in the accounts. If the contingency is only reasonably possible (it could happen), then it should be disclosed only in the notes to the financial statements. If the possibility that the contingency will happen is remote (unlikely to occur), it need not be recorded or disclosed. 6. Compute and record the payroll for a pay period. The computation of the payroll involves gross earnings, payroll deductions, and net pay. In recording the payroll, companies debit salaries and wages expense for gross earnings, credit individual tax and other liability accounts for payroll deductions, and credit salaries and wages payable for net pay. When the payroll is paid, companies debit Salaries and Wages Payable, and credit Cash. 7. Describe and record employer payroll taxes. Employer payroll taxes consist of FICA, federal unemployment taxes, and state unemployment taxes. The taxes are usually accrued at the time the company records the payroll, by debiting Payroll Tax Expense and crediting separate liability accounts for each type of tax. 8. Discuss the objectives of internal control for payroll. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy of the accounting records pertaining to payrolls. a
9. Identify additional fringe benefits associated with employee compensation. Additional fringe benefits associated with wages are paid absences (paid vacations, sick pay benefits, and paid holidays), and post-retirement benefits (pensions, health care, and life insurance).
TRUE-FALSE STATEMENTS 1.
A current liability must be paid out of current earnings.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 3.
11 - 5
The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
4.
A company whose current liabilities exceed its current assets may have a liquidity problem.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
5.
Notes payable usually require the borrower to pay interest.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
6.
Notes payable are often used instead of accounts payable.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7.
A note payable must always be paid before an account payable.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
8.
A $60,000, 8%, 9-month note payable requires an interest payment of $3,600 at maturity.
Ans: T, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
9.
Most notes are not interest bearing.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
10.
With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
11.
Interest expense on a note payable is only recorded at maturity.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
12.
Interest expense is reported under Other Expenses and Losses in the income statement.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
13.
Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
14.
The higher the sales tax rate, the more profit a retailer can earn.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
15.
Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000.
Ans: F, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 6 16.
Test Bank for Accounting Principles, Tenth Edition During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
17.
Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
The current ratio permits analysts to compare the liquidity of different sized companies.
Ans: T, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
Working capital is current assets divided by current liabilities.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
Contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will actually occur.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
A contingent liability is a liability that may occur if some future event takes place.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
22.
In concept, the estimating of Warranty Expense when products are sold under warranty is similar to the estimating of Bad Debts Expense based on credit sales.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
23.
FICA taxes and federal income taxes are levied on employees' earnings without limit.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
The employer incurs a payroll tax expense equal to the amount withheld from the employees' wages for federal income taxes.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
26.
Internal control over payroll is not necessary because employees will complain if they do not receive the correct amount on their payroll checks.
Ans: F, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
27.
The timekeeping function includes supervisors monitoring hours worked through time cards and time reports.
Ans: T, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 28.
11 - 7
The human resources department documents and authorizes employment of new employees.
Ans: T, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
29.
Payroll activities involve three functions: hiring employees, preparing the payroll, and paying the payroll.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics a
30.
Post-retirement benefits consist of payments by employers to retired employees for health care, life insurance, and pensions.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
31.
A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
Notes payable usually are issued to meet long-term financing needs.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
In a given year, total warranty expense is the sum of actual warranty costs incurred on units sold plus the estimated cost of servicing those units in the future.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
FICA taxes are a voluntary deduction from employee earnings.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
FICA taxes are a deduction from employee earnings and are also imposed upon employers as an expense.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
37.
The objectives of internal accounting control for payrolls are (a) to safeguard company assets from unauthorized payments of payrolls and (b) to assure accuracy and reliability of the accounting records pertaining to payroll.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls a
38.
When a company gives employees rights to receive compensation for absences and the payment for such absences is probable and the amount can be reasonably estimated, the company should accrue a liability.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 8
Test Bank for Accounting Principles, Tenth Edition
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T F T T T
7. 8. 9. 10. 11. 12.
F T F F F T
13. 14. 15. 16. 17. 18.
F F F F F T
19. 20. 21. 22. 23. 24.
F F T T F T
25. 26. 27. 28. 29. a 30.
F F T T F T
31. 32. 33. 34. 35. 36.
F F T T F T
Item
Ans.
37. 38.
T T
a
MULTIPLE CHOICE QUESTIONS 39.
All of the following are reported as current liabilities except a. accounts payable. b. bonds payable. c. notes payable. d. unearned revenues.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
The relationship between current liabilities and current assets is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
42.
A current liability is a debt that can reasonably be expected to be paid a. within one year or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
43.
Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 44.
11 - 9
From a liquidity standpoint, it is more desirable for a company to have current a. assets equal current liabilities. b. liabilities exceed current assets. c. assets exceed current liabilities. d. liabilities exceed long-term liabilities.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
The relationship of current assets to current liabilities is used in evaluating a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
Which of the following is usually not an accrued liability? a. Interest payable b. Wages payable c. Taxes payable d. Notes payable
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
47.
In most companies, current liabilities are paid within a. one year through the creation of other current liabilities. b. the operating cycle through the creation of other current liabilities. c. one year or the operating cycle out of current assets. d. the operating cycle out of current assets.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's a. maturity value. b. market value. c. face value. d. cash realizable value.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
49.
With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 10 Test Bank for Accounting Principles, Tenth Edition 50.
A note payable is in the form of a. a contingency that is reasonably likely to occur. b. a written promissory note. c. an oral agreement. d. a standing agreement.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
51.
The entry to record the proceeds upon issuing an interest-bearing note is a. Interest Expense Cash Notes Payable b. Cash Notes Payable c. Notes Payable Cash d. Cash Notes Payable Interest Payable
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense ................................................................. 18,000 Cash. .................................................................................. 282,000 Notes Payable ............................................................ 300,000 b. Cash ................................................................................... 300,000 Notes Payable ............................................................ 300,000 c. Cash ................................................................................... 300,000 Interest Expense ................................................................. 18,000 Notes Payable ............................................................ 318,000 d. Cash ................................................................................... 300,000 Interest Expense ................................................................. 18,000 Notes Payable ............................................................ 300,000 Interest Payable ......................................................... 18,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
53.
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30? a. Interest Expense ................................................................. 12,000 Interest Payable ......................................................... 12,000 b. Interest Expense ................................................................. 12,000 Cash........................................................................... 12,000 c. Interest Payable .................................................................. 12,000 Cash........................................................................... 12,000 d. Interest Payable .................................................................. 12,000 Interest Expense ........................................................ 12,000
Ans: A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 54.
11 - 11
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable .................................................................... 318,000 Cash .......................................................................... 318,000 b. Notes Payable .................................................................... 300,000 Interest Payable .................................................................. 18,000 Cash .......................................................................... 318,000 c. Interest Expense ................................................................. 18,000 Notes Payable .................................................................... 300,000 Cash .......................................................................... 318,000 d. Interest Payable .................................................................. 12,000 Notes Payable .................................................................... 300,000 Interest Expense ................................................................. 6,000 Cash .......................................................................... 318,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
55.
As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
56.
When an interest-bearing note matures, the balance in the Notes Payable account is a. less than the total amount repaid by the borrower. b. the difference between the maturity value of the note and the face value of the note. c. equal to the total amount repaid by the borrower. d. greater than the total amount repaid by the borrower.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3month, $250,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared? a. Interest Payable .................................................................. Interest Expense ........................................................
5,000
b. Interest Expense ................................................................. Interest Payable .........................................................
20,000
c. Interest Expense ................................................................. Interest Payable .........................................................
5,000
d. Interest Expense ................................................................. Notes Payable............................................................
5,000
5,000 20,000 5,000 5,000
Ans: C, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 12 Test Bank for Accounting Principles, Tenth Edition 58.
On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is a. Notes Payable..................................................................... Cash...........................................................................
255,000
b. Notes Payable..................................................................... Interest Payable .................................................................. Cash...........................................................................
250,000 5,000
c. Notes Payable..................................................................... Interest Payable .................................................................. Cash...........................................................................
250,000 20,000
d. Notes Payable..................................................................... Interest Expense ................................................................. Cash...........................................................................
250,000 5,000
255,000
255,000
270,000
255,000
Ans: B, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.
Ans: B, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
60.
The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is a. Notes Payable Interest Payable Cash b. Notes Payable Interest Expense Cash c. Notes Payable Cash d. Notes Payable Cash Interest Payable
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
Sales taxes collected by a retailer are recorded by a. crediting Sales Taxes Revenue. b. debiting Sales Taxes Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 62.
11 - 13
Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Sales taxes collected by the retailer are recorded as a(n) a. revenue. b. liability. c. expense. d. asset.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
64.
On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4month, $100,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable .................................................................. 2,000 Interest Expense ........................................................ 2,000 b. Interest Expense ................................................................. 6,000 Interest Payable ......................................................... 6,000 c. Interest Expense ................................................................. 2,000 Interest Payable ......................................................... 2,000 d. Interest Expense ................................................................. 2,000 Notes Payable............................................................ 2,000
Ans: C, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4month, $100,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable .................................................................... 102,000 Cash .......................................................................... 102,000 b. Notes Payable .................................................................... 100,000 Interest Payable .................................................................. 2,000 Cash .......................................................................... 102,000 c. Notes Payable .................................................................... 100,000 Interest Payable .................................................................. 6,000 Cash .......................................................................... 106,000 d. Notes Payable .................................................................... 100,000 Interest Expense ................................................................. 2,000 Cash .......................................................................... 102,000
Ans: B, SO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 14 Test Bank for Accounting Principles, Tenth Edition 66.
The interest charged on a $200,000 note payable, at the rate of 8%, on a 90-day note would be a. $16,000. b. $8,888. c. $4,000. d. $1,333.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
67.
The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be a. $6,000. b. $3,333. c. $1,500. d. $1,000.
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
68.
The interest charged on a $75,000 note payable, at the rate of 8%, on a 3-month note would be a. $6,000. b. $3,000. c. $1,500. d. $1,000.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
69.
The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be a. $3,000. b. $1,500. c. $750. d. $500.
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
70.
On October 1, 2012, Pennington Company issued an $80,000, 10%, nine-month interestbearing note. If the Pennington Company is preparing financial statements at December 31, 2012, the adjusting entry for accrued interest will include a: a. credit to Notes Payable of $2,000. b. debit to Interest Expense of $2,000 c. credit to Interest Payable of $4,000. d. debit to Interest Expense of $3,000.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 71.
11 - 15
On October 1, 2012, Pennington Company issued an $80,000, 10%, nine-month interestbearing note. Assuming interest was accrued in June 30, 2013, the entry to record the payment of the note on July 1, 2013, will include a: a. debit to Interest Expense of $2,000. b. credit to Cash of $80,000 c. debit to Interest Payable of $6,000. d. debit to Notes Payable of $86,000.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
72.
Crawford Company has total proceeds (before segregation of sales taxes) from sales of $4,770. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is: a. $4,770. b. $4,484. c. $5,056. d. $4,500.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
Reliable Insurance Company collected a premium of $30,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31? a. $0. b. $10,000. c. $20,000. d. $30,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
74.
A company receives $198, of which $18 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Tax Expense for $18. b. credit to Sales Taxes Payable for $18. c. debit to Sales Revenue for $198. d. debit to Cash for $180.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a a debit to Sales Tax Expense for $28. b. debit to Sales Taxes Payable for $28. c. debit to Sales Revenue for $348. d. debit to Cash for $348.
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 16 Test Bank for Accounting Principles, Tenth Edition 76.
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $525,000, what is the amount of the sales taxes owed to the taxing agency? a. $500,000 b. $525,000 c. $26,250 d. $25,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
77.
On January 1, 2012, Howard Company, a calendar-year company, issued $800,000 of notes payable, of which $200,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2012, is a. Current Liabilities, $800,000. b. Long-term Debt, $800,000. c. Current Liabilities, $400,000; Long-term Debt, $400,000. d. Current Liabilities, $200,000; Long-term Debt, $600,000.
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
78.
On January 1, 2012, Donahue Company, a calendar-year company, issued $500,000 of notes payable, of which $125,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2012, is a. Current Liabilities, $500,000. b. Long-term Debt , $500,000. c. Current Liabilities, $125,000; Long-term Debt, $375,000. d. Current Liabilities, $375,000; Long-term Debt, $125,000.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
79.
A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is a. Cash ................................................................................... 1,620 Sales Revenue ........................................................... 1,620 b. Cash ................................................................................... 1,620 Sales Taxes Payable .................................................. 120 Sales Revenue ........................................................... 1,500 c. Cash ................................................................................... 1,500 Sales Tax Expense ............................................................. 120 Sales Revenue ........................................................... 1,620 d. Cash ................................................................................... 1,620 Sales Revenue ........................................................... 1,500 Sales Taxes Revenue ................................................ 120
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 80.
11 - 17
Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed's Bookstore make to show the April remittance? a. Sales Taxes Payable .......................................................... 750 Cash .......................................................................... 750 b. Sales Tax Expense ............................................................. 750 Cash .......................................................................... 750 c. Sales Tax Expense ............................................................. 750 Sales Taxes Payable ................................................. 750 d. No entry required.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $27,300. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $1,300 b. $1,365 c. $65 d. It cannot be determined.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
82.
Valerie's Salon has total receipts for the month of $18,550 including sales taxes. If the sales tax rate is 6%, what are Valerie's sales for the month? a. $17,437 b. $19,663 c. $17,500 d. It cannot be determined.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
83.
The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $273,000, what is the amount of the sales taxes owed to the taxing agency? a. $260,000 b. $273,000 c. $13,650 d. $13,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 18 Test Bank for Accounting Principles, Tenth Edition 85.
Advances from customers are classified as a(n) a. revenue. b. expense. c. current asset. d. current liability.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a long-term liability. d. not be separated from the long-term portion of debt.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
Sales taxes collected by a retailer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
88.
Sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
89.
Julie's Boutique has total receipts for the month of $30,660 including sales taxes. If the sales tax rate is 5%, what are Julie's sales for the month? a. $29,127 b. $29,200 c. $32,193 d. It cannot be determined.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 90.
11 - 19
A cash register tape shows cash sales of $2,500 and sales taxes of $150. The journal entry to record this information is a. Cash ................................................................................... 2,500 Sales Revenue........................................................... 2,500 b. Cash ................................................................................... 2,650 Sales Tax Revenue .................................................... 150 Sales Revenue........................................................... 2,500 c. Cash ................................................................................... 2,500 Sales Tax Expense ............................................................. 150 Sales Revenue........................................................... 2,650 d. Cash ................................................................................... 2,650 Sales Revenue........................................................... 2,500 Sales Taxes Payable ................................................. 150
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
91.
Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance? a. Sales Tax Expense ............................................................. 600 Cash .......................................................................... 600 b. Sales Taxes Payable .......................................................... 600 Cash .......................................................................... 600 c. Sales Tax Expense ............................................................. 600 Sales Taxes Payable ................................................. 600 d. No entry required.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
Oakley Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $32,100. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes? a. $2,247 b. $2,100 c. $3,210 d. It cannot be determined.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
93.
Any balance in an unearned revenue account is reported as a(n) a. current liability. b. long-term debt. c. revenue. d. unearned liability.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 20 Test Bank for Accounting Principles, Tenth Edition 94.
Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable .................................................... 1,200,000 Subscription Revenue ................................................ 1,200,000 b. Cash ................................................................................... 1,200,000 Unearned Subscription Revenue ................................ 1,200,000 c. Subscriptions Receivable .................................................... 200,000 Unearned Subscription Revenue ................................ 200,000 d. Prepaid Subscriptions ......................................................... 1,200,000 Cash........................................................................... 1,200,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
95.
Hilton Company issued a four-year interest-bearing note payable for $400,000 on January 1, 2011. Each January the company is required to pay $100,000 on the note. How will this note be reported on the December 31, 2012 balance sheet? a. Long-term debt, $400,000. b. Long-term debt, $300,000. c. Long-term debt, $200,000; Long-term debt due within one year, $100,000. d. Long-term debt, $300,000; Long-term debt due within one year, $100,000.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
96.
Kelly Rice has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Rice account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Prepaid Service Fees Service Revenue d. No entry is required when the engagement is concluded.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
97.
Which one of the following is shown first under current liabilities by many companies as a matter of custom? a. Accrued expenses b. Current maturities of long-term debt c. Sales taxes payable d. Notes payable
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
98.
Working capital is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.
Ans: B, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 99.
11 - 21
The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
100.
Hardy Company has current assets of $90,000, current liabilities of $100,000, long-term assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are: a. $90,000 and .90:1. b. -$10,000 and 1.50:1. c. $10,000 and .90:1. d. -$10,000 and .90:1.
Ans: D, SO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
101.
Madden Electric began operations in 2012 and provides a one year warranty on the products it sells. They estimate that 10,000 of the 200,000 units sold in 2012 will be returned for repairs and that these repairs will cost $8 per unit. The cost of repairing 8,000 units presented for service in 2012 was $64,000. Madden should report a. warranty expense of $16,000 for 2012. b. warranty expense of $80,000 for 2012. c. warranty liability of $80,000 on December 31, 2012. d. no warranty obligation on December 31, 2012, since this is only a contingent liability.
Ans: B, SO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
102.
Lincoln Company sells 600 units of a product that has a one-year warranty on parts. The average cost of honoring one warranty contract is $60. During the year 30 contracts are honored at a cost of $1,800. It is estimated that 60 contracts will be honored in the following year. The adjusting entry at the end of the current year will include a a. credit to Warranty Liability for $3,600. b. credit to Warranty Liability for $5,400. c. debit to Warranty Expense for $1,800. d. debit to Warranty Expense for $5,400.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
A contingent liability need only be disclosed in the financial statement notes when the likelihood of the contingency is a. reasonably possible. b. probable. c. remote. d. unlikely.
Ans: A, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 22 Test Bank for Accounting Principles, Tenth Edition 104.
If a contingent liability is reasonably estimable and it is reasonably possible that the contingency will occur, the contingent liability a. should be recorded in the accounts. b. should be disclosed in the notes accompanying the financial statements. c. should not be recorded or disclosed in the notes until the contingency actually happens. d. must be paid for the amount estimated.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period. d. only if the repairs are expected to be made within one year.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
106.
If a liability is dependent on a future event, it is called a a. potential liability. b. hypothetical liability. c. probabilistic liability. d. contingent liability.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
107.
Current maturities of long-term debt a. require an adjusting entry. b. are optionally reported on the balance sheet. c. can be properly classified during balance sheet preparation, with no adjusting entry required. d. are not considered to be current liabilities.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
108.
A contingency that is remote a. should be disclosed in the financial statements. b. must be accrued as a loss. c. does not need to be disclosed. d. is recorded as a contingent liability.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
109.
The accounting for warranty costs is based on the a. going concern principle. b. expense recognition principle. c. conservatism principle. d. objectivity principle.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 110.
11 - 23
Warranty expenses are reported on the income statement as a. administrative expenses. b. part of cost of goods sold. c. contra-revenues. d. selling expenses.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
111.
Shaw Company sells 3,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 60 units for a total cost of $3,000. What amount should Shaw Company accrue on December 31 for estimated warranty costs? a. $4,500 b. $3,000 c. $1,500 d. $22,500
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
Shaw Company sells 3,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 60 units for a total cost of $3,000. What amount will be reported on Shaw Company's balance sheet as Warranty Liability on December 31, 2012? a. $3,000 b. $4,500 c. $1,500 d. It cannot be determined.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Which of the following items would not be identified if a contingent liability were disclosed in a financial statement footnote? a. The nature of the item b. The expected outcome of the future event c. A numerical probability of the expected loss d. The amount of the contingency, if known
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
114.
Disclosure of a contingent liability is usually made a. parenthetically, in the body of the balance sheet. b. parenthetically, in the body of the income statement. c. in a note to the financial statements. d. in the management discussion section of the financial statement.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 24 Test Bank for Accounting Principles, Tenth Edition 115.
Current liabilities generally appear a. after long-term debt on the balance sheet. b. in decreasing order of magnitude on the balance sheet. c. in order of maturity on the balance sheet. d. in increasing order of magnitude on the balance sheet.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
Which of the following employees would likely receive a salary instead of wages? a. Store clerk b. Factory employee c. Sales manager d. Manual laborer
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
117.
The total compensation earned by an employee is called a. take-home pay. b. net pay. c. net earnings. d. gross earnings.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
118.
Which one of the following payroll taxes does not result in a payroll tax expense for the employer? a. FICA tax b. Federal income tax c. Federal unemployment tax d. State unemployment tax
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
119.
Ann Ellis's regular rate of pay is $15 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were a. $720. b. $600. c. $780. d. $1,080.
Ans: C, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
120.
Assuming a FICA tax rate of 8% on the first $100,000 in wages, and a federal income tax rate of 20% on all wages, what would be an employee's net pay for the year if he earned $120,000 for the year? a. $120,000 b. $86,400 c. $96,000 d. $88,000
Ans: D, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 121.
11 - 25
Most companies involved in interstate commerce are required to compute overtime at a. the worker's regular hourly wage. b. 1.25 times the worker's regular hourly wage. c. 1.5 times the worker's regular hourly wage. d. 2.5 times the worker's regular hourly wage.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
122.
Jan Goll has worked 44 hours this week. She worked in excess of 8 hours each day. Her regular hourly wage is $18 per hour. What are Jan's gross wages for the week? (The company Jan works for is in compliance with the Fair Labor Standards Act.) a. $792 b. $828 c. $1,188 d. $864
Ans: B, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
123.
FICA taxes do not provide workers with a. life insurance. b. supplemental retirement. c. employment disability. d. medical benefits.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: None
124.
Employee payroll deductions include each of the following except a. federal unemployment taxes. b. federal income taxes. c. FICA taxes. d. insurance, pension plans, and union dues.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
125.
The journal entry to record the payroll for a period will include a credit to Salaries and Wages Payable for the gross a. amount less all payroll deductions. b. amount of all paychecks issued. c. pay less taxes payable. d. pay less voluntary deductions.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
126.
The amount of income taxes withheld from employees is dependent on each of the following except the a. employee's gross earnings. b. employee's net pay. c. length of the pay period. d. number of allowances claimed by the employee.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 26 Test Bank for Accounting Principles, Tenth Edition 127.
The following totals for the month of April were taken from the payroll register of Kirk Company. Salaries and wages $36,000 FICA taxes withheld 1,650 Income taxes withheld 7,500 Medical insurance deductions 1,350 Federal unemployment taxes 96 State unemployment taxes 648 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $36,000. b. credit to Salaries and Wages Payable for $36,000. c. debit to Salaries and Wages Payable for $36,000. d. debit to Salaries and Wages Expense for $25,500.
Ans: A, SO: 6, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
The following totals for the month of April were taken from the payroll register of Kirk Company. Salaries and wages $36,000 FICA taxes withheld 1,650 Income taxes withheld 7,500 Medical insurance deductions 1,350 Federal unemployment taxes 96 State unemployment taxes 648 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $24,756. b. debit to Salaries and Wages Payable for $25,500. c. debit to Salaries and Wages Payable for $23,850. d. credit to Cash for $27,150.
Ans: B, SO: 6, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
129.
The following totals for the month of April were taken from the payroll register of Kirk Company. Salaries and wages $36,000 FICA taxes withheld 1,650 Income taxes withheld 7,500 Medical insurance deductions 1,350 Federal unemployment taxes 96 State unemployment taxes 648 The entry to record accrual of Kirk Company’s payroll taxes would include a a. debit to Payroll Tax Expense for $744. b. debit to Payroll Tax Expense for $2,394. c. credit to FICA Taxes Payable for $3,300. d. credit to Payroll Tax Expense for $744.
Ans: B, SO: 7, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 130.
11 - 27
The following totals for the month of April were taken from the payroll register of Kirk Company. Salaries and wages $36,000 FICA taxes withheld 1,650 Income taxes withheld 7,500 Medical insurance deductions 1,350 Federal unemployment taxes 96 State unemployment taxes 648 The entry to record the accrual of federal unemployment taxes would include a a. credit to Federal Unemployment Taxes Payable for $96. b. debit to Federal Unemployment Taxes Expense for $96. c. credit to Payroll Tax Expense for $96. d. debit to Federal Unemployment Taxes Payable for $96
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
131.
Julie Norman, earns $20 per hour for a 40 hour work week and $30 per hour for overtime work. If Julie works 44 hours, her gross earnings are: a. $880. b. $920. c. $1,045. d. $1,320.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
132.
Gary Dittman, an employee of Hopkins Company, has gross earnings for the month of October of $6,000. FICA taxes are 8% of gross earnings, federal income taxes amount to $952 for the month, state income taxes are 2% of gross earnings, and authorizes voluntary deductions of $15 per month to the United Way. What is the net pay for Gary? a. $4,442 b. $4,433 c. $4,448 d. $4,452
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
133.
FICA Taxes Payable was credited for $9,000 in the entry when Peltry Company recorded payroll. When Peltry Company records employer's payroll taxes, FICA Taxes Payable should be credited for: a. $0. b. $9,000. c. $18,000. d. some other amount.
Ans: B, SO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 28 Test Bank for Accounting Principles, Tenth Edition 134.
The following totals for the month of June were taken from the payroll register of Ford Company. Salaries and wages $40,000 FICA taxes withheld 3,066 Income taxes withheld 8,800 Medical insurance deductions 1,600 Federal unemployment taxes 320 State unemployment taxes 2,000 The journal entry to record the monthly payroll on June 30 would include a a. debit to Salaries and Wages Expense for $40,000. b. credit to Salaries and Wages Payable for $40,000. c. debit to Salaries and Wages Payable for $40,000. d. debit to Salaries and Wages Expense for $26,534
Ans: A, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
135.
The following totals for the month of June were taken from the payroll register of Ford Company. Salaries and wages $40,000 FICA taxes withheld 3,066 Income taxes withheld 8,800 Medical insurance deductions 1,600 Federal unemployment taxes 320 State unemployment taxes 2,000 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $24,214. b. debit to Salaries and Wages Payable for $26,534. c. debit to Salaries and Wages Payable for $24,534. d. credit to Cash for $24,534.
Ans: B, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
136.
The following totals for the month of June were taken from the payroll register of Ford Company. Salaries and wages $40,000 FICA taxes withheld 3,066 Income taxes withheld 8,800 Medical insurance deductions 1,600 Federal unemployment taxes 320 State unemployment taxes 2,000 The entry to record accrual of Ford Company’s payroll taxes would include a a. debit to Payroll Tax Expense for $5,386 b. credit to Payroll Tax Expense for $5,386 c. credit to FICA Taxes Payable for $2,320. d. credit to Payroll Tax Expense for $2,320.
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 137.
11 - 29
The following totals for the month of June were taken from the payroll register of Ford Company. Salaries and wages $40,000 FICA taxes withheld 3,066 Income taxes withheld 8,800 Medical insurance deductions 1,600 Federal unemployment taxes 320 State unemployment taxes 2,000 The entry to record the accrual of federal unemployment taxes would include a a. credit to Federal Unemployment Taxes Payable for $320. b. credit to Federal Unemployment Taxes Expense for $320. c. credit to Payroll Tax Expense for $320. d. debit to Federal Unemployment Taxes Payable for $320.
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
138.
Which one of the following payroll taxes is not withheld from an employee's wages because it is not levied on the employee? a. Federal income tax b. Federal unemployment tax c. State income tax d. FICA tax
Ans: B, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
139.
By January 31 following the end of a calendar year, an employer is required to provide each employee with a(n) a. state unemployment tax form. b. federal unemployment tax form 940. c. wage and tax statement form W-2. d. employee's withholding allowance certificate form W-4.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
140.
Which of the following payroll taxes are usually filed and remitted annually? a. Federal unemployment taxes b. FICA taxes c. State unemployment taxes d. Federal and state unemployment taxes
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
141.
The tax that is paid equally by the employer and employee is the a. federal income tax. b. federal unemployment tax. c. state unemployment tax. d. FICA tax.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 30 Test Bank for Accounting Principles, Tenth Edition 142.
The effective federal unemployment tax rate is usually a. 6.2%. b. 0.8%. c. 5.4%. d. 8.0%.
Ans: B, SO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
143.
The treasurer's department is responsible for a. approving the payroll. b. maintaining payroll records. c. preparing payroll tax returns. d. signing payroll checks.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
144.
The payroll is paid by the a. personnel department. b. payroll department. c. cashier. d. treasurer's department.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics a
145. Post-retirement benefits consist of payments by employers to retired employees for a. health care and life insurance only. b. health care and pensions only. c. life insurance and pensions only. d. health care, life insurance, and pensions.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics a
146. The paid absence that is most commonly accrued is a. voting leave. b. vacation time. c. maternity leave. d. disability leave.
Ans: B, SO: 9, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
147. Flott Company has ten employees who each earn $120 per day. If they accumulate vacation time at the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be accrued at the end of the month is a. $120. b. $1,200. c. $1,800. d. $180.
Ans: C, SO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
11 - 31
a
148. An employer's estimated cost for post-retirement benefits for its employees should be a. recognized as an expense when paid. b. recognized as an expense during the employees' work years. c. recognized as an expense during the employees' retirement years. d. charged to the goodwill account because providing employees with benefits generates employee goodwill.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
149.
A current liability is a debt the company reasonably expects to pay from existing current assets within a. one year. b. the operating cycle. c. one year or the operating cycle, whichever is longer. d. one year or the operating cycle, whichever is shorter.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
Which of the following statements concerning current liabilities is incorrect? a. Current liabilities include unearned revenues. b. A company that has more current liabilities than current assets is usually the subject of some concern. c. Current liabilities include prepaid expenses. d. A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
On August 1, 2012, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2013. How will the note payable and the related interest be classified in the December 31, 2012, balance sheet? Note Payable Interest Payable a. Current liability Noncurrent liability b. Noncurrent liability Current liability c. Current liability Current liability d. Noncurrent liability Not shown
Ans: C, SO: 2,3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
Companies report current liabilities on the balance sheet in a. alphabetical order. b. order of maturity. c. random order. d. order of magnitude.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 32 Test Bank for Accounting Principles, Tenth Edition 153.
A contingency need not be recorded nor disclosed when a. it is probable the contingency will happen and the amount can be reasonably estimated. b. it is probable the contingency will happen but the amount cannot be reasonably estimated. c. it is reasonably possible the contingency will happen and the amount can be reasonably estimated. d. the possibility of the contingency happening is remote.
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
154.
A contingent liability is recorded when the likelihood of the contingency is a. remote. b. reasonably possible. c. probable. d. nil or zero.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
155.
Nick Dent, an employee of Spottswood Company, has gross earnings for the month of October of $4,000. FICA taxes are 8% of gross earnings, federal income taxes amount to $635 for the month, state income taxes are 2% of gross earnings, and Nick authorizes voluntary deductions of $10 per month to the United Fund. What is the net pay for Nick Dent? a. $2,961 b. $2,955 c. $2,965 d. $2,968
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
156.
A payroll record that accumulates the gross earnings, deductions, and net pay by employee for each pay period is the a. withholding tax table. b. employee earnings record. c. payroll register. d. Wage and Tax Statement.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
157.
The journal entry to record the payroll for Detwiler Company for the week ending January 8, would probably include a a. credit to Office Salaries. b. credit to Wages Expense. c. debit to Federal Income Taxes Payable. d. credit to FICA Taxes Payable.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting 158.
11 - 33
Employer payroll taxes include all of the following except a. FICA taxes. b. federal unemployment taxes. c. state unemployment taxes. d. federal income taxes.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
159.
The record that provides a cumulative summary of each employee’s gross earnings, payroll deductions, and net pay during the year and is required to be maintained to comply with state and local federal law is the a. register. b. employee earnings record. c. statement of earnings. d. wage and tax statement.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
160. Post-retirement benefits include all of the following except a. health care. b. life insurance. c. pensions. d. vacation benefits.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
161.
Under IFRS, liabilities a. must be legally enforceable by a contract. b. must be legally enforceable by law. c. may be legally enforceable by a contract or law but need not be. d. are defined differently than under GAAP.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
162.
When current liabilities are presented under IFRS, they are generally shown a. alphabetically. b. in order of magnitude. c. in order of the dates they become due. d. in order of liquidity.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
163.
Which of the following statements about liabilities in incorrect? Companies sometimes show a. liabilities before assets. b. long-term liabilities before current assets. c. current liabilities netted against current assets. d. liabilities in order of magnitude.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 34 Test Bank for Accounting Principles, Tenth Edition 164.
Under IFRS, contingent liabilities are a. recorded in the financial statements. b. disclosed if certain criteria are met. c. always disclosed in the financial statements. d. accounted for in the same way as under GAAP.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
165.
Examples of provisions include each of the following except provisions for a. anticipated losses. b. defined contribution plans. c. employee vacation pay. d. warranties.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
IFRS and GAAP accounting is similar for a. defined contribution plans. b. defined benefit plans. c. both defined benefit and defined contribution plans. d. none of the above.
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.
b b a a c c c d c c a b b b a b c a c
58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76.
b b a c c b c b c d c d b c d b b d d
77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.
d c b a a c b d d b b d b d b b a b c
96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
b d b c d b a a b b d c c b d a c c c
115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133.
b c d b c d c b a a a b a b b a b b b
134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. a 145. a 146. a 147. a 148. 149. 150. 151. 152.
a b a a b c a d b d d d b c b c c c d
153. 154. 155. 156. 157. 158. 159. a 160. 161. 162. 163. 164. 165. 166.
d c b c d d b d c d d b b a
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
11 - 35
BRIEF EXERCISES BE 167 Kingery Sales Company has the following selected accounts after posting adjusting entries: Accounts Payable Notes Payable, 3-month Accumulated Depreciation—Equipment Notes Payable, 5-year, 6% Payroll Tax Expense Interest Payable Mortgage Payable Sales Taxes Payable
$ 62,000 40,000 14,000 80,000 4,000 3,000 120,000 38,000
Instructions Prepare the current liability section of Kingery Sales Company's balance sheet, assuming $16,000 of the mortgage is payable next year. Ans: N/A, SO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 167
(5 min.) KINGERY SALES COMPANY
Current Liabilities Notes Payable, 3-month Accounts Payable Sales Taxes Payable Current portion of long-term debt Interest Payable Total Current Liabilities
$ 40,000 62,000 38,000 16,000 3,000 $159,000
BE 168 Identify which of the following would be classified as current liabilities as of December 31, 2012: 1. Wages Payable 2. Bonds Payable, maturing in 2017 3. Interest Payable, due July 1, 2013 4. Sales Taxes Payable 5. Notes Payable, due January 30, 2014 Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 168
(3 min.)
Current liabilities include: Wages Payable, Sales Taxes Payable, and Interest Payable BE 169 On December 1, Gilman Corporation borrowed $10,000 on a 90-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 36 Test Bank for Accounting Principles, Tenth Edition Solution 169 Dec 1
(5 min.)
Cash ...................................................................................... Notes Payable ...............................................................
10,000
Dec 31 Interest Expense .................................................................... Interest Payable ............................................................
50
Mar 1
Interest Expense .................................................................... Interest Payable ..................................................................... Notes Payable ....................................................................... Cash .............................................................................
10,000
50 100 50 10,000 10,150
BE 170 During December 2012, Markowitz Publishing sold 2,500 12-month annual magazine subscriptions at a rate of $20 each. The first issues were mailed in February 2013. Prepare the entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first issues. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 170 December 2012
February 2013
(4 min.) Cash ........................................................................ Unearned Subscription Revenue .................... (2,500 × $20 = $50,000)
50,000
Unearned Subscription Revenue ............................. Subscription Revenue ..................................... ($50,000 ÷ 12 = $4,167)
4,167
50,000
4,167
BE 171 Putman Company had cash sales of $65,100 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 171
(3 min.)
Cash ............................................................................................ Sales Revenue.................................................................... Sales Taxes Payable ..........................................................
65,100 60,000 5,100
BE 172 On December 1, Yung Company introduces a new product that includes a one-year warranty on parts. In December, 500 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $60 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
11 - 37
Solution 172 (3 min.) Dec. 31
Warranty Expense .............................................................. Warranty Liability ....................................................... [(500 × 5%) × $60]
1,500 1,500
BE 173 Judy Reber’s regular hourly wage rate is $14, and she receives an hourly rate of $21 for work in excess of 40 hours. During a March pay period, Judy works 47 hours. Judy’s federal income tax withholding is $80, and she has no voluntary deductions. Compute Judy Reber’s gross earnings and net pay for the pay period. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 173
(4 min.)
Gross earnings: Regular pay (40 × $14) Overtime pay (7 × $21) Gross earnings Less: FICA taxes payable ($707 × 8%) Federal income taxes payable Net pay
$560.00 147.00 $707.00 $56.56 80.00
136.56 $570.44
BE 174 Judy Reber’s regular hourly wage rate is $14, and she receives an hourly rate of $21 for work in excess of 40 hours. During a March pay period, Judy works 47 hours. Judy’s federal income tax withholding is $80, and she has no voluntary deductions. Prepare the journal entry to record Judy’s pay for the period. Use March 15 for the end of the pay period. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 174 Mar. 15
(5 min.)
Salaries and Wages Expense ............................................. FICA Taxes Payable ($707 × 8%) ........................... Federal Income Taxes Payable ............................... Salaries and Wages Payable ..................................
707.00 56.56 80.00 570.44
BE 175 In February, gross earnings in Wine Company totaled $75,000. All earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Prepare the entry to record January payroll tax expense. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 175 Jan. 31
(4 min.)
Payroll Tax Expense ............................................................... FICA Taxes Payable ($75,000 × 8%) ............................. Federal Unemployment Taxes Payable ($75,000 × .8%) State Unemployment Taxes Payable ($75,000 × 5.4%)..
FOR INSTRUCTOR USE ONLY
10,650 6,000 600 4,050
11 - 38 Test Bank for Accounting Principles, Tenth Edition *BE 176 Truman Company employees are entitled to one day’s vacation for each month worked. In February, 60 employees worked the full month. Record the vacation pay liability for February assuming the average daily pay for each employee is $90. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 176 Feb. 28
(3 min.)
Vacation Benefits Expense (60 × $90) ................................ Vacation Benefits Payable ..........................................
5,400 5,400
EXERCISES Ex. 177 Howell Company has the following selected accounts after posting adjusting entries: Accounts Payable Notes Payable, 3-month Accumulated Depreciation—Equipment FICA Taxes Payable Notes Payable, 5-year, 8% Warranty Liability Payroll Tax Expense Interest Payable Mortgage Payable Sales Taxes Payable
$ 45,000 70,000 14,000 27,000 30,000 29,000 6,000 3,000 200,000 16,000
Instructions (a) Prepare the current liability section of Howell Company's balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.) (b)
Comment on Howell 's liquidity, assuming total current assets are $450,000.
Ans: N/A, SO: 1 and 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177 (a)
(10 min.) HOWELL COMPANY
Current Liabilities Notes payable, 3-month Accounts payable Warranty liability FICA taxes payable Long-term debt due within one year Sales taxes payable Interest payable Total Current Liabilities
$ 70,000 45,000 29,000 27,000 25,000 16,000 3,000 $215,000
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting Solution 177 (b)
11 - 39
(Cont.)
The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be $235,000 of current assets. The current assets are more than twice the current liabilities and it appears as though Howell Company has sufficient current resources to meet current obligations when due.
Ex. 178 Prepare the necessary journal entries for the following transactions: (a) On September 1, Cole Company borrowed $180,000 from National Bank on a 6-month, 8% note. (b) On December 31, Cole Company accrued interest (assume adjusting entries are only made at the end of the year). Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 178
(5 min.)
(a) Cash ............................................................................................. Notes Payable ....................................................................
180,000
(b) Interest Expense ........................................................................... Interest Payable ($180,000 × .08 × 4/12) ............................
4,800
180,000
4,800
Ex. 179 On March 1, Jordan Company borrows $150,000 from Ottawa State Bank by signing a 6-month, 8%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Jordan Company. (a) Prepare the entry on March 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made. (c) Prepare the adjusting entry at August 31 to accrue interest. (d) Prepare the entry to record payment of the note at maturity. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 179
(10 min.)
(a)
Cash .......................................................................... Notes Payable ...................................................
150,000
Interest Expense ........................................................ Interest Payable ($150,000 × 8% × 4 ÷ 12) .......
4,000
Interest Expense ........................................................ Interest Payable ................................................
2,000
Notes Payable............................................................ Interest Payable ......................................................... Cash..................................................................
150,000 6,000
(b) (c) (d)
March 1 June 30 Aug. 31 Sept. 1
FOR INSTRUCTOR USE ONLY
150,000 4,000 2,000
156,000
11 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 180 Wellington Company had the following transactions involving notes payable. Nov. 1, 2012 Dec. 31, 2012 Feb. 1, 2013
Borrows $120,000 from Olathe State Bank by signing a 3-month, 10% note. Prepares the adjusting entry. Pays principal and interest to Olathe State Bank.
Instructions Prepare journal entries for each of the transactions. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 180
(8 min.)
November 1, 2012 Cash........................................................................................ Notes Payable ................................................................ ... December 31, 2012 Interest Expense ($120,000 10% 2/12) ....................................................... Interest Payable................................................................... February 1, 2013 Notes Payable ......................................................................... Interest Payable ........................................................................ Interest Expense ...................................................................... Cash ..............................................................................
120,000 120,000
2,000 2,000 120,000 2,000 1,000 123,000
Ex. 181 Flores Company publishes a monthly sports magazine, Hunting Preview. Subscriptions to the magazine cost $25 per year. During October 2012, Flores sells 18,000 subscriptions beginning with the November issue. Flores prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscriptions and Subscription Revenue. Instructions (a) Prepare the entry in October for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, 2012, to record subscription revenue earned in December 2012. (c) Prepare the adjusting entry at March 31, 2013, to record subscription revenue earned in the first quarter of 2013. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181 (a)
Oct. 31
(5 min.) Cash .............................................................. Unearned Subscription Revenue (18,000 $25) .........................................
FOR INSTRUCTOR USE ONLY
450,000 450,000
Current Liabilities and Payroll Accounting Solution 181 (b)
(c)
Dec. 31
Mar. 31
11 - 41
(Cont.) Unearned Subscription Revenue ..... Subscription Revenue ($450,000 2/12) .....................
75,000
Unearned Subscription Revenue ..... Subscription Revenue ($450,000 3/12) .....................
112,500
75,000
112,500
Ex. 182 Maddox Company sells televisions with a 2-year warranty. Past experience indicates that 2% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is estimated to be $75 per unit. During 2012, 7,000 units were sold at an average price of $400. During the year, repairs were made on 55 units at a cost of $3,600. Instructions Prepare journal entries to record the repairs made under warranty and estimated warranty expense for the year. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 182
(5 min.)
Warranty Liability ................................................................................ Repair Parts/Wages Payable ...................................................... (To record cost of honoring 55 warranties)
3,600
Warranty Expense .............................................................................. Warranty Liability ........................................................................ (To accrue estimated warranty costs on 140 warranty contracts) Number of units sold 7,000 Estimated rate of defective units × 2% Total estimated defective units 140 Average warranty repair costs $ 75 Estimated warranty expense $10,500
10,500
3,600
10,500
Ex. 183 English Company billed its customers a total of $1,575,000 for the month of November. The total includes a 5% state sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 42 Test Bank for Accounting Principles, Tenth Edition Solution 183
(5 min.)
(a)
$1,575,000 ÷ 1.05 = $1,500,000 is the total sales revenue.
(b)
$1,500,000 × .05 = $75,000 is the state sales tax liability. Journal Entry: Accounts Receivable .................................................................. 1,575,000 Sales Revenue ................................................................... Sales Taxes Payable .........................................................
1,500,000 75,000
Ex. 184 Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total for the month is $291,500, which includes a 6% sales tax. Instructions Compute sales taxes payable, and make the entry to record sales and sales taxes payable. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 184
(5 min.)
Sales taxes payable = $14,700 [$291,500 – ($291,500 1.06)] Cash..................................................................................................... Sales Taxes Payable .................................................................... Sales Revenue ($291,500 1.06) .................................................
291,500 16,500 275,000
Ex. 185 Kaiser Coat Company, which prepares annual financial statements, is preparing adjusting entries on December 31. Analysis indicates the following: 1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of damages. Legal counsel believes it is unlikely that the company will have to pay any damages. 2. December 31st is a Friday. The employees of the company have been paid on Monday, December 27th for the previous week which ended on Friday, December 24th. The company employs 30 people who earn $100 per day and 15 people who earn $160 per day. All employees work 5-day weeks. 3. The company is a defendant in a $500,000 product liability lawsuit. Legal counsel believes the company probably will have to pay the amount requested. a
4. Employees are entitled to one day's vacation for each month worked. All employees described above in (2.) worked the month of December.
Instructions Prepare any adjusting entries necessary at the end of the year. Ans: N/A, SO: 3,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting Solution 185
(10 min.)
1.
No entry—loss is not probable.
2.
Salaries and Wages Expense...................................................... Salaries and Wages Payable .............................................. 30 × $100 × 5 = $15,000 15 × $160 × 5 = 12,000 $27,000
27,000
Lawsuit Loss .............................................................................. Lawsuit Liability .................................................................
500,000
Vacation Benefits Expense .......................................................... Vacation Benefits Payable [(30 × $100) + (15 × $160)] .......
5,400
3. a
4.
11 - 43
27,000
500,000 5,400
Ex. 186 Based on the following information, compute the (1) current ratio and (2) working capital. Current assets $200,000 Total assets 900,000 Current liabilities 80,000 Total liabilities 500,000 Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 186
(4 min.)
(1) Current ratio = 2.5:1 ($200,000 $80,000) (2) Working capital = $120,000 ($200,000 – $80,000) Ex. 187 Mehring's 2012 financial statements contained the following data (in millions). Current assets Total assets Current liabilities Total liabilities Cash Instructions Compute these values: (a) Working capital.
$16,890 42,430 12,000 32,580 380
Accounts receivable Interest expense Income tax expense Net income
(b)
$1,550 980 1,270 2,230
Current ratio.
Ans: N/A, SO: 4, Bloom: S, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187
(4 min.)
(a) Working capital = $16,890 – $12,000 = $4,890 million (b) Current ratio = $16,890 $12,000 = 1.41:1
FOR INSTRUCTOR USE ONLY
11 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 188 Marx Company sells exercise machines for home use. The machines carry a 2-year warranty. Past experience indicates that 6% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is $70 for labor and $90 for parts per unit. During 2012, 2,500 exercise machines were sold at an average price of $800. During the year, 60 of the machines that were sold were repaired at the average price per unit. Instructions (a) Prepare the journal entry to record the repairs made under warranty. (b) Prepare the journal entry to record the warranty expense for the year. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 188 (a)
(10 min.)
Labor on repaired units: $70 × 60 = $4,200 Parts on repaired units: $90 × 60 = $5,400 Warranty Liability ......................................................................... Repair Parts ........................................................................ Salaries and Wages Payable .............................................. (To record honoring of 60 warranty contracts)
(b)
9,600 5,400 4,200
2,500 units × 6% = 150 units 150 units × $160 = $24,000 Warranty Expense ....................................................................... 24,000 Warranty Liability ................................................................ (To record estimated cost of honoring 150 warranty contracts)
24,000
The balance in Warranty Liability at year end is $14,400 ($24,000 – $9,600), which equals the expected cost of honoring the 90 remaining expected warranty contracts. Ex. 189 Golf Pro Publications publishes a golf magazine for women. The magazine sells for $3 a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During December 2012, Golf Pro Publications sells 12,000 copies of the golf magazine at newsstands and receives payment for 20,000 subscriptions for 2013. Financial statements are prepared monthly. Instructions (a) Prepare the December 2012 journal entries to record the newsstand sales and subscriptions received. (b)
Prepare the necessary adjusting entry on January 31, 2013. The January 2013 issue has been mailed to subscribers.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting Solution 189 (a)
(b)
11 - 45
(5 min.)
Cash............................................................................................ Sales Revenue ...................................................................
36,000
Cash............................................................................................ Unearned Subscription Revenue ........................................
480,000
36,000 480,000
$480,000 ÷ 12 months = $40,000 Unearned Subscription Revenue ................................................. Subscription Revenue.........................................................
40,000 40,000
Ex. 190 Delaney Company sells a product that includes a one-year warranty on parts and labor. During the year, 10,000 units are sold. Delaney expects that 3% of the units will be defective and that the average warranty cost will be $50 per unit. Actual warranty costs incurred during the year were $14,000. Instructions Prepare the journal entries to record (a) the estimated warranty costs and (b) the actual costs incurred. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 190 (a)
(b)
(5 min.)
Warranty Expense (10,000 × 3% × $50) ..................................... Warranty Liability ................................................................
15,000
Warranty Liability ......................................................................... Repair Parts, Wages Payable, etc. .....................................
14,000
15,000
14,000
Ex. 191 Foster Company is preparing adjusting entries at December 31. An analysis reveals the following: 1. During December, Foster Company sold 3,000 units of a product that carries a 60-day warranty. The sales for this product totaled $100,000. The company expects 4% of the units to need repair under the warranty and it estimates that the average repair cost per unit will be $15. 2. The company has been sued by a disgruntled employee. Legal counsel believes that it is reasonably possible that the company will have to pay $200,000 in damages. 3. The company has been named as one of several defendants in a $400,000 damage suit. Legal counsel believes it is unlikely that the company will have to pay any damages. a
4. Employees earn vacation pay at a rate of 1 day per month. During December, ten employees qualify for vacation pay. Their average daily wage is $90 per employee.
Instructions Prepare adjusting entries, if required, for each of the four items. Ans: N/A, SO: 5,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 191 1.
(10 min.)
3,000 units × 4% = 120 units expected to be defective 120 units × $15 = $1,800 Warranty Expense ....................................................................... Warranty Liability ................................................................
1,800 1,800
2.
No entry is required unless the loss is probable. Disclosure of this contingent liability should be made in the notes to the financial statements.
3.
Contingent losses that are remote do not require accrual or disclosure. No entry is required.
a
10 employees × $90 × 1 day = $900
4.
Vacation Benefits Expense .......................................................... Vacation Benefits Payable ..................................................
900 900
Ex. 192 Eve Trek's regular hourly wage is $16 an hour. She receives overtime pay at the rate of time and a half. The FICA tax rate is 8%. Eve is paid every two weeks. For the first pay period in January, Eve worked 86 hours of which 6 were overtime hours. Eve's federal income tax withholding is $350 and her state income tax withholding is $110. Eve has authorized that $50 be withheld from her check each pay period for savings bonds. Instructions Compute Eve Trek's gross earnings and net pay for the pay period showing each payroll deduction in arriving at net pay. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 192
(10 min.)
Gross Earnings: Regular Pay: Overtime Pay:
80 hours × $16/hr. = $16 × 1.5 = $24/hr. for overtime 6 overtime hours × $24 Total Gross Earnings:
Net Pay: Gross Earnings Less: Federal Income Taxes Payable State Income Taxes Payable FICA Taxes Payable Savings Bonds Payable Net Pay
$1,280 144 $1,424
$1,424.00 $350.00 110.00 113.92 50.00
FOR INSTRUCTOR USE ONLY
623.92 $ 800.08
Current Liabilities and Payroll Accounting
11 - 47
Ex. 193 Cindy Morrow's regular hourly wage rate is $14, and she receives a wage of 1 1/2 times her regular rate for work in excess of 40 hours. During a June pay period, Cindy worked 46 hours. Cindy's federal income tax withholding is $68, and her only voluntary deduction is $25 for group hospitalization insurance. The FICA tax rate is 8%. Instructions Compute Cindy's (a) gross earnings and (b) net pay for the pay period. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 193
(6 min.)
(a) Gross earnings: Regular pay (40 × $14) = Overtime pay (6 × $21) = (b) Gross earnings Less: Federal income taxes FICA taxes ($686 × 8%) Group insurance Net pay
$560 126
$686 $686.00
$68.00 54.88 25.00
147.88 $538.12
Ex. 194 Employee earnings records for Shoemaker Company reveal the following gross earnings for four employees through the pay period of December 15. C. Glenn K. Mintz
$95,500 $97,200
M. Ramirez T. Tanner
$ 96,500 $102,000
For the pay period ending December 31, each employee's gross earnings is $3,800. The FICA tax rate is 8% on gross earnings of $100,000. Instructions Compute the FICA withholdings that should be made for each employee for the December 31 pay period. (Show computations.) Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 194
(12 min.)
C. Glenn
$3,800 × 8% = $304. Glenn's total gross earnings for the year are $99,300 = ($95,500 + $3,800), which is below the $100,000 maximum for FICA taxes.
M. Ramirez
$3,500 × 8% = $280. Ramirez's total gross earnings for the year are $100,300. Thus, $3,500 of the gross earnings ($3,800 – $300) for this pay period are subject to FICA taxes.
K. Mintz
$2,800 × 8% = $224. Mintz's total gross earnings for the year are $101,000. Thus, only $2,800 of the gross earnings ($3,800 – $1,000) for this pay period are subject to FICA taxes.
FOR INSTRUCTOR USE ONLY
11 - 48 Test Bank for Accounting Principles, Tenth Edition Solution 194 T. Tanner
(Cont.) $0. Tanner's gross earnings prior to this pay equal the maximum amount subject to FICA taxes. Thus, none of the gross earnings in the December 31 pay period is subject to FICA taxes.
Ex. 195 Selected data from a February payroll register for Cheney Company are presented below. Some amounts are intentionally omitted. Gross earnings: Regular Overtime Total Deductions: FICA taxes Federal income taxes
$22,200 (1) (2)
State income taxes Union dues Total deductions
$(3) 200 (4) $18,960
$2,000 2,840
Net pay Accounts debited: Salaries/wages expense
(5)
FICA taxes are 8%. State income taxes are 4% of gross earnings. Instructions (a) Fill in the missing amounts. (b) Journalize the February payroll and the payment of the payroll. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 195
(15 min.) $ 2,800 [$25,000 see (2) below – $22,200] $25,000 (FICA taxes $2,000 8%) $ 1,000 ($25,000 × 4%) $ 6,040 ($25,000 – $18,960) $25,000
(a)
(1) (2) (3) (4) (5)
(b)
Feb. 28
28
Salaries and Wages Expense ........................ FICA Taxes Payable ................................... Federal Income Taxes Payable ................................................. State Income Taxes Payable ................... Union Dues Payable ................................... Salaries and Wages Payable ....................
25,000
Salaries and Wages Payable ......................... Cash ......................................................
18,960
FOR INSTRUCTOR USE ONLY
2,000 2,840 1,000 200 18,960
18,960
Current Liabilities and Payroll Accounting
11 - 49
Ex. 196 Haney Company's payroll for the week ending January 15 amounted to $367,000 for salaries and wages. None of the employees has reached the earnings limits specified for federal or state employer payroll taxes. The following deductions were withheld from employees' salaries and wages: Federal Income Tax State Income Tax FICA Taxes Union Dues United Fund Contributions
$75,000 13,500 29,400 4,100 2,700
Federal unemployment tax (FUTA) rate is 6.2% less a credit equal to the rate paid for state unemployment taxes. The state unemployment tax (SUTA) rate is 5.4%. Instructions Prepare the journal entry to record the weekly payroll ending January 15 and also the employer’s payroll tax expense on the payroll. Ans: N/A, SO: 6,7, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196 Jan. 15
15
(8 min.)
Salaries and Wages Expense ............................................. Federal Income Taxes Payable .................................. State Income Taxes Payable ..................................... FICA Taxes Payable .................................................. Union Dues Payable .................................................. United Fund Contributions Payable ............................ Salaries and Wages Payable ..................................... (To record payroll for the week ending January 15)
367,000
Payroll Tax Expense ........................................................... FICA Taxes Payable .................................................. Federal Unemployment Taxes Payable...................... State Unemployment Taxes Payable ......................... (To record employer's payroll taxes on January 15 payroll)
52,154
75,000 13,500 29,400 4,100 2,700 242,300
29,400 2,936 19,818
Ex. 197 Pam Norman had earned (accumulated) salary of $97,000 through November 30. Her December salary amounted to $9,000. Sam Hall began employment on December 1 and will be paid his first month's salary of $7,000 on December 31. Income tax withholding for December for each employee is as follows: Pam Norman Sam Hall Federal Income Tax $2,180 $1,390 State Income Tax 390 250
FOR INSTRUCTOR USE ONLY
11 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 197
(Cont.)
The following payroll tax rates are applicable: FICA tax on first $100,000 8% FUTA tax on first $7,000 6.2%* SUTA tax on first $7,000 5.4% *Less a credit equal to the state unemployment contribution Instructions Record the payroll for the two employees at December 31 and record the employer's share of payroll tax expense for the December 31 payroll. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197 Dec. 31
(15 min.)
Salaries and Wages Expense ............................................. Federal Income Taxes Payable .................................. State Income Taxes Payable ...................................... FICA Taxes Payable .................................................. Salaries and Wages Payable...................................... (To record December 31 payroll)
16,000 3,570 640 800 10,990
FICA Taxes Pam Norman ($100,000 – $97,000 = $3,000 × 8%)=$240 Sam Hall ($7,000 × 8%) = 560 $800 Payroll Tax Expense ........................................................... FICA Taxes Payable .................................................. Federal Unemployment Taxes Payable ...................... State Unemployment Taxes Payable.......................... (To record employer's share of payroll taxes for Dec. 31 payroll)
1,234 800 56 378
(FUTA and SUTA are based only on Sam Hall’s salary of $7,000.) Ex. 198 Assume that the payroll records of Darby Oil Company provided the following information for the weekly payroll ended November 30, 2012. Year-to-Date Hourly Federal Earnings Through Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week C. Brown 44 $45 $362 $9 $101,000 J. Polk 46 15 97 5 23,200 K. Glass 40 25 148 — 5,700 M. Raney 42 30 230 7 49,500
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting Ex. 198
11 - 51
(Cont.)
Additional information: All employees are paid overtime at time and a half for hours worked in excess of 40 per week. The FICA tax rate is 8% for the first $100,000 of each employee's annual earnings. The employer pays unemployment taxes of 6.2% (5.4% for state and .8% for federal) on the first $7,000 of each employee's annual earnings. Instructions (a) Prepare the payroll register for the pay period. (b) Prepare general journal entries to record the payroll and payroll taxes. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 198
(20 min.)
(a)
DARBY OIL COMPANY Payroll Register For the Week Ending November 26, 2012 ——————————————————————————————————————————— Earnings Deductions Total Gross Employee Hours Reg. Overtime Pay FICA FIT Union Net Pay C. Brown 44 1,800 270 2,070 — 362 9 1,699.00 J. Polk 46 600 135 735 58.80 97 5 574.20 K. Glass 40 1,000 — 1,000 80.00 148 — 772.00 M. Raney 42 1,200 90 1,290 103.20 230 7 949.80 4,600 495 5,095 242.00 837 21 3,995.00 (b) Nov. 30
30
Salaries and Wages Expense ....................................... FICA Taxes Payable ............................................ Federal Income Taxes Payable ............................ Union Dues Payable............................................. Salaries and Wages Payable ............................... (To record weekly payroll)
5,095
Payroll Tax Expense ..................................................... 304 State Unemployment Taxes Payable ($1,000 × .054) Federal Unemployment Taxes Payable ($1,000 × .008) FICA Taxes Payable ............................................ (To record employer's payroll taxes)
242 837 21 3,995
54 8 242
Ex. 199 Donna Grace earns a salary of $7,500 per month during the year. FICA taxes are 8% on the first $100,000 of gross earnings. Federal unemployment insurance taxes are 6.2% of the first $7,000; however, a credit is allowed equal to the state unemployment insurance taxes of 5.4% on the $7,000. During the year, $25,600 was withheld for federal income taxes and $5,700 was withheld for state income taxes.
FOR INSTRUCTOR USE ONLY
11 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 199
(Cont.)
Instructions (a) Prepare a journal entry summarizing the payment of Grace’s total salary during the year. (b)
Prepare a journal entry summarizing the employer payroll tax expense on Grace’s salary for the year.
(c)
Determine the cost of employing Grace for the year.
Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 199 (a)
(b)
(c)
(8 min.)
Salaries and Wages Expense ...................................................... Federal Income Taxes Payable ........................................... State Income Taxes Payable .............................................. FICA Taxes Payable ($90,000 × .08) .................................. Salaries and Wages Payable ..............................................
90,000
Payroll Tax Expense .................................................................... FICA Taxes Payable ........................................................... Federal Unemployment Taxes Payable............................... State Unemployment Taxes Payable ..................................
7,634
25,600 5,700 7,200 51,500
7,200 56 378
The total cost of employment is: $90,000 + $7,634 = $97,634.
Ex. 200 Hiatt Company had the following payroll data for the year: Gross earnings of employees Employee earnings not subject to FICA tax Employee earnings not subject to FUTA or SUTA tax Assuming the following: FICA tax rate State Unemployment tax rate Federal Unemployment tax rate
$740,000 140,000 490,000
8% 5.4% (SUTA) .8% (FUTA)
Instructions Compute Hiatt's payroll tax expense for the year. Make a summary journal entry to record the payroll tax expense. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 200
(15 min.)
Compute FICA tax: Less: Exempted wages Wages subject to FICA tax Applicable tax rate FICA tax expense
$740,000 140,000 600,000 .08 $ 48,000
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting Solution 200
11 - 53
(Cont.)
Compute FUTA tax: Less: Exempted wages Wages subject to FUTA tax Applicable tax rate FUTA tax expense
$740,000 490,000 250,000 .008 $ 2,000
Wages subject to SUTA tax Applicable tax rate SUTA tax expense
$250,000 .054 $ 13,500
Journal entry to record payroll tax expense: Payroll Tax Expense ...................................................................... FICA Taxes Payable .............................................................. Federal Unemployment Taxes Payable ................................. State Unemployment Taxes Payable .....................................
63,500 48,000 2,000 13,500
Ex. 201 In March, gross earnings of Ransey Company totaled $250,000. All earnings are subject to FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Instructions (a) Compute the employer's payroll tax expense. (b) Prepare the entry to record payroll taxes. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 201
(6 min.)
(a)
Payroll tax expense = $35,500 [(8% + 5.4% + .8%) × $250,000]
(b)
Payroll Tax Expense ................................................................... FICA Taxes Payable ($250,000 × 8%)................................ State Unemployment Taxes Payable .................................. Federal Unemployment Taxes Payable .............................. *$250,000 × 5.4% **$250,000 × 0.8%
FOR INSTRUCTOR USE ONLY
35,500 20,000 13,500* 2,000**
11 - 54 Test Bank for Accounting Principles, Tenth Edition Ex. 202 The following payroll liability accounts are included in the ledger of Eckstrom Company on January 1, 2012: FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable Union Dues Payable Health Insurance Payable U.S. Savings Bonds Payable
$1,750 4,000 665 175 1,190 400 5,000 1,500
In January, the following transactions occurred: Jan. 9 11 14 18 21 22
Sent a check for $5,000 to Blue Cross and Blue Shield. Deposited a check for $5,750 in Federal Reserve Bank for FICA taxes and federal income taxes withheld. Sent a check for $400 to the union treasurer for union dues. Paid state income taxes withheld from employees. Paid state and federal unemployment taxes. Purchased U.S. Savings Bonds for employees by writing a check for $1,500.
Instructions Journalize the January transactions Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 202 Jan. 9
11
14
18
21
22
(15 min.)
Health Insurance Payable ................................................... Cash...........................................................................
5,000
FICA Taxes Payable ........................................................... Federal Income Taxes Payable ........................................... Cash...........................................................................
1,750 4,000
Union Dues Payable ........................................................... Cash...........................................................................
400
State Income Taxes Payable .............................................. Cash...........................................................................
665
Federal Unemployment Taxes Payable............................... Cash...........................................................................
175
State Unemployment Taxes Payable .................................. Cash...........................................................................
1,190
U.S. Savings Bonds Payable .............................................. Cash...........................................................................
1,500
FOR INSTRUCTOR USE ONLY
5,000
5,750
400
665
175
1,190
1,500
Current Liabilities and Payroll Accounting
11 - 55
Ex. 203 Match the codes assigned to the following payroll functions to the procedures listed below: H T PRE PAY
Hiring Employees Timekeeping Preparing the Payroll Paying the Payroll
____
1. Distribution of checks by the treasurer
____
2. Supervisor approves hours worked
____
3. Documentation of employee hiring
____
4. Maintenance of payroll records
____
5. Verification of payroll calculations
____
6. Screening and interviewing of job applicants
____
7. Use of a time clock
____
8. Signing prenumbered payroll checks
Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics
Solution 203 1. 2. 3. 4.
PAY T H PRE
(4 min.) 5. 6. 7. 8.
PRE H T PAY
COMPLETION STATEMENTS 204. A current liability is a debt that can be expected to be paid within ______________ year or the ______________, whichever is longer. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
205. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
206. Obligations in written form are called ______________ and usually require the borrower to pay interest. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
207. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
208. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 56 Test Bank for Accounting Principles, Tenth Edition 209. The current ratio is current assets divided by ______________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210. A contingent liability should be recorded in the accounts if it is ______________ that the contingency will occur and the amount is ______________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
211. Two federal taxes which are levied against employees' wages that must be deducted in arriving at net pay are (1)______________ taxes and (2)______________ taxes. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
212. The employer incurs a payroll tax expense equal to the amount contributed by each employee for ______________ taxes. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
213. A payroll tax expense which is borne entirely by the employer is the federal _______________ tax. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 204. 205. 206. 207. 208.
one, operating cycle current, long-term notes payable face value, interest current liability
209. 210. 211. 212. 213.
current liabilities probable, reasonably estimable FICA, federal income FICA unemployment
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
11 - 57
MATCHING 214. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Current liability Notes payable Wage and Tax Statement Current ratio Contingent liability
F. G. H. a I. a J.
Federal income taxes FICA taxes Federal unemployment taxes Post-retirement benefits Pension plan
____
1. Levied against employees' wages without limit.
____
2. An obligation in the form of a written promissory note.
____
3. An agreement whereby an employer provides benefits to employees after they retire.
____
4. A payroll tax expense levied only against the employer based on employees' wages.
____
5. A measure of a company’s liquidity.
____
6. A debt than can reasonably be expected to be paid from current assets.
____
7. A form showing gross earnings, FICA taxes withheld, and income taxes withheld.
____
8. Levied against employees' wages with a maximum limit.
____
9. Payments by employers to retired employees.
____ 10. A potential liability that may become an actual liability in the future. Ans: N/A, SO: 1−9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. a 3. 4. 5.
F B J H D
6. 7. 8. a 9. 10.
A C G I E
SHORT-ANSWER ESSAY QUESTIONS S-A E 215 A company will incur product repair costs in the future if products that it sells currently under warranty are brought in for repair during the warranty period. The company will also incur bad debts expense in the future if customers who buy on credit currently are unable to pay their accounts. Are the accounting procedures for these two contingent costs (warranty expense and bad debt expense) related or guided by the same accounting principle? Briefly explain. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 58 Test Bank for Accounting Principles, Tenth Edition Solution 215 The accounting procedures for both warranty expense and bad debt expense are guided by the expense recognition principle. Accounting for warranty expense requires matching the expense with the period in which the revenue is earned for the product under warranty. Similarly, accounting for bad debt expense matches the bad debt expense resulting from credit sales with the period when revenue from the credit sale is earned. The accounting procedures for matching these costs with the related revenues are also similar because the costs can be estimated based on prior experience. Matching is possible by basing the expense on an estimate, using past data as a guide. S-A E 216 What is a contingent liability? Give an example of a contingent liability that is usually recorded in the accounts. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Solution 216 A contingent liability is a potential liability that may become an actual liability in the future. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. Warranty costs are a contingent liability usually recorded in the accounts since they are both probable in occurrence and subject to estimation. S-A E 217 An employee's net pay consists of gross pay less mandatory and voluntary payroll deductions. Identify the mandatory payroll deductions and give two or three examples of common voluntary deductions. Are these deductions recognized as payroll expenses by the employer? What type of payroll expenses does the employer incur related to having a payroll? Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 217 Mandatory payroll deductions include both federal and state income taxes and also FICA taxes. Among the deductions that are voluntary payroll deductions are United Way contributions, savings account deposits, insurance payments, and pension plan contributions. These mandatory payroll deductions do not represent payroll expenses for the employer because the employer is only acting as an agent in collecting these deductions. The expenses that do constitute payroll expenses for the employer include the federal and state unemployment taxes and the employer share of FICA taxes. S-A E 218 (a) (b)
Identify the three types of employer payroll taxes. How are tax liability accounts and payroll tax expense accounts classified in the financial statements?
Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Current Liabilities and Payroll Accounting
11 - 59
Solution 218 (a) (b)
The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement.
S-A E 219 (Ethics) Hannah Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system. Required: Is it ethical for a company to have a secret system like the one described? Explain. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
Solution 219 Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the misuse of these systems, such as to obtain unauthorized information, or to commit some other crime, that is unethical. S-A E 220 (Communication) El-Fab is a manufacturing company that makes various industrial components out of aluminum. El-Fab is located in a large city in the northeastern United States. Various labor disputes have occurred in the city, some with acrimonious public debate concerning the honesty of management. During one of El-Fab's routine employee meetings, Gary Kuehn, a production worker, brought up the issue of the cost of a worker as reported in the company's annual report. The cost was given as $32,000 per year. Gary points out that the average wage rate of $12 per hour is at most around $25,000 in gross wages. He asks whether the company is adding in overtime, because if so, the figures are misleading because the employees are not allowed to work overtime. Required: Prepare a note explaining to Mr. Kuehn how El-Fab might calculate a cost per employee that is greater than gross wages. Explain in general terms only. Do not use any calculations. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 220 (letterhead) Dear Mr. Kuehn: I was happy to meet with you in the monthly employee meetings. It was good to see that you had given so much thought to each issue. One of the issues about which you expressed concern was the company's use of a $32,000 figure as an average cost of an employee, when the average wage rate of an employee is only $12 per hour. You were right that the average gross pay of an employee is only around $25,000. There are, however, some additional costs that most employees never hear about, but that companies must pay. One of these is unemployment insurance. Exactly how much we pay depends on how many layoffs there are in the company and in the state, but we have to pay unemployment taxes on all employees. We also have to match the F.I.C.A. contributions. The greatest additional cost, however, is employee benefits. We pay around $2,000 per year per employee to get the best insurance benefits we can for our employees. We also pay for your uniforms; and we help you stay up-to-date by sponsoring employee education programs. I know this note has been pretty general—you'll be glad to see all the figures spelled out in detail in next year's annual report. Thanks again for coming to the meetings. I hope to see you again next month. (signature)
FOR INSTRUCTOR USE ONLY
CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 6 6 6 6 7 1 1
K K C C C C K K
sg
33. 34. sg 35. sg,a 36. sg,a 37.
2 3 5 6 7
K C K K K
113. 114. 115. 116. 117. 118. 119. 120. a 121. a 122. a 123. a 124. a 125. a 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137.
5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP C C C K
a
6 6 7 7 7 7 7 7 7 7 7 1 1 2 3 3 5 5 5 5 6 6
C C AP AP AP AP C K AP AP AP K C K C K K K K K C AP
a
6 6
AP AP
7 7
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 2 2 2
K K K K K K AP K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 3 3 3 3 3 3
C C K K K K C K
17. 18. 19. 20. 21. 22. 23. 24.
3 3 4 4 4 4 4 5
K K C C K K K K
25. 26. a 27. a 28. a 29. a 30. sg 31. sg 32. a
sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
1 1 1 2 1 1 1 1 1 1 1 1 1 1 5 3 1 1 3 1 2 2 2 2 2
K K K K K K K K K K K K K K C K K K K AP AP AP K C K
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
3 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K C AP AP AP AP AP AP AP AP AP AP AP AP C K K AP C C C C AP AP AP
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.
4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5
K K K C AP AP AP AP K K K K K K AP AP AP AP K C K K K K C
138. 139. a 140. a 141. a 142. a 143. a 144. a 145. a 146. a 147. a 148. st 149. sg 150. st 151. sg 152. st 153. sg 154. st 155. sg 156. st 157. sg,a 158. sg.a 159. a
Brief Exercises 160. 161. sg st a
2 2
AP AP
162. 163.
3 4
AP AP
164. 165.
5 5
AP AP
166. 167.
a
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
a
168. 169.
a
12 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 170. 171. 172. 173. 174.
2 2 2 3 3
AP AP AP AP AP
175. 176. 177. 178. 179.
3 3 3 3 3,4
AP AP AP AP AP
180. 181. 182. 183. 184.
4 5 4 5 5
AP AP AP AP AP
185. 186. 187. a 188. a 189.
5 5 5 6 6
AP AP AP AP AP
6 6 6
K K K
a
190. 191. a 192. a 193. a 194. a
6 6 6,7 7 7
AP AP AP AP AP
Completion Statements 195. 196. 197.
1 1 1
K K K
198. 199. 200.
3 3 3
K K K
201. 202. 203.
3 5 5
K K K
a
204. 205. a 206. a
Matching Statements 207.
1
K
Short-Answer Essay 208. 209.
1 3
S S
210. 211.
4 5
S S
212. 213.
1 1
S S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5.
TF TF TF TF TF
31. 32. 38. 39. 40.
TF TF MC MC MC
42. 43. 44. 45. 46.
6. 7. 8. 9.
TF TF TF TF
10. 33. 41. 56.
TF TF MC MC
58. 59. 60. 61.
11. 12. 13. 14. 15. 16. 17.
TF TF TF TF TF TF TF
18. 34. 53. 56. 63. 70. 71.
TF TF MC MC MC MC MC
72. 73. 74. 75. 76. 77. 78.
19. 20. 21.
TF TF TF
22. 23. 88.
TF TF MC
89. 90. 91.
Type
Item
Type
Item
Study Objective 1 MC 47. MC 52. MC 48. MC 54. MC 49. MC 55. MC 50. MC 57. MC 51. MC 149. Study Objective 2 MC 62. MC 66. MC 63. MC 67. MC 64. MC 68. MC 65. MC 69. Study Objective 3 MC 79. MC 86. MC 80. MC 87. MC 81. MC 152. MC 82. MC 153. MC 83. MC 162. MC 84. MC 173. MC 85. MC 174. Study Objective 4 MC 92. MC 95. MC 93. MC 96. MC 94. MC 97.
Type
Item
Type
Item
Type
MC MC MC MC MC
150. 195. 196. 197. 207.
MC C C C MA
208. 212. 213.
SA SA SA
MC MC MC MC
151. 160. 161. 170.
MC BE BE Ex
171. 172.
Ex Ex
MC MC MC MC BE Ex Ex
175. 176. 177. 178. 179. 187. 198.
Ex Ex Ex Ex Ex Ex C
199. 200. 201. 209.
C C C SA
MC MC MC
98. 163. 179.
MC BE Ex
180. 182. 210.
Ex Ex SA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
24. 25. 35. 52. 99. 100.
TF TF TF MC MC MC
a
26. 27. a 28. a 29. a 36. a 121.
TF TF TF TF TF MC
a
a
TF TF MC
a
30. 37. a 140. a
101. 102. 103. 104. 105. 106.
MC MC MC MC MC MC
122. 123. a 124. a 125. a 126. a 127.
MC MC MC MC MC MC
a
a
MC MC MC
a
a
141. 142. a 143. a
107. 108. 109. 110. 111. 112. 128. 129. a 130. a 131. a 132. a 133. a
144. 145. a 146. a
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 5 MC 113. MC 119. MC 114. MC 120. MC 115. MC 154. MC 116. MC 155. MC 117. MC 156. MC 118. MC 157. a Study Objective 6 MC a134. MC a158. MC a135. MC a159. MC a136. MC 166. MC a137. MC 167. a a MC 138. MC 188. MC a139. MC a189. Study Objective a7 MC a147. MC a169. MC a148. MC a192. MC a168. BE a193.
MC MC MC MC MC MC
164. 165. 181. 183. 184. 185.
BE BE Ex Ex Ex Ex
MC MC BE BE Ex Ex
a
190. 191. a 192. a 204. a 205. a 206.
Ex Ex Ex C C C
BE Ex Ex
a
Ex
BE = Brief Exercise Ex = Exercise
a
194.
186. 187. 202. 203. 211.
Ex Ex C C SA
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Identify the characteristics of the partnership form of business organization. The principal characteristics of a partnership are: (a) association of individuals, (b) mutual agency, (c) limited life, (d) unlimited liability, and (e) co-ownership of property. 2. Explain the accounting entries for the formation of a partnership. When formed, a partnership records each partner's initial investment at the fair value of the assets at the date of their transfer to the partnership. 3. Identify the bases for dividing net income or net loss. Partnerships divide net income or net loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on beginning or average capital balances, (c) salaries to partners and the remainder on a fixed ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to partners, interest on partners' capital, and the remainder on a fixed ratio.
FOR INSTRUCTOR USE ONLY
12 - 4
Test Bank for Accounting Principles, Tenth Edition
4. Describe the form and content of partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The principal differences are: (a) The partnership shows the division of net income on the income statement. (b) The owners' equity statement is called a partners' capital statement. (c) The partnership reports each partner's capital on the balance sheet. 5. Explain the effects of the entries to record the liquidation of a partnership. When a partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of cash to the partners on the basis of their capital balances. a
6. Explain the effects of the entries when a new partner is admitted. The entry to record the admittance of a new partner by purchase of a partner's interest affects only partners' capital accounts. The entries to record the admittance by investment of assets in the partnership (a) increase both net assets and total capital and (b) may result in recognition of a bonus to either the old partners or the new partner.
a
7. Describe the effects of the entries when a partner withdraws from the firm. The entry to record a withdrawal from the firm when the partners pay from their personal assets affects only partners' capital accounts. The entry to record a withdrawal when payment is made from partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a bonus either to the retiring partner or the remaining partners.
TRUE-FALSE STATEMENTS 1.
The personal assets, liabilities, and personal transactions of partners are excluded from the accounting records of the partnership.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
3.
A major advantage of the partnership form of organization is that the partners have unlimited liability.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
4.
Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
5.
The partnership agreement between partners must be in writing.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 6.
12 - 5
If a partner invests noncash assets in a partnership, they should be recorded by the partnership at their fair value.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
7.
L. Hill invests the following assets in a new partnership: $30,000 in cash, and equipment that cost $60,000 but has a book value of $34,000 and fair value of $40,000. Hill, Capital will be credited for $64,000.
Ans: F, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
8.
Two proprietorships cannot combine and form a partnership.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
9.
If a partner's investment in a partnership consists of equipment that has accumulated depreciation of $8,000, it would not be appropriate for the partnership to record the accumulated depreciation.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
10.
If a partner's investment in a partnership consists of Accounts Receivable of $25,000 and an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
11.
Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio of their capital equity balances.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
12.
If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
13.
Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
If a partnership has a loss for the period, the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 6 16.
Test Bank for Accounting Principles, Tenth Edition The partners' drawing accounts are closed each period into the Income Summary account.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
Salary allowances to partners are a major expense on most partnership income statements.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners' invested capital during the period.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
19.
The financial statements of a partnership are similar to those of a proprietorship.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
21.
The function of the Partners' Capital Statement is to explain the changes in partners' capital account balances during a period.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
A detailed listing of all the assets invested by a partner in a partnership appears on the Partners' Capital Statement.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
Total partners' equity of a partnership is equal to the sum of all partners' capital account balances.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
The distribution of cash to partners in a partnership liquidation is always made based on the partners' income sharing ratio.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
The liquidation of a partnership means that a new partner has been admitted to the partnership.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
26.
The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
27.
12 - 7
If a new partner is admitted into a partnership by investment, the total assets and total capital will change.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
28.
A bonus to old partners results when the new partner's capital credit on the date of admittance is greater than his or her investment in the firm.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it indicates that a bonus was paid to the original partners.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
30.
A bonus to the remaining partners results when a retiring partner receives partnership assets which are less than his or her capital balance on the date of withdrawal.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
32.
Once assets have been invested in the partnership, they are owned jointly by all partners.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
33.
Each partner's initial investment in a partnership should be recorded at book value.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
Partnership income is shared in proportion to each partner's capital equity interest unless the partnership contract specifically indicates the manner in which net income or net loss is to be divided.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
35.
In a liquidation, the final distribution of cash to partners should be on the basis of their income ratios.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
36.
In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
37.
The withdrawal of a partner legally dissolves the partnership.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 8
Test Bank for Accounting Principles, Tenth Edition
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
T T F T F T
Item
7. 8. 9. 10. 11. 12.
Ans.
F F T F F F
Item
13. 14. 15. 16. 17. 18.
Ans.
F F T F F T
Item
19. 20. 21. 22. 23. 24.
Ans.
T F T F T F
Item
Ans.
25. 26. a 27. a 28. a 29. a 30. a
Item
F T T F F T
31. 32. 33. 34. 35. a 36.
Ans.
Item
Ans.
F T F F F F
a
T
37.
MULTIPLE CHOICE QUESTIONS 38.
A hybrid form of business organization with certain features like a corporation is a(n) a. limited liability partnership. b. limited liability company. c. "S" corporation. d. sub-chapter "S" corporation.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
39.
A partnership a. has only one owner. b. pays taxes on partnership income. c. must file an information tax return. d. is not an accounting entity for financial reporting purposes.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
40.
A general partner in a partnership a. has unlimited liability for all partnership debts. b. is always the general manager of the firm. c. is the partner who lacks a specialization. d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
41.
The individual assets invested by a partner in a partnership a. revert back to that partner if the partnership liquidates. b. determine that partner's share of net income or loss for the year. c. are jointly owned by all partners. d. determine the scope of authority of that partner.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
42.
Which one of the following would not be considered a disadvantage of the partnership form of organization? a. Limited life b. Unlimited liability c. Mutual agency d. Ease of formation
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 43.
12 - 9
The partnership form of business is a. restricted to law and medical practices. b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
44.
Which of the following is not a principal characteristic of the partnership form of business organization? a. Mutual agency b. Association of individuals c. Limited liability d. Limited life
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
The partnership agreement should include each of the following except the a. date of the partnership inception. b. principal location of the firm. c. surviving family members in the event of a partner's death. d. Each of these should be included.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46.
Which of the following statements is true regarding the form of a legally binding partnership contract? a. The partnership contract must be in writing. b. The partnership contract may be based on a handshake. c. The partnership contract may be implied. d. The partnership contract cannot be oral.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47.
Which of the following statements about a partnership is correct? a. The personal assets of a partner are included in the partnership accounting records. b. A partnership is not required to file an information tax return. c. Each partner's share of income is taxable to the partnership. d. A partnership represents an accounting entity for financial reporting purposes.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
In a partnership, mutual agency means a. each partner acts on his own behalf when engaging in partnership business. b. the act of any partner is binding on all other partners, only if partners act within their scope of authority. c. an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for the partnership. d. that partners must pay taxes on a mutual or combined basis.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 10 Test Bank for Accounting Principles, Tenth Edition 49.
A partnership a. is dissolved only by the withdrawal of a partner. b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate. d. has unlimited life.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
50.
The partner in a limited partnership that has unlimited liability is referred to as the a. lead partner. b. head partner. c. general partner. d. unlimited partner.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
51.
Limited partnerships a. must have at least one general partner. b. guarantee that a partner will receive a return. c. guarantee that a partner will get back his original investment. d. are limited to only three partners.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
52.
The Polen-James partnership is terminated when creditor claims exceed partnership assets by $40,000. James is a millionaire and Polen has no personal assets. Polen's partnership interest is 75% and James's is 25%. Creditors a. must collect their claims equally from Polen and James. b. may collect the entire $40,000 from James. c. must collect their claims 75% from Polen and 25% from James. d. may not require James to use his personal assets to satisfy the $40,000 in claims.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
53.
Which of the following statements about partnerships is incorrect? a. Partnership assets are co-owned by partners. b. If a partnership is terminated, the assets do not legally revert to the original contributor. c. If the partnership agreement does not specify the manner in which net income is to be shared, it is distributed according to capital contributions. d. Each partner has a claim on assets equal to the balance in the partner's capital account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
54.
Which of the following is not an advantage of the partnership form of business? a. Mutual agency b. Ease of formation c. Ease of decision making d. Freedom from governmental regulations and restrictions
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 55.
12 - 11
The largest companies in the United States are primarily organized as a. limited partnerships. b. partnerships. c. corporations. d. proprietorships.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
56.
The basis for dividing partnership net income or net loss is referred to as any of the following except the a. income ratio. b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
57.
Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the “articles of co-partnership.” b. Oral agreements are preferable to written articles. c. It should specify the different relationships that are to exist among the partners. d. It should state procedures for submitting disputes to arbitration.
Ans: B, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
58.
Horton invests personally owned equipment, which originally cost $110,000 and has accumulated depreciation of $30,000 in the Horton and Matile partnership. Both partners agree that the fair value of the equipment was $60,000. The entry made by the partnership to record Horton's investment should be a. Equipment .......................................................................... 110,000 Accumulated Depreciation—Equipment ..................... 30,000 Horton, Capital ........................................................... 80,000 b. Equipment .......................................................................... 80,000 Horton, Capital ........................................................... 80,000 c. Equipment .......................................................................... 60,000 Loss on Purchase of Equipment ......................................... 20,000 Accumulated Depreciation—Equipment.............................. 30,000 Horton, Capital ........................................................... 110,000 d. Equipment .......................................................................... 60,000 Horton, Capital ........................................................... 60,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Bob is investing in a partnership with Andy. Bob contributes as part of his initial investment, Accounts Receivable of $120,000; an Allowance for Doubtful Accounts of $18,000; and $12,000 cash. The entry that the partnership makes to record Bob's initial contribution includes a a. credit to Bob, Capital for $132,000. b. debit to Accounts Receivable for $102,000. c. credit to Bob, Capital for $114,000. d. debit to Allowance for Doubtful Accounts for $18,000.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 12 Test Bank for Accounting Principles, Tenth Edition 60.
Which of the following would not be recorded in the entry for the formation of a partnership? a. Accumulated depreciation b. Allowance for doubtful accounts c. Accounts receivable d. All of these would be recorded.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
Sam is investing in a partnership with Jerry. Sam contributes equipment that originally cost $84,000, has a book value of $40,000, and a fair value of $52,000. The entry that the partnership makes to record Sam's initial contribution includes a a. debit to Equipment for $44,000. b. debit to Equipment for $84,000. c. debit to Equipment for $52,000. d. credit to Accumulated Depreciation for $44,000.
Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
62.
Amber contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment? a. The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value. b. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed. c. The allowance account should not be carried onto the books of the partnership. d. The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
63.
Which one of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Salary allowance to partners c. Supplies used d. Freight-out
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
A partner invests into a partnership a building with an original cost of $180,000 and accumulated depreciation of $80,000. This building has a $140,000 fair value. As a result of the investment, the partner’s capital account will be credited for a. $140,000. b. $100,000. c. $180,000. d. $240,000.
Ans: A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 65.
12 - 13
Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of $20,000 and a fair value of $28,000. Vicky will invest a building with a book value of $60,000 and a fair value of $84,000 with a mortgage of $30,000. At what amount should the building be recorded? a. $60,000 b. $54,000 c. $84,000 d. $90,000
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66.
Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of $20,000 and a fair value of $28,000. Vicky will invest a building with a book value of $60,000 and a fair value of $84,000 with a mortgage of $30,000. What amount should be recorded in Vicky’s capital account? a. $60,000 b. $54,000 c. $84,000 d. $28,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of $20,000 and a fair value of $28,000. Vicky will invest a building with a book value of $60,000 and a fair value of $84,000 with a mortgage of $30,000. What amount should be recorded in Danny’s capital account? a. $60,000 b. $54,000 c. $84,000 d. $28,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
68.
Rosen and Noble decide to organize a partnership. Rosen invests $15,000 cash, and Noble contributes $12,000 cash and equipment having a book value of $6,000. Choose the entry to record Noble’s investment in the partnership assuming the equipment has a fair value of $9,000. a. Cash ................................................................................... 12,000 Equipment ......................................................................... 6,000 Noble, Capital ........................................................... 18,000 b. Equipment ......................................................................... 6,000 Noble, Capital ........................................................... 6,000 c. Cash ................................................................................... 12,000 Noble, Capital ........................................................... 12,000 d. Cash ................................................................................... 12,000 Equipment ......................................................................... 9,000 Noble, Capital ........................................................... 21,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 14 Test Bank for Accounting Principles, Tenth Edition 69.
L. Trevino and B. Hogan combine their individual sole proprietorships to start the TrevinoHogan partnership. L. Trevino and B. Hogan invest in the partnership as follows Book Value Fair Value Trevino Hogan Trevino Hogan Cash $21,000 $6,000 $21,000 $6,000 Accounts Receivable 9,000 3,000 9,000 3,000 Allowance for Doubtful Accounts (1,500) (600) (2,100) (900) Equipment 15,000 24,000 13,500 9,000 Accumulated Depreciation (3,000) (9,000) The entries to record the investment will include a credit to: a. Trevino, Capital of $40,500. b. Hogan, Capital of $17,100. c. Trevino, Capital of $42,000. d. Hogan, Capital of $23,100.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
70.
Partners Don and Ron have agreed to share profits and losses in an 80:20 ratio respectively, after Don is allowed a salary allowance of $60,000 and Ron is allowed a salary allowance of $30,000. If the partnership had net income of $60,000 for 2012, Ron’s share of the income would be a. $30,000. b. $24,000. c. $36,000. d. $6,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
The partnership agreement of Nieto, Keller, and Pickert provides for the following income ratio: (a) Nieto, the managing partner, receives a salary allowance of $54,000, (b) each partner receives 15% interest on average capital investment, and (c) remaining net income or loss is divided equally. The average capital investments for the year were: Nieto $300,000, Keller $600,000, and Pickert $900,000. If partnership net income is $360,000, the amount distributed to Keller should be: a. $90,000. b. $93,000. c. $102,000. d. $120,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 72.
12 - 15
The partnership agreement of Nieto, Keller, and Pickert provides for the following income ratio: (a) Nieto, the managing partner, receives a salary allowance of $54,000, (b) each partner receives 15% interest on average capital investment, and (c) remaining net income or loss is divided equally. The average capital investments for the year were: Nieto $300,000, Keller $600,000, and Pickert $900,000. If partnership net income is $270,000, the amount distributed to Nieto should be a. $45,000. b. $81,000. c. $90,000. d. $99,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
Partners Acer and Barr have capital balances in a partnership of $80,000 and $120,000, respectively. They agree to share profits and losses as follows: Acer Barr As salaries $20,000 $24,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was $100,000, what will be the distribution of income to Barr? a. $46,000 b. $54,000 c. $40,000 d. $20,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
Partners Acer and Barr have capital balances in a partnership of $80,000 and $120,000, respectively. They agree to share profits and losses as follows: Acer Barr As salaries $20,000 $24,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was $60,000, what will be the distribution of income to Acer? a. $26,000 b. $34,000 c. $20,000 d. $28,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 16 Test Bank for Accounting Principles, Tenth Edition 75.
Partners Acer and Barr have capital balances in a partnership of $80,000 and $120,000, respectively. They agree to share profits and losses as follows: Acer Barr As salaries $20,000 $24,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If net loss for the year was $4,000, what will be the distribution to Barr? a. $24,000 income b. $2,000 income c. $2,000 loss d. $4,000 loss
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
76.
Partners Bob and Don have agreed to share profits and losses in an 80:20 ratio respectively, after Bob is allowed a salary allowance of $140,000 and Don is allowed a salary allowance of $70,000. If the partnership had net income of $140,000 for 2012, Don’s share of the income would be a. $70,000. b. $56,000. c. $84,000. d. $14,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
77.
The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is a. on a fixed ratio. b. interest on capital balances and salaries to the partners. c. on a ratio based average capital balances. d. salaries to the partners and the remainder on a fixed ratio.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
78.
The Raney and Kiser partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $200,000 for Raney and $100,000 for Kiser. At the beginning of the year, Raney's Capital account had a balance of $400,000, while Kiser' Capital account had a balance of $350,000. Net income for the year was $250,000. The balance of Kiser' Capital account at the end of the year after closing is a. $475,000. b. $100,000. c. $425,000. d. $450,000.
Ans: C, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 79.
12 - 17
A partner's share of net income is recognized in the accounts through a. adjusting entries. b. closing entries. c. correcting entries. d. accrual entries.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
The partnership of Lane and Starr reports net income of $60,000. The partners share equally in income and losses. The entry to record the partners' share of net income will include a a. credit to Income Summary for $60,000. b. credit to Lane, Capital for $30,000. c. debit to Starr, Capital for $30,000. d. credit to Starr, Drawing for $30,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
Mel receives $420,000 and Norm receives $280,000 in a split of $700,000 net income. Which expression does not reflect the income splitting arrangement? a. 3:2 b. 3/5 & 2/5 c. 6:4 d. 2:1
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
82.
An income ratio based on capital balances might be appropriate when a. service is a primary consideration. b. some, but not all, partners plan to work in the business. c. funds invested in the partnership are considered the critical factor. d. little net income is expected.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
83.
If the partnership agreement specifies salaries to partners, interest on partners' capital, and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest, a. only salaries are allocated to the partners. b. only interest is allocated to the partners. c. the entire net income is shared on a fixed ratio. d. both salaries and interest are allocated to the partners.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
84.
Which of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Income tax expense c. Rent expense d. Utilities expense
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 18 Test Bank for Accounting Principles, Tenth Edition 85.
The net income of the Rice and Nance partnership is $300,000. The partnership agreement specifies that Rice and Nance have a salary allowance of $80,000 and $120,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $200,000. Any remaining net income or net loss is shared equally. What is Rice's share of the $300,000 net income? a. $80,000 b. $100,000 c. $110,000 d. $130,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods
86.
The net income of the Rice and Nance partnership is $300,000. The partnership agreement specifies that Rice and Nance have a salary allowance of $80,000 and $120,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $200,000. Any remaining net income or net loss is shared equally. What is the balance of Nance's Capital account at the end of the year after net income has been distributed? a. $340,000 b. $320,000 c. $370,000 d. $350,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
87.
The net income of the Linder and Hill partnership is $250,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $200,000 (Linder) and $150,000 (Hill) have been allocated. At the beginning of the year, Linder 's Capital account had a balance of $500,000 and Hill's Capital account had a balance of $650,000. What is the balance of Hill's Capital account at the end of the year after profits and losses have been distributed? a. $650,000 b. $100,000 c. $750,000 d. $775,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods
88.
A partners' capital statement explains a. the amount of legal liability of each of the partners. b. the types of assets invested in the business by each partner. c. how the partnership will be capitalized if a new partner is admitted to the partnership. d. the changes in each partner's capital account and in total partnership capital during a period.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 89.
12 - 19
Each of the following is used in preparing the partners’ capital statement except the a. balance sheet. b. income statement. c. partners’ capital accounts. d. partners’ drawing accounts.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
The owners' equity statement for a partnership is called the a. partners' proportional statement. b. partners' capital statement. c. statement of shareholders' equity. d. capital and drawing statement.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
91.
Which of the following would not cause an increase in partnership capital? a. Drawings b. Net income c. Additional capital investment by the partners d. Initial capital investment by the partners
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
92.
Mary Janane's capital statement reveals that her drawings during the year were $100,000. She made an additional capital investment of $50,000 and her share of the net loss for the year was $20,000. Her ending capital balance was $400,000. What was Mary Janane's beginning capital balance? a. $450,000 b. $370,000 c. $470,000 d. $520,000
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods
93.
Jeff Lake started the year with a capital balance of $270,000. During the year, his share of partnership net income was $240,000 and he withdrew $45,000 from the partnership for personal use. He made an additional capital contribution of $75,000 during the year. The amount of Jeff Lake's capital balance that will be reported on the year-end balance sheet will be a. $240,000. b. $585,000. c. $450,000. d. $540,000.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods
FOR INSTRUCTOR USE ONLY
12 - 20 Test Bank for Accounting Principles, Tenth Edition 94.
The Partners' Capital Statement for the United Center reported the following information in total: Capital, January 1 ................................................ $120,000 Additional investment ........................................... 40,000 Drawings .............................................................. 80,000 Net income ........................................................... 100,000 The partnership has three partners: Kent, Hall, and Penn with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners? a. Kent, $80,000; Hall, $40,000; Penn, $80,000. b. Kent, $72,000: Hall, $36,000; Penn, $72,000. c. Kent, $136,000; Hall, $68,000; Penn, $136,000. d. Kent, $90,000; Hall, $48,000; Penn, $90,000.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods
95.
The total column of the Partners' Capital Statement for Orson Company is as follows: Capital, January 1 ................................................ $300,000 Additional investment ........................................... 120,000 Drawings .............................................................. 180,000 Net income ........................................................... 360,000 The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner? a. $144,000 b. $96,000 c. $120,000 d. $132,000
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods
96.
The partners' drawing accounts are a. reported on the income statement. b. reported on the balance sheet. c. closed to Income Summary. d. closed to the partners' capital accounts.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
The Uniform Partnership Act provides that a. a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners. b. a partner must obtain the approval of other partners before selling his or her interest. c. the price paid in a purchase of partner's interest must be equal to the capital equity acquired. d. the price paid in a purchase of partner's interest must be greater than the capital equity acquired.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 98.
12 - 21
The balance sheet of a partnership will a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner. c. show a separate drawing account for each partner. d. show the amount of income that was distributed to each partner.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
The liquidation of a partnership may result from each of the following except the a. bankruptcy of the partnership. b. death of a partner. c. retirement of a partner. d. sale of the business by the partners.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
100.
In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated a. first to creditors and the remainder to partners. b. to the partners on the basis of their capital balances. c. to the partners on the basis of their income ratios. d. only after all creditors have been paid.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
101.
In the liquidation of a partnership, any partner who has a capital deficiency a. has a personal debt to the partnership for the amount of the deficiency. b. is automatically terminated as a partner. c. will receive a cash distribution only on the basis of his or her income-sharing ratio. d. is not obligated to make up the capital deficiency.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
102.
Partners Audrey, Betty, and Charles have capital account balances of $180,000 each. The income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a book value of $150,000 are sold for $60,000. The balance of Betty's Capital account after the sale is a. $135,000. b. $153,000. c. $162,000. d. $198,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 22 Test Bank for Accounting Principles, Tenth Edition 103.
The partners' income and loss sharing ratio is 2:3:5, respectively. CINDI, JENNI, AND BECKI PARTNERSHIP Balance Sheet December 31, 2012 Assets
Liabilities and Owners' Equity
Cash Noncash assets
$ 90,000 570,000
Total
$660,000
Liabilities Cindi, Capital Jenni, Capital Becki, Capital Total
$300,000 120,000 180,000 60,000 $660,000
If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for $390,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner? a. Cindi, $72,000; Jenni, $108,000; Becki, $0. b. Cindi, $84,000; Jenni, $126,000; Becki, $30,000. c. Cindi, $69,000; Jenni, $111,000; Becki, $0. d. Cindi, $66,000; Jenni, $114,000; Becki, $0. Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
104.
The partners' income and loss sharing ratio is 2:3:5, respectively. CINDI, JENNI, AND BECKI PARTNERSHIP Balance Sheet December 31, 2012 Assets
Liabilities and Owners' Equity
Cash Noncash assets
$ 90,000 570,000
Total
$660,000
Liabilities Cindi, Capital Jenni, Capital Becki, Capital Total
$300,000 120,000 180,000 60,000 $660,000
If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for $750,000, and creditors are paid in full, what is the total amount of cash that Cindi will receive in the distribution of cash to partners? a. $36,000 b. $234,000 c. $156,000 d. $150,000 Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 105.
12 - 23
The partners' income and loss sharing ratio is 2:3:5, respectively. CINDI, JENNI, AND BECKI PARTNERSHIP Balance Sheet December 31, 2012 Assets
Liabilities and Owners' Equity
Cash Noncash assets
$ 90,000 570,000
Total
$660,000
Liabilities Cindi, Capital Jenni, Capital Becki, Capital Total
$300,000 120,000 180,000 60,000 $660,000
If the Cindi, Jenni, and Becki Partnership is liquidated and the noncash assets are worthless, the creditors will look to what partner's personal assets for settlement of the creditors' claims? a. The personal assets of Partner Jenni. b. The personal assets of Partners Cindi and Becki. c. The personal assets of Partners Cindi, Jenni, and Becki. d. The personal assets of the partners are not available for partnership debts. Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
106.
If a partner has a capital deficiency and does not have the personal resources to eliminate it, a. the creditors will have to absorb the capital deficiency. b. the other partners will absorb the capital deficiency on the basis of their respective capital balances. c. the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios. d. neither the creditors nor the other partners will have to absorb the capital deficiency.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
107.
When a partnership terminates business, the sale of noncash assets is called a. liquidation. b. realization. c. recognition. d. disposition.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
108.
The liquidation of a partnership a. cannot be a voluntary act of the partners. b. terminates the business. c. eliminates those partners with a capital deficiency. d. cannot occur unless all partners approve.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 24 Test Bank for Accounting Principles, Tenth Edition 109.
The liquidation of a partnership is a process containing the following steps: 1. 2. 3. 4.
Pay partnership liabilities in cash. Allocate the gain or loss on realization to the partners on their income ratios. Sell noncash assets for cash and recognize a gain or loss on realization. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process. a. 3, 2, 4, 1. b. 3, 2, 1, 4. c. 1, 3, 2, 4. d. 1, 4, 3, 2. Ans: B, SO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
110.
In the final step of the liquidation process, remaining cash is distributed to partners a. on an equal basis. b. on the basis of the income ratios. c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
111.
In the liquidation process, if a capital account shows a deficiency a. the partner with a deficiency has an obligation to the partnership for the amount of the deficiency. b. it may be written off to a "Loss" account. c. it is disregarded until after the partnership books are closed. d. it can be written off to a "Gain" account.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
112.
Before distributing any remaining cash to partners in a partnership liquidation, it is necessary to do each of the following except a. sell noncash assets for cash. b. recognize a gain or loss on realization. c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
113.
Mary, Ann, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and 20%, respectively. Cash of $600,000 was available after the partnership’s assets were liquidated. Prior to the final distribution of cash, Mary’s capital balance was $400,000, Ann’s capital balance was $300,000, and Tina had a capital deficiency of $100,000. Assuming Tina contributes cash to match her capital deficiency, Mary should receive a. $350,000. b. $337,500. c. $262,500. d. $400,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 114.
12 - 25
Arlene, Brad, and Chick are partners, sharing income 2:1:2. After selling all of the assets for cash, dividing gains and losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Arlene, $10,000 Cr; Brad, $10,000 Cr; and Chick, $30,000 Cr. How much cash should be distributed to Arlene? a. $6,000 b. $20,000 c. $10,000 d. $16,667
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
115.
In liquidation, balances prior to the distribution of cash to the partners are: Cash $600,000; Presley, Capital $280,000; Laswell, Capital $260,000, and Hunter, Capital $60,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Presley? a. $250,000 b. $272,500 c. $280,000 d. $300,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
116.
In liquidation, balances prior to the distribution of cash to the partners are: Cash $510,000; Presley, Capital $280,000; Laswell, Capital $260,000, and Hunter, Capital $30,000 deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to Laswell if Hunter does not pay his deficiency? a. $245,000 b. $252,500 c. $237,500 d. $260,000
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
117.
In liquidation, balances prior to the distribution of cash to the partners are: Cash $480,000; Peterson, Capital $224,000; Staley, Capital $208,000, and Klugman, Capital $48,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson? a. $200,000 b. $218,000 c. $224,000 d. $240,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
118.
In liquidation, balances prior to the distribution of cash to the partners are: Cash $408,000; Peterson, Capital $224,000; Staley, Capital $208,000, and Klugman, Capital $24,000 deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to Staley if Klugman does not pay his deficiency? a. $196,000 b. $202,000 c. $190,000 d. $208,000
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 26 Test Bank for Accounting Principles, Tenth Edition 119.
Use the following account balance information for Grinotfin Partnership with income ratios of 2:4:4 for Grigsby, Nott, and Fine, respectively. Assets $ 27,000
Cash Accounts receivable Inventory
66,000 219,000 $312,000
Liabilities and Owner’s Equity Accounts payable $ 63,000 Grigsby, Capital 69,000 Nott, Capital 24,000 Fine, Capital 156,000 $312,000
Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for $255,000. The amount of cash that would ultimately be distributed to Fine would be a. $156,000. b. $144,000. c. $102,000. d. $258,000. Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
120.
Use the following account balance information for Grinotfin Partnership with income ratios of 2:4:4 for Grigsby, Nott, and Fine, respectively. Assets Cash $ 27,000 Accounts receivable 66,000 Inventory 219,000 $312,000
Liabilities and Owner’s Equity Accounts payable $ 63,000 Grigsby, Capital 69,000 Nott, Capital 24,000 Fine, Capital 156,000 $312,000
Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for $180,000. As a result, one of the partners has a capital deficiency which that partner decides not to repay. The amount of cash that would ultimately be distributed to Fine would be a. $156,000. b. $114,000. c. $72,000. d. $102,000. Ans: D, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
121.
D. Dieker purchases a 25% interest for $30,000 when the Reeves, Porter, Kiner partnership has total capital of $270,000. Prior to the admission of Dieker, each partner has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital balance to Dieker. The amount to be relinquished by Kiner is a. $15,000. b. $19,000. c. $22,500. d. $37,500.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 27
a
122. Finney is admitted to a partnership with a 25% capital interest by a cash investment of $180,000. If total capital of the partnership is $780,000 before admitting Finney, the bonus to Finney is a. $60,000. b. $30,000. c. $90,000. d. $120,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
123. Eberle and Lankton are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Eberle, $280,000 and Lankton, $240,000. On that date, they agree to admit Newman as a partner with a one-third capital interest. If Newman invests $200,000 in the partnership, what is Eberle's capital balance after Newman's admittance? a. $240,000 b. $253,333 c. $256,000 d. $280,000
Ans: C, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
124. Eberle and Lankton are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Eberle, $280,000 and Lankton, $240,000. On that date, they agree to admit Newman as a partner with a one-third capital interest. If Newman invests $320,000 in the partnership, what is Lankton's capital balance after Newman's admittance? a. $280,000 b. $256,000 c. $252,000 d. $240,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
125. King and Otto are partners who share profits and losses equally and have capital balances of $560,000 and $490,000, respectively. Pitts is admitted into the partnership by investing $490,000 for a 30% capital interest. The account balance of Otto, Capital after the admission of Pitts would be a. $462,000. b. $476,000. c. $504,000. d. $490,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 28 Test Bank for Accounting Principles, Tenth Edition a
126. Roper and Walton have partnership capital balances of $480,000 and $360,000, respectively. Walton negotiates to sell his partnership interest to Molle for $420,000. Roper agrees to accept Molle as a new partner. The partnership entry to record this transaction is a. Cash ................................................................................... 420,000 Molle, Capital ............................................................. 420,000 b. Walton, Capital.................................................................... 420,000 Molle, Capital ............................................................. 420,000 c. Cash ................................................................................... 60,000 Walton, Capital.................................................................... 360,000 Molle, Capital ............................................................. 420,000 d. Walton, Capital.................................................................... 360,000 Molle, Capital ............................................................. 360,000
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
127. Gore and Dean share partnership profits and losses in the ratio of 6:4. Gore's Capital account balance is $320,000 and Dean’s Capital account balance is $200,000. Naylor is admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership interest. Gore, Dean and Naylor's capital balances after Naylor's investment will be Gore Dean Naylor a. $320,000 $200,000 $360,000 b. $404,000 $256,000 $220,000 c. $396,000 $264,000 $220,000 d. $390,000 $270,000 $220,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
128. Judy and Sue have partnership capital account balances of $960,000 and $720,000, respectively and share profits and losses equally. Sara is admitted to the partnership by investing $400,000 for a one-fourth ownership interest. The balance of Sue's Capital account after Sara is admitted is a. $660,000. b. $720,000. c. $780,000. d. $520,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
129. The admission of a new partner to an existing partnership a. may be accomplished only by investing assets in the partnership. b. requires purchasing the interest of one or more existing partners. c. causes a legal dissolution of the existing partnership. d. is almost always accompanied by the liquidation of the business.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 29
a
130. When a partnership interest is purchased a. every partner’s capital account is affected. b. the transaction is a personal transaction between the purchaser and the selling partner(s). c. the buyer receives equity equal to the amount of cash paid. d. all partners will receive some part of the purchase price.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
131. Baker and Mays each sell 1/3 of their partnership interest to Pool, receiving $210,000 each. At the time of the admission, each partner has a $630,000 capital balance. The entry to record the admission of Pool will show a a. debit to Cash for $420,000. b. credit to Pool, Capital for $630,000. c. debit to Mays, Capital for $630,000. d. debit to Baker, Capital for $210,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
132. Bell and Herr sell 1/4 of their partnership interest to Ives receiving $400,000 each. At the time of admission, Bell and Herr each had a $700,000 capital balance. The admission of Ives will cause the net partnership assets to a. increase by $800,000. b. remain at $1,400,000. c. decrease by $800,000. d. remain at $2,200,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
133. Diaz and Helms sell to Mayo a 1/3 interest in the Diaz-Helms partnership. Mayo will pay Diaz and Helms each $70,000 for admission into the organization. Before this transaction, Diaz and Helms show capital balances of $105,000 each. The journal entry to record the admission of Mayo will a. show a debit to Cash for $140,000. b. not show a debit to Cash. c. show a debit to Helms, Capital for $70,000. d. show a credit to Mayo, Capital for $140,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
134. Garr invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to acquire a 1/4 interest. In this case a. the accounting will be the same as a purchase of an interest. b. the total net assets of the new partnership are unchanged from the previous partnership. c. the total capital of the new partnership is greater than the total capital of the old partnership. d. Garr's income ratio will automatically be 1/4.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 30 Test Bank for Accounting Principles, Tenth Edition a
135. Which of the following is correct when admitting a new partner into an existing partnership? Purchase of an Interest Admission by Investment a. Total net assets unchanged unchanged b. Total capital increased unchanged c. Total net assets unchanged increased d. Total capital unchanged unchanged
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
136. When admitting a new partner by investment, a bonus to old partners a. is usually unjustified because book values clearly reflect partnership net worth. b. is sometimes justified because goodwill may exist and it is not reflected in the accounts. c. results if the debit to cash is less than the new partner's capital credit. d. results if the debit to cash is equal to the new partner's capital credit.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
137. When admitting a new partner by investment, a bonus to old partners is allocated on a. the basis of capital balances. b. the basis of the original investment of the old partners. c. the basis of income ratios before the admission of the new partner. d. a seniority basis.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
138. A bonus to a new partner a. is prohibited by GAAP. b. results when the new partner's capital credit is less than his or her investment of assets in the firm. c. may occur when recorded book values are lower than market values. d. results when the new partner's capital credit is greater than his or her investment of assets in the firm.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
139. A bonus to a new partner will a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner. b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner. c. decrease the capital balances of existing partners based on their income ratios before the admission of the new partner. d. decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 31
a
140. On November 30, capital balances are Gast $360,000, Cook $300,000 and Irving $300,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire from the partnership. The partnership pays Gast $300,000 cash for her partnership interest. After Gast’s retirement, what is the balance of Irving’s capital account? a. $264,000 b. $300,000 c. $336,000 d. $345,000
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
141. On November 30, capital balances are Gast $360,000, Cook $300,000 and Irving $300,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire from the partnership. In order for Cook and Irving to have equal capital interests after the retirement of Gast, how much partnership cash would have to be paid to Gast for her partnership interest? a. $0. b. $320,000 c. $360,000 d. Any amount paid to Gast will cause Cook and Irving to still have equal capital balances.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
142. Mary, Jim, and Mike have partnership capital account balances of $300,000, $600,000 and $140,000, respectively. The income sharing ratio is Mary, 50%; Jim, 40%; and Mike, 10%. Mary desires to withdraw from the partnership and it is agreed that partnership assets of $260,000 will be used to pay Mary for her partnership interest. The balances of Jim's and Mike's Capital accounts after Mary's withdrawal would be a. Jim, $600,000; Mike, $140,000. b. Jim, $632,000; Mike, $148,000. c. Jim, $568,000; Mike, $132,000. d. Jim, $580,000; Mike, $120,000.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 32 Test Bank for Accounting Principles, Tenth Edition a
143. Ard, Ball, and Dole have partnership capital account balances of $400,000 each. Income and losses are shared equally. Dole agrees to sell three-fourths of his ownership interest to Ard for $350,000 and one-fourth to Ball for $125,000. Ard and Ball will use personal assets to purchase Dole's interest. The partnership's entry to record Dole's withdrawal from the partnership would be a. Dole, Capital ...................................................................... 475,000 Cash .......................................................................... 475,000 b. Dole, Capital ...................................................................... 475,000 Ard, Capital ............................................................... 350,000 Ball, Capital ............................................................... 125,000 c. Dole, Capital ...................................................................... 400,000 Ard, Capital ............................................................... 300,000 Ball, Capital ............................................................... 100,000 d. Ard, Capital ........................................................................ 356,250 Ball, Capital ........................................................................ 118,750 Dole, Capital ............................................................. 475,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
144. When a partner withdraws from the firm, which of the following reflects the correct partnership effects? Payment from Payment from Partners' Personal Assets Partnership Assets a. Total net assets decreased decreased b. Total capital decreased decreased c. Total net assets unchanged decreased d. Total capital unchanged unchanged
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
145. Which of the following is not a necessary action that the partnership must take upon the death of a partner? a. Determine the net income or net loss for the year to date. b. Discontinue business operations. c. Close the books. d. Prepare financial statements.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
146. On November 30, capital balances are Howe $150,000, Doss $125,000 and Newlin $125,000. The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the partnership. The partnership pays Howe $175,000 cash for her partnership interest. After Howe's retirement, what is the balance of Doss's capital account? a. $118,750 b. $120,000 c. $125,000 d. $162,500
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 33
a
147. On November 30, capital balances are Howe $150,000, Doss $125,000 and Newlin $125,000. The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the partnership. The partnership pays Howe $125,000 cash for her partnership interest. After Howe's retirement, what is the balance of Newlin's capital account? a. $110,000 b. $125,000 c. $140,000 d. $143,750
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
148. On November 30, capital balances are Howe $150,000, Doss $125,000 and Newlin $125,000. The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the partnership. In order for Doss and Newlin to have equal capital interests after the retirement of Howe, how much partnership cash would have to be paid to Howe for her partnership interest? a. $0 b. $133,333 c. $150,000 d. Any amount paid to Howe will cause Doss and Newlin to still have equal capital balances.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
149.
All of the following are characteristics of partnerships except a. co-ownership of property. b. mutual agency. c. unlimited life. d. association of individuals.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
150.
The Butkus, Sayers, and Halas partnership is terminated when the claims of company creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers, and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually liable for all partnership liabilities? a. Butkus b. Sayers c. Sayers and Halas d. Butkus, Sayers, and Halas
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
151.
When a partner invests noncash assets in a partnership, the assets should be recorded at their a. book value. b. carrying value. c. fair value. d. original cost.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 34 Test Bank for Accounting Principles, Tenth Edition 152.
The partnership agreement of Rossi and Petry provides for salary allowances of $45,000 to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally. During the year, Rossi and Petry each withdraw cash equal to 80% of their salary allowances. If partnership net income is $100,000, Rossi's equity in the partnership would a. increase more than Petry’s. b. decrease more than Petry's. c. increase the same as Petry's. d. decrease the same as Petry's.
Ans: A, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
153.
Which of the following statements is correct? a. Salaries to partners and interest on partners' capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners' capital. c. Interest on partners' capital is an expense of the partnership but not salaries to partners. d. Neither salaries to partners nor interest on partners' capital are expenses of the partnership.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
154.
In the liquidation of a partnership, the gains and losses from assets sold are a. divided equally among the partners. b. divided among the partners in the stated income ratio. c. divided among the partners in proportion to their capital equity interests. d. ignored.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
155.
If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances a. equally. b. on the basis of their income ratios. c. on the basis of their capital balances. d. on the basis of their original investments.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
156.
An entry is not required in the liquidation of a partnership to record the a. payment of cash to creditors. b. distribution of cash to the partners. c. sale of noncash assets. d. allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 157.
12 - 35
The first step in the liquidation of a partnership is to a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
158.
Lance joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net assets of the partnership are still the same amount after Lance has been admitted as a partner, then Lance a. must have been admitted by investment of assets. b. must have been admitted by purchase of a partner's interest. c. must have received a bonus upon being admitted. d. could have been admitted by an investment of assets or by a purchase of a partner's interest.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
159.
Mock is admitted to a partnership with a 25% capital interest by a cash investment of $180,000. If total capital of the partnership is $780,000 before admitting Mock, the bonus to Mock is a. $60,000. b. $30,000. c. $90,000. d. $120,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
b c a c d c c c b d c b c a b c a c
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
d b d c a c b b a c b d d b b c b b
74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
a b b c c b b d c d b d c c d a b a
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
c d b c d a b c c a c a c c c b b b
110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. a 121. a 122. a 123. a 124. a 125. a 126. a 127.
c a c d c c b c b b d a a c b c d b
FOR INSTRUCTOR USE ONLY
Item a
128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145.
Ans.
a c b d b b c c b c d c d c b c c b
Item a
146. a 147. a 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. a 158. a 159.
Ans.
a d c c d c a d b b d d b a
12 - 36 Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 160 Dauber and Jackson decide to organize a partnership. Dauber invests $25,000 cash, and Jackson contributes $5,000 and equipment having a book value of $7,000 and a fair value of $15,000. Instructions Prepare the entry to record each partner’s investment. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160
(5 min.)
Cash……...………….. .......................................................................... Dauber, Capital………………………………………………………….
25,000
Cash………………….. .......................................................................... Equipment……………. ......................................................................... Jackson, Capital…. .......................................................................
5,000 15,000
25,000
20,000
BE 161 Santo Company and Renfro Company decide to merge their proprietorships into a partnership called Crestwood Company. The balance sheet of Renfro Company shows: Accounts Receivable Less: Allowance for doubtful accounts
$18,000 1,500
$16,500
Equipment Less: Accumulated depreciation
$20,000 10,000
$10,000
The partners agree that the net realizable value of the receivables is $16,000 and that the fair value of the equipment is $15,000. Instructions Indicate how the four accounts should appear in the opening balance sheet of the partnership. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 161
12 - 37
(4 min.) CRESTWOOD COMPANY Balance Sheet (partial)
Assets Accounts Receivable Less: Allowance for Doubtful Accounts
$18,000 2,000
Equipment
$16,000 15,000
BE 162 The Frick & Frack Co. reports net income of $24,000. Interest allowances are Frick $3,000 and Frack $5,000; partner salary allowances are Frick $18,000 and Frack $10,000 and the remainder is shared equally. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 162
(6 min.)
Division of Net Income Salary allowance Interest allowance on partners’ capital Total salaries and interest Remaining income, ($12,000) ($24,000 – $36,000) Frick ($12,000 × 50%) Frack ($12,000 × 50%) Total remainder Total division of net income
Frick $18,000 3,000 21,000
Frack $10,000 5,000 15,000
Total $28,000 8,000 36,000
(6,000) (6,000) $15,000
$ 9,000
(12,000) $24,000
The entry to record the division of net income is: Income Summary ........................................................................... Frick, Capital ......................................................................... Frack, Capital ........................................................................
24,000 15,000 9,000
BE 163 Northern Co. had beginning capital balances on January 1, 2012, as follows: Andy Golic $30,000 and Jim Carney $25,000. During the year, drawings were Golic $15,000 and Carney $8,000. Net income was $40,000, and the partners share income equally. Instructions Prepare the partners’ capital statement for the year. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 38 Test Bank for Accounting Principles, Tenth Edition Solution 163
(4 min.) NORTHERN COMPANY Partners’ Capital Statement
Beginning Capital Add: Net Income Less: Drawings Ending Capital
Golic $30,000 20,000 50,000 15,000 $35,000
Carney $25,000 20,000 45,000 8,000 $37,000
Total $55,000 40,000 95,000 23,000 $72,000
BE 164 After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash $29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The partners share income equally. Instructions Journalize the final distribution of cash to the partners. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 164
(4 min.)
A, Capital ............................................................................................. B, Capital ............................................................................................. C, Capital ............................................................................................. Cash ......................................................................................
11,000 8,000 10,000 29,000
BE 165 Dailey Company at December 31 has cash $40,000, noncash assets $200,000, liabilities $110,000, and the following capital balances: Dickinson $90,000 and Meierhoff $40,000. The firm is liquidated, and $220,000 in cash is received for the noncash assets. Dickinson and Meierhoff income ratios are 60% and 40%, respectively. Instructions Prepare a cash distribution schedule. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 165
12 - 39
(5 min.) DAILEY COMPANY Schedule of Cash Payments Cash
Balances before Liquidation $ 40,000 Sale of noncash assets and allocation of losses 220,000 New balances 260,000 Pay liabilities (110,000) New balances 150,000 Cash distribution
$150,000
+
Noncash Assets =
Dickinson Liabilities + Capital +
Meierhoff Capital
$200,000
$110,000
$ 90,000
$40,000
(200,000) -0_____ -0-
110,000 (110,000) -0-
12,000 102,000
8,000 48,000
102,000
48,000
$
$
$102,000
$48,000
-0-
-0-
a
BE 166
In Taylor Co., capital balances are Oscor $60,000 and Glenda $75,000. The partners share income equally. Jared is admitted to the firm with a 40% interest by an investment of cash of $85,000. Journalize the admission of Jared. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 166
(3 min.)
Cash .................................................................................................... Oscor, Capital (50% × $3,000*)............................................................ Glenda, Capital (50% × $3,000*).......................................................... Jared, Capital (40% × $220,000) ..............................................
85,000 1,500 1,500 88,000
*[(60,000 + $75,000 + $85,000) × 40%] – $85,000 = $3,000. a
BE 167
Ron and Linda are partners who share profits 60% and 40%. Their capital balances were both $120,000 before Kelly was admitted to the partnership. Kelly contributed $160,000 in cash to the partnership for a 30% interest. Instructions Compute the capital balances of Ron and Linda after Kelly is admitted to the partnership. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 167
(4 min.)
Ron’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) × .30]} × .60 = $144,000 Linda’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) ×.30]} × .40 = $136,000
FOR INSTRUCTOR USE ONLY
12 - 40 Test Bank for Accounting Principles, Tenth Edition a
BE 168
Capital balances in Carson Co. are Donald $50,000, Anne $38,000, and Harry $25,000. The partners share income equally. Harry receives $31,000 from partnership assets in withdrawing from the firm. Instructions Journalize the withdrawal of Harry. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 168
(3 min.)
Harry, Capital ....................................................................................... Donald, Capital (50% × $6,000) ........................................................... Anne, Capital (50% × $6,000) .............................................................. Cash ............................................................................................
25,000 3,000 3,000 31,000
a
BE 169
Nick, Alan, and Tim are partners who share profits 40%, 20%, and 40%. Their capital balances were $630,000, $420,000, and $210,000, respectively, before Tim’s retirement. Tim was paid $240,000 from partnership assets to buy his interest. Instructions Compute the capital balances of Nick and Alan after Tim has withdrawn. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 169
(4 min.)
Nick’s capital balance: $630,000 – [($240,000 – $210,000) X 40/60] = $610,000 Alan’s capital balance: $420,000 – [($240,000 – $210,000) X 20/60] = $410,000
EXERCISES Ex. 170 Mark Bahr and Robert Engler decide to form a partnership. Bahr invests $35,000 cash and accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Engler contributes $25,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account should be $3,000 and the fair value of the equipment is $10,000. Instructions Prepare the necessary journal entry to record the formation of the partnership. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 170
12 - 41
(6 min.)
Cash ($35,000 + $25,000) ................................................................... Accounts Receivable............................................................................ Equipment............................................................................................ Allowance for Doubtful Accounts ................................................. Bahr, Capital ($35,000 + $30,000 – $3,000) ................................ Engler, Capital ($25,000 + $10,000) ............................................
60,000 30,000 10,000 3,000 62,000 35,000
Ex. 171 Joe Mann and Sam Trane operate separate auto repair shops. On January 1, 2012, they decide to combine their separate businesses which were operated as proprietorships to form M & T Auto Repair, a partnership. Information from their separate balance sheets is presented below: Cash Accounts receivable Allowance for doubtful accounts Accounts payable Notes payable Salaries and wages payable Equipment Accumulated depreciation—equipment
Mann Auto Repair $10,000 12,000 1,000 5,000 — 1,000 12,000 2,000
Trane Auto Repair $14,000 10,000 500 6,000 3,000 1,500 24,000 4,000
It is agreed that the expected realizable value of Mann's accounts receivable is $11,000 and Trane's receivables is $7,000. The fair value of Mann's equipment is $13,000 and the value of Trane's equipment is $20,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Trane's balance sheet which he will pay himself. Instructions Prepare the journal entries necessary to record the formation of the partnership. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 171
(15 min.)
Cash .................................................................................................... Accounts Receivable............................................................................ Equipment............................................................................................ Allowance for Doubtful Accounts ................................................. Salaries and Wages Payable....................................................... Accounts Payable........................................................................ J. Mann, Capital .......................................................................... (To record J. Mann's investment)
10,000 12,000 13,000
Cash .................................................................................................... Accounts Receivable............................................................................ Equipment............................................................................................ Allowance for Doubtful Accounts ................................................. Salaries and Wages Payable....................................................... Accounts Payable........................................................................ S. Trane, Capital ......................................................................... (To record S. Trane's investment)
14,000 10,000 20,000
FOR INSTRUCTOR USE ONLY
1,000 1,000 5,000 28,000
3,000 1,500 6,000 33,500
12 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 172 M. Flaherty, P. Denny, and G. Newman are forming a partnership. Flaherty is transferring $75,000 of personal cash to the partnership. Denny owns land worth $25,000 and a small building worth $120,000, which she transfers to the partnership. Newman transfers to the partnership cash of $14,000, accounts receivable of $48,000 and equipment worth $28,000. The partnership expects to collect $45,000 of the accounts receivable. Instructions (a) Prepare the journal entries to record each of the partners’ investments. (b) What amount would be reported as total owners’ equity immediately after the investments? Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 172 (a)
(b)
(10 min.)
Cash ........................................................................................... Flaherty, Capital ..................................................................
75,000
Land ........................................................................................... Building........................................................................................ Denny, Capital ....................................................................
25,000 120,000
Cash ........................................................................................... Accounts Receivable ................................................................... Equipment ................................................................................... Allowance for Doubtful Accounts ......................................... Newman, Capital.................................................................
14,000 48,000 28,000
75,000
145,000
3,000 87,000
$75,000 + $145,000 + $87,000 = $307,000
Ex. 173 L. Pinella (beginning capital, $80,000) and H. Johnston (beginning capital $120,000) are partners. During 2012, the partnership earned net income of $90,000, and Pinella made drawings of $24,000 while Johnston made drawings of $32,000. Instructions (a) Assume the partnership income-sharing agreement calls for income to be divided 40% to Pinella and 60% to Johnston. Prepare the journal entry to record the allocation of net income. (b) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $40,000 to Pinella and $35,000 to Johnston, with the remainder divided 40% to Pinella and 60% to Johnston. Prepare the journal entry to record the allocation of net income. (c) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $50,000 to Pinella and $45,000 to Johnston, interest of 10% on beginning capital, and the remainder divided 50%-50%. Prepare the journal entry to record the allocation of net income. (d) Compute the partners’ ending capital balances under the assumption in part (c). Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 173 (a)
(b)
(c)
12 - 43
(15 min.)
Income Summary ........................................................................ L. Pinella, Capital ($90,000 X 40%) .................................... H. Johnston, Capital ($90,000 X 60%) ................................
90,000
Income Summary ........................................................................ L. Pinella, Capital [$40,000 + ($15,000 X 40%)]................ H. Johnston, Capital [$35,000 + ($15,0000 X 60%)] ........
90,000
Income Summary ........................................................................ L. Pinella, Capital ................................................................ H. Johnston, Capital ...........................................................
90,000
36,000 54,000
46,000 44,000
45,500 44,500
Pinella: [$50,000 + $8,000 – ($25,000 X 50%)] Johnston: [$45,000 + $12,000 – ($25,000 X 50%)] (d)
Pinella: $80,000 + $45,500 – $24,000 = $101,500 Johnston: $120,000 + $44,500 – $32,000 = $132,500
Ex. 174 The Jones and Yancey partnership reports net income of $50,000. Partner salary allowances are Jones $18,000 and Yancey $12,000. Any remaining income is shared 60:40. Instructions Determine the amount of net income allocated to each partner. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods
Solution 174
(5 min.)
Salary allowance Remaining income, $15,000 Jones ($20,000 × 60%) Yancey ($20,000 × 40%) Total division
Jones $18,000
Yancey $12,000
Total $30,000
8,000 $20,000
20,000 $50,000
12,000 $30,000
Ex. 175 Cain, Foley, and Hardy formed a partnership on January 1, 2012. Cain invested $60,000, Foley $60,000 and Hardy $140,000. Cain will manage the store and work 40 hours per week in the store. Foley will work 20 hours per week in the store, and Hardy will not work. Each partner withdrew 40 percent of his income distribution during 2012. If there was no income distribution to a partner, there were no withdrawals of cash. Instructions Compute the partners' capital balances at the end of 2012 under the following independent conditions: (Hint: Use T accounts to determine each partner's capital balances.)
FOR INSTRUCTOR USE ONLY
12 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 175 (1) (2) (3)
(Cont.)
Net income is $120,000 and the income ratio is Cain 40%, Foley 35%, and Hardy 25%. Net income is $125,000 and the partnership agreement only specifies a salary of $50,000 to Cain and $30,000 to Foley. Net income is $76,000 and the partnership agreement provides for (a) a salary of $40,000 to Cain and $40,000 to Foley, (b) interest on beginning capital balances at the rate of 10%, and (c) any remaining income or loss is to be shared by Cain 40%, Foley 35%, and Hardy 25%.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 175
(15 min.)
(1) Cain, Capital 19,200
Cain Foley Hardy
Foley, Capital 60,000 48,000 88,800
16,800
Net Income % $120,000 × 40 120,000 × 35 120,000 × 25
Hardy, Capital 60,000 42,000 85,200
Distribution % $ 48,000 × 40 42,000 × 40 30,000 × 40 $120,000
12,000
140,000 30,000 158,000
Drawings $19,200 16,800 12,000 $48,000
(2) Bass, Capital 26,000
Foley, Capital 60,000 65,000 99,000
18,000
Hardy, Capital 60,000 45,000 87,000
6,000
140,000 15,000 149,000
Salary Remainder Total
Cain $50,000 15,000 $65,000
Foley $30,000 15,000 $45,000
Hardy $ 0 15,000 $15,000
Total $ 80,000 45,000 $125,000
× 40% = Drawings
$26,000
$18,000
$ 6,000
$ 50,000
(3) Cain, Capital 13,600
Foley, Capital 60,000 34,000 80,400
14,200
Hardy, Capital 60,000 35,500 81,300
2,600
140,000 6,500 143,900
Cain Salary $40,000 Interest 6,000 Remainder ($30,000) (12,000) Total $34,000
Foley $40,000 6,000 (10,500) $35,500
Hardy $ 0 14,000 (7,500) $ 6,500
Total $80,000 26,000 (30,000) $76,000
× 40% = Drawings
$14,200
$ 2,600
$30,400
$13,600
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 45
Ex. 176 Decker and Mader have a partnership agreement which includes the following provisions regarding sharing net income or net loss: 1. A salary allowance of $48,000 to Decker and $36,000 to Mader. 2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Decker and 40% to Mader. The capital balance on January 1, 2012, for Decker and Mader was $90,000 and $120,000, respectively. During 2012, the Decker and Mader Partnership had sales of $495,000, cost of goods sold of $290,000, and operating expenses of $85,000. Instructions Prepare an income statement for the Decker and Mader Partnership for the year ended December 31, 2012. As a part of the income statement, include a Division of Net Income to each of the partners. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 176
(15 min.) DECKER AND MADER PARTNERSHIP Income Statement For the Year Ended December 31, 2012
Sales ...................................................................................................................... Cost of goods sold ................................................................................................. Gross profit ............................................................................................................ Operating expenses ............................................................................................... Net income ............................................................................................................
$495,000 290,000 205,000 85,000 $120,000
Division of Net Income Salary allowance Interest allowance ($90,000 × 10%) ($120,000 × 10%) Total interest Total salaries and interest Remaining income, $15,000 Decker ($15,000 × 60%) Mader ($15,000 × 40%) Total remainder Total division
Decker $48,000
Mader $36,000
Total $ 84,000
9,000 12,000 57,000
48,000
21,000 105,000
9,000 6,000 $66,000
$54,000
FOR INSTRUCTOR USE ONLY
15,000 $120,000
12 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 177 Fink & Elston Co. reports net income of $42,000. The partnership agreement provides for annual salaries of $24,000 for Fink and $18,000 for Elston and interest allowances of $4,000 to Fink and $6,000 to Elston. Any remaining income or loss is to be shared 70% by Fink and 30% by Elston. Instructions Compute the amount of net income distributed to each partner. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(8 min.)
Salary allowance Interest allowance Total salaries and interest Remaining deficiency ($10,000) Fink ($10,000 × 70%) Elston ($10,000 × 30%) Total division
Fink $24,000 4,000 28,000
Elston $18,000 6,000 24,000
Total $42,000 10,000 52,000
(3,000) $21,000
(10,000) $42,000
(7,000) $21,000
Ex. 178 The adjusted trial balance of the Melton and Yount Partnership for the year ended December 31, 2012, appears below: MELTON AND YOUNT PARTNERSHIP Adjusted Trial Balance December 31, 2012 Current Assets ..................................................................................... Plant Assets ......................................................................................... Current Liabilities.................................................................................. Long-term Debt .................................................................................... Melton, Capital ..................................................................................... Melton, Drawings.................................................................................. Yount, Capital....................................................................................... Yount, Drawings ................................................................................... Sales .................................................................................................... Cost of Goods Sold .............................................................................. Operating Expenses .............................................................................
Debit 19,000 80,000
Credit
7,000 40,000 20,000 4,000 18,000 7,000 110,000 62,000 23,000 195,000
195,000
The partnership agreement stipulates that a division of partnership net income or net loss is to be made as follows: 1. A salary allowance of $12,000 to Melton and $23,000 to Yount. 2. The remainder is to be divided equally.
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Ex. 178
12 - 47
(Cont.)
Instructions (a) Prepare a schedule which shows the division of net income to each partner. (b) Prepare the closing entries for the division of net income and for the drawings accounts at December 31, 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178 (a)
(15 min.)
Schedule for Division of Net Income Sales Cost of goods sold Gross profit Operating expenses Net income
Salary allowance Remaining deficiency, ($10,000) Melton ($10,000) × 50% Yount ($10,000) × 50% Total remainder Total division (b) Dec. 31
31
$110,000 62,000 48,000 23,000 $ 25,000 Melton $12,000
Yount $23,000
Total $35,000
(5,000) (5,000) $ 7,000
$18,000
Income Summary ....................................................... Melton, Capital .................................................... Yount, Capital ..................................................... (To close net income to capital)
25,000
Melton, Capital ........................................................... Yount, Capital ............................................................ Melton, Drawings ................................................ Yount, Drawings ................................................. (To close drawing accounts to capital)
4,000 7,000
(10,000) $25,000
7,000 18,000
4,000 7,000
Ex. 179 Jan Penny and Barb Gant have formed the PG Partnership, and have capital balances of $130,000 and $100,000, respectively, on January 1, 2012. On June 1, 2012, Gant invested an additional $30,000. Also during the year, Penny withdrew $60,000 and Gant withdrew $48,000. Sales for the year amounted to $360,000 and expenses were $240,000. Penny and Gant share income and losses on a 3:1 basis. Instructions (a) Prepare the closing entries at December 31, 2012, for the PG Partnership. (b) Prepare a partners' capital statement for 2012. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 48 Test Bank for Accounting Principles, Tenth Edition Solution 179 (a)
(15 min.)
Sales ........................................................................................... Expenses ............................................................................ Income Summary ................................................................
360,000
Income Summary ........................................................................ Penny, Capital ($120,000 × 75%) ....................................... Gant, Capital ($120,000 × 25%) ..........................................
120,000
Penny, Capital ............................................................................. Gant, Capital................................................................................ Penny, Drawings ................................................................. Gant, Drawings ...................................................................
60,000 48,000
(b)
240,000 120,000 90,000 30,000
60,000 48,000
PG Partnership Partners' Capital Statement For the Year Ended December 31, 2012 Capital, January 1, 2012 Add: Additional Investment Net Income Less: Drawings Capital, December 31, 2012
Penny $130,000 90,000 220,000 60,000 $160,000
Gant $100,000 30,000 30,000 160,000 48,000 $112,000
Totals $230,000 30,000 120,000 380,000 108,000 $272,000
Ex. 180 Ace, Goran, and Notte are forming The Acgono Partnership. Ace is transferring $40,000 of personal cash and equipment worth $38,000 to the partnership. Goran owns land worth $27,000 and a small building worth $112,000, which he transfers to the partnership. There is a long-term mortgage of $40,000 on the land and building, which the partnership assumes. Notte transfers cash of $10,000, accounts receivable of $54,000, supplies worth $5,000, and equipment worth $28,000 to the partnership. The partnership expects to collect $48,000 of the accounts receivable. Instructions Prepare a classified balance sheet for the partnership after the partner’s investments on December 31, 2012. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 180
12 - 49
(15 min.) THE ACGONO PARTNERSHIP Balance Sheet December 31, 2012 Assets
Current Assets Cash .......................................................................... Accounts Receivable .................................................. Less: Allowance for Doubtful Accounts....................... Supplies ..................................................................... Total current assets ...........................................
$50,000 $54,000 (6,000)
Property, Plant and Equipment Land .......................................................................... Building ...................................................................... Equipment .................................................................. Total property, plant, and equipment ................. Total assets ........................................................................
48,000 5,000 $103,000
$27,000 112,000 66,000 205,000 $308,000
Liabilities and Owners’ Equity Long-term Liabilities Mortgage Payable ...................................................... Owners’ Equity Ace, Capital ................................................................ Goran, Capital ............................................................ Notte, Capital ............................................................. Total owners’ equity ........................................... Total liabilities and owners’ equity .......................................
$40,000 $78,000 99,000 91,000 268,000 $308,000
Ex. 181 The Mago Company at December 31 has cash $50,000, noncash assets $250,000, liabilities $138,000, and the following capital balances: Gonzalez $112,000 and Maldonado $50,000. The firm is liquidated, and $265,000 in cash is received for the noncash assets. Gonzalez and Maldonado income ratios are 60% and 40%, respectively. Instructions Prepare the entries to record: (a) The sale of noncash assets. (b) The allocation of the gain or loss on liquidation to the partners. (c) Payment of creditors. (d) Distribution of cash to the partners. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 181 (a)
(b)
(c)
(d)
(10 min.)
Cash ........................................................................................... Noncash Assets .................................................................. Gain on Realization .............................................................
265,000
Gain on Realization ..................................................................... Gonzalez, Capital ($15,000 X 60%) .................................... Maldonado, Capital ($15,000 X 40%)..................................
15,000
Liabilities ...................................................................................... Cash ...................................................................................
138,000
Gonzalez, Capital ........................................................................ Maldonado, Capital ...................................................................... Cash ...................................................................................
121,000 56,000
250,000 15,000
9,000 6,000
138,000
177,000
Ex. 182 Prepare a partners' capital statement for Zimmermann Company based on the following information. Zimmer Mann Beginning capital $30,000 $27,000 Drawings during year 15,000 8,000 Net income was $45,000, and the partners share income 60% to Zimmer and 40% to Mann. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 182
(8 min.) ZIMMERMANN COMPANY Partners' Capital Statement
Beginning capital Add: Net income Less: Drawings Ending capital
Zimmer $30,000 27,000 57,000 15,000 $42,000
Mann $27,000 18,000 45,000 8,000 $37,000
Total $57,000 45,000 102,000 23,000 $79,000
Ex. 183 On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and liabilities $80,000. Capital balances were Stine $55,000 and Pine $45,000. The firm is liquidated, and the noncash assets are sold for $115,000. Stine and Pine share income in a 60:40 ratio. Instructions Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on liquidation to the partners. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 183
12 - 51
(6 min.)
(a) Cash ............................................................................................. Loss on Realization ...................................................................... Noncash Assets ..................................................................
115,000 35,000
(b) Stine, Capital ($35,000 × 60%) ..................................................... Pine, Capital ($35,000 × 40%) ...................................................... Loss on Realization ............................................................
21,000 14,000
150,000
35,000
Ex. 184 The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners Andie, Becka, and Candice share income and losses in the ratio of 4:3:3, respectively. Assume the following: 1. The noncash assets were sold for $70,000. 2. Liabilities were paid in full. 3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.) Instructions Using the above information, complete the Schedule of Cash Payments below: ABC PARTNERSHIP Schedule of Cash Payments
Item Cash + Balances before liquidation 25,000 +
Noncash Assets =
Liabilities +
Andie Capital +
Becka Candice Capital + Capital
150,000 =
50,000
25,000
35,000
+
+
+
65,000
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(20 min.) ABC PARTNERSHIP Schedule of Cash Payments
Item Balances before liquidation Sale of noncash assets (1) New balance Pay liabilities (2) New balances Allocate capital deficiency New balances Cash distribution (3) Final balances
Noncash Assets = Liabilities +
Andie Capital
+
Becka Capital
+
Candice Capital
+
25,000
+
35,000
+
65,000
+ 50,000 + (50,000) -0+
(32,000) (7,000)
+ +
(24,000) 11,000
+ +
(24,000) 41,000
(7,000)
+
11,000
+
41,000
7,000 -0-
+ +
(3,500) 7,500 (7,500) -0-
+ + +
(3,500) 37,500 (37,500) -0-
Cash
+
25,000
+ 150,000
=
50,000
70,000 + (150,000) 95,000 + -0(50,000) 45,000 + -0-
= = = =
45,000 + (45,000) -0-
= =
-0-0-
-0-0-
+
-0-
FOR INSTRUCTOR USE ONLY
12 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 185 The MFP Partnership is to be liquidated when the ledger shows the following: Cash Noncash Assets Liabilities Moss, Capital Fairly, Capital Pratt, Capital
$ 50,000 200,000 50,000 75,000 100,000 25,000
Moss, Fairly, and Pratt's income ratios are 6:3:1, respectively. Instructions Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $140,000 in cash. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 185
(15 min.)
1. Cash ............................................................................................... Loss on Realization ........................................................................ Noncash Assets .....................................................................
140,000 60,000
2. Moss, Capital ($60,000 × 6/10) ....................................................... Fairly, Capital ($60,000 × 3/10) ...................................................... Pratt, Capital ($60,000 × 1/10)........................................................ Loss on Realization................................................................
36,000 18,000 6,000
3. Liabilities ........................................................................................ Cash ......................................................................................
50,000
4. Moss, Capital ($75,000 – $36,000) ................................................. Fairly, Capital ($100,000 – $18,000) ............................................... Pratt, Capital ($25,000 – $6,000) .................................................... Cash ($50,000 + $140,000 – $50,000)...................................
39,000 82,000 19,000
200,000
60,000
50,000
140,000
Ex. 186 Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $35,000, Ace, Capital (Dr.) $5,000, Ball, Capital (Cr.) $25,000, and Catt, Capital (Cr.) $15,000. They share income on a 5:3:2 basis. Instructions Prepare entries to record (a) the absorption of Ace's capital deficiency by the other partners and (b) the distribution of cash to the partners with credit balances. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 186 (a)
(b)
12 - 53
(8 min.)
Ball, Capital ($5,000 × 3/5) .......................................................... Catt, Capital ($5,000 × 2/5) ......................................................... Ace, Capital ........................................................................
3,000 2,000
Ball, Capital ($25,000 – $3,000) .................................................. Catt, Capital ($15,000 – $2,000).................................................. Cash ...................................................................................
22,000 13,000
5,000
35,000
Ex. 187 The HK Partnership is liquidated when the ledger shows: Cash Noncash Assets Liabilities Howell, Capital Kenton, Capital
$60,000 90,000 44,000 100,000 6,000
Howell and Kenton's income ratios are 3:2, respectively. Instructions Prepare a schedule of cash payments, assuming that the noncash assets were sold for $65,000. Assume that any partner’s capital deficiencies cannot be paid to the partnership. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187
(10 min.) HK Partnership Schedule of Cash Payments
Cash Balances before liquidation $ 60,000 Sale of noncash assets and allocation of losses 65,000 New Balances 125,000 Pay Liabilities (44,000) New Balances 81,000 Allocate capital deficiency Cash Distribution $(81,000)
+
Noncash Assets
= Liabilities +
Howell Capital
$90,000
$44,000
$100,000
$6,000
(15,000) 85,000
(10,000) (4,000)
85,000 (4,000) $(81,000)
(4,000) 4,000 $ -0-
(90,000) -0-
$
-0-
44,000 (44,000) -0-
-0-
$
-0-
+
Kenton Capital
a
Ex. 188
The Dobler and Menke Partnership has partner capital account balances as follows: Dobler, Capital Menke, Capital
$550,000 200,000
The partners share income and losses in the ratio of 60% to Dobler and 40% to Menke.
FOR INSTRUCTOR USE ONLY
12 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 187
(Cont.)
Instructions Prepare the journal entry on the books of the partnership to record the admission of Sloan as a new partner under the following three independent circumstances. 1. Sloan pays $400,000 to Dobler and $150,000 to Menke for one-half of each of their ownership interest in a personal transaction. 2. Sloan invests $600,000 in the partnership for a one-third interest in partnership capital. 3. Sloan invests $240,000 in the partnership for a one-third interest in partnership capital. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 188
1.
(20 min.)
Dobler, Capital ............................................................................. Menke, Capital............................................................................. Sloan, Capital ..................................................................... (To record admission of Sloan by purchase)
275,000 100,000 375,000
Total net assets and total capital of the partnership do not change. 2.
Cash ............................................................................................ 600,000 Dobler, Capital .................................................................... Menke, Capital .................................................................... Sloan, Capital ..................................................................... (To record admission of Sloan and bonus to old partners) Total capital of existing partnership Investment by new partner, Sloan Total capital of new partnership Sloan's capital credit = $1,350,000 × 1/3 = $450,000 Sloan's investment Sloan's capital credit Bonus to old partners Allocation to old partners Dobler (60% × $150,000) Menke (40% × $150,000)
3.
Cash ............................................................................................ Dobler, Capital ............................................................................. Menke, Capital............................................................................. Sloan, Capital ..................................................................... (To record Sloan's admission and bonus)
FOR INSTRUCTOR USE ONLY
90,000 60,000 450,000
$ 750,000 600,000 $1,350,000
$600,000 450,000 $150,000 $90,000 60,000 $150,000 240,000 54,000 36,000 330,000
Accounting for Partnerships a
Solution 188
12 - 55
(Cont.)
Total capital of existing partnership Investment by new partner, Sloan Total capital of new partnership
$750,000 240,000 $990,000
Sloan's capital credit = $990,000 × 1/3 = $330,000 Bonus to Sloan ($330,000 – $240,000) = $90,000 Reduction of old partners' capital Dobler ($90,000 × 60%) Menke ($90,000 × 40%)
$ 54,000 36,000 $90,000
a
Ex. 189
Hoy, Lever, and Stone share income on a 6:3:1 basis. They have capital balances of $80,000, $60,000, and $45,000, respectively, when Morton is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Morton into the partnership if Morton purchases one-half of Hoy's equity for $45,000; one-half of Lever's equity for $22,000; and onethird of Stone 's equity for $18,000. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189
(5 min.)
Hoy, Capital ......................................................................................... Lever, Capital ....................................................................................... Stone, Capital ...................................................................................... Morton, Capital ............................................................................
40,000 30,000 15,000 85,000
a
Ex. 190
Jim Welch and Sam Thayer share partnership income on a 3:2 basis. They have capital balances of $560,000 and $280,000, respectively, when Bill Ryan is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Ron Ryan under each of the following assumptions: (a) Ryan invests $320,000 for a 25% ownership interest. (b) Ryan invests $220,000 for a 25% ownership interest. (c) Ryan invests an amount that gives him a 25% ownership interest. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
12 - 56 Test Bank for Accounting Principles, Tenth Edition a
Solution 190
(a)
(20 min.)
Cash ............................................................................................ Ryan, Capital ...................................................................... Welch, Capital (3/5 × $30,000) ............................................ Thayer (2/5 × $30,000) ....................................................... Total capital of existing partnership Investment by new partner, Ryan Total capital of new partnership
$290,000
Investment by new partner, Ryan Ryan's capital credit Bonus to existing partners
$320,000 290,000 $ 30,000
(b) Cash ............................................................................................ Welch, Capital ($45,000 × 3/5) .................................................... Thayer ($45,000 × 2/5) ................................................................ Ryan, Capital ......................................................................
(c)
290,000 18,000 12,000
$ 840,000 320,000 $1,160,000
Ryan's capital credit ($1,160,000 × 25%)
Total capital of existing partnership Investment by new partner, Ryan Total capital of new partnership
320,000
220,000 27,000 18,000 265,000
$ 840,000 220,000 $1,060,000
Ryan's capital credit ($1,060,000 × 25%)
$265,000
Investment by new partner, Ryan Ryan's capital credit Reduction of existing partners
$220,000 265,000 $ (45,000)
Cash ............................................................................................ Ryan, Capital ......................................................................
280,000 280,000
$840,000 ÷ .75 = $1,120,000; $1,120,000 – $840,000 = $280,000 a
Ex. 191
Donna Leeds and Ann Reeves have capital accounts of $420,000 and $480,000, respectively. Jeff Evans and Pete Patton are to join the partnership. Evans invests $425,000 in the partnership for which he receives a capital credit of $425,000. Patton purchases a one-half interest from Leeds for $300,000 and a one-fourth interest from Reeves for $90,000. Instructions (a) Prepare the journal entries to record the admission of Evans and Patton to the partnership. (b)
Determine the capital balances of the partners after the admission of Evans and Patton.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
Solution 191
(a)
(b)
12 - 57
(10 min.)
Cash............................................................................................ Evans, Capital ....................................................................
425,000
Mills, Capital ................................................................................ Reeves, Capital ........................................................................... Patton, Capital ....................................................................
210,000 120,000
Mills ($420,000 – $210,000) Reeves ($480,000 – $120,000) Evans Patton Total Capital
425,000
330,000
$ 210,000 360,000 425,000 330,000 $1,325,000
a
Ex. 192
Dobson, Lancaster, and Pender are partners who share profits and losses 50%, 30%, and 20%, respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively. Instructions (a) Assume Shannon joins the partnership by investing $140,000 for a 25% interest with bonuses to the existing partners. Prepare the journal entry to record his investment. (b) Assume instead that Dobson leaves the partnership. Dobson is paid $170,000 with a bonus to the retiring partner. Prepare the journal entry to record Dobson's withdrawal. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 192
(a)
(b)
(10 min.)
Cash .......................................................................... Shannon, Capital ($440,000 25%) ..................... Dobson, Capital ($30,000 50%) ....................... Lancaster, Capital ($30,000 30%) ...................... Pender, Capital ($30,000 20%) ..........................
140,000
Dobson, Capital ......................................................... Lancaster, Capital ($20,000 3/5)............................. Pender, Capital ($20,000 2/5) ................................... Cash .....................................................................
150,000 12,000 8,000
110,000 15,000 9,000 6,000
170,000
a
Ex. 193
Bale, Heller, and Winrow share income and losses in a ratio of 3:2:5, respectively. The capital account balances of the partners are as follows: Bale, Capital Heller, Capital Winrow, Capital
$600,000 360,000 260,000
FOR INSTRUCTOR USE ONLY
12 - 58 Test Bank for Accounting Principles, Tenth Edition a
Ex. 193
(Cont.)
Instructions Prepare the journal entry on the books of the partnership to record the withdrawal of Winrow under the following independent circumstances: 1. The partners agree that Winrow should be paid $280,000 by the partnership for his interest. 2. The partners agree that Winrow should be paid $220,000 by the partnership for his interest. 3. Bale agrees to pay Winrow $180,000 for one-half of his capital interest and Heller agrees to pay Winrow $180,000 for one-half of his capital interest in a personal transaction among the partners. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 193
(15 min.)
1. Winrow, Capital .............................................................................. Bale, Capital ................................................................................... Heller, Capital ................................................................................. Cash ...................................................................................... (To record withdrawal and bonus to Winrow) Bonus to Winrow $20,000 ($280,000 – $260,000) Allocation to reduce remaining partners' capital: Bale (3/5 × $20,000) $12,000 Heller (2/5 × $20,000) 8,000 $20,000
260,000 12,000 8,000 280,000
2. Winrow, Capital .............................................................................. 260,000 Bale, Capital .......................................................................... Heller, Capital ........................................................................ Cash ...................................................................................... (To record withdrawal of Winrow and bonus to remaining partners) Bonus to remaining partners $40,000 ($260,000 – $220,000) Allocation to increase remaining partners' capital: Bale (3/5 × $40,000) $24,000 Heller (2/5 × $40,000) 16,000 $40,000 3. Winrow, Capital .............................................................................. Bale, Capital .......................................................................... Heller, Capital ........................................................................ (To record withdrawal of Winrow) Total net assets and total capital of the partnership do not change.
FOR INSTRUCTOR USE ONLY
24,000 16,000 220,000
260,000 130,000 130,000
Accounting for Partnerships
12 - 59
a
Ex. 194
Eaton, Korman, and Roland have capital balances of $150,000, $100,000, and $75,000, respectively, and their income ratios are 4:2:4. Instructions Record the withdrawal of Roland from the partnership under each of the following assumptions: 1. Roland is paid $75,000 from partnership assets. 2. Roland is paid $93,000 from partnership assets. 3. Roland is paid $60,000 from partnership assets. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 194
(10 min.)
1. Roland, Capital............................................................................... Cash ......................................................................................
75,000
2. Roland, Capital............................................................................... Eaton, Capital ($18,000 × 4/6)........................................................ Korman, Capital ($18,000 × 2/6) .................................................... Cash ......................................................................................
75,000 12,000 6,000
3. Roland, Capital............................................................................... Eaton, Capital ($15,000 × 4/6) ............................................... Korman, Capital ($15,000 × 2/6) ............................................ Cash ......................................................................................
75,000
75,000
93,000
10,000 5,000 60,000
COMPLETION STATEMENTS 195. The ______________ Act provides the basic rules for the formation and operation of partnerships in more than 90% of the states. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
196. A partnership characteristic which enables each partner to act on behalf of the partnership when engaging in partnership business is called ______________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
197. A major disadvantage of the partnership form of organization is ______________, which makes each partner personally and individually liable for all partnership liabilities. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
198. The capital accounts indicate each partner's ______________ investment, while the partner's drawing accounts are ______________ owner's equity accounts. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
199. The ______________ ratio specifies the basis for sharing income and losses. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
12 - 60 Test Bank for Accounting Principles, Tenth Edition 200. An income ratio based on ______________ balances may be appropriate when the amount of funds invested in the partnership is critical to the partnership. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
201. A ______________ allowance or ______________ on partners' capital accounts are not expenses of the partnership when they are specified as the basis for sharing income and losses. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
202. In liquidating a partnership, it is necessary to convert ______________ into cash and to allocate any ______________ or ______________ to the partners based on their income ratios. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
203. A debit balance in a partner's capital account is called a _____________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
204. A new partner may be admitted to the partnership by ______________ the interest of an existing partner, or by ______________ assets in the partnership.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
205. When a new partner's capital interest on the date of admittance is less than his or her investment in the firm, a ______________ results for the ______________ partner(s).
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
206. If a bonus is given to a new partner, the old partners' capital accounts are decreased based on their ______________ ratio prior to the admission of the new partner.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 195. 196. 197. 198. 199. 200.
Uniform Partnership mutual agency unlimited liability permanent, temporary income capital
201. 202. 203. a 204. a 205. a 206.
salary, interest noncash assets, gains, losses capital deficiency purchasing, investing bonus, old Income
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 61
MATCHING 207. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Mutual agency Unlimited liability Partnership agreement Income ratio Partners' capital statement Admission by investment
G. H. I. J.
Purchase of an interest Partnership liquidation Capital deficiency Distribution of cash to partners in liquidation of a partnership.
____
1. Each partner is personally and individually liable for partnership debts.
____
2. Made on basis of partners' capital balances.
____
3. Explains changes in individual partner's capital accounts during a period.
____
4. Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.
____
5. Business terminates.
____
a
____
7. Capital account with a debit balance.
____
8. The basis for sharing income and losses.
____
a
6. Results in an increase in total net assets and total capital of the partnership.
9. Total net assets and total capital of the partnership do not change.
____ 10. Written contract establishing duties and responsibilities of partners. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
B J E A H
a
6. 7. 8. a 9. 10.
F I D G C
SHORT-ANSWER ESSAY QUESTIONS S-A E 208 Identify and explain the principal characteristics of the partnership form of business organization. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
12 - 62 Test Bank for Accounting Principles, Tenth Edition Solution 208 The principal characteristics of a partnership form of organization are as follows: (a)
It is a voluntary association of two or more individuals based on a legally binding contract.
(b)
The partners act in a mutual agency relationship; that is, each partner acts on behalf of the partnership when engaging in partnership business.
(c)
A partnership has limited life. That is, a partnership may be ended voluntarily at any time through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a partnership may be ended involuntarily by the death or incapacity of a partner.
(d)
The partners have unlimited liability. Each partner is personally and individually liable for all partnership liabilities.
(e)
All partnership assets are co-owned by the partners; that is, the assets are owned jointly by all the partners.
S-A E 209 Drift and Wood are discussing how income and losses should be divided in a partnership they plan to form. What factors should be considered in determining the division of net income or net loss? Ans: N/A, SO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 209 Factors to be considered in determining how income and loss should be divided are: (1) a fixed ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance ratios when the funds invested in the partnership are considered the most critical factor; and (3) salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives specific recognition to differences that may exist among partners by providing salary allowances for time worked and interest allowances for capital invested. S-A E 210 Are the financial statements of a partnership similar to those of a proprietorship? Discuss. Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 210 The financial statements of a partnership are similar to those of a proprietorship. The differences are due to the number of partners involved. The income statement for a partnership is identical to the income statement for a proprietorship except for the division of net income. The owners' equity statement is called the partners' capital statement. This statement shows the changes in each partner's capital account and in total partnership capital during the year. On the balance sheet each partner's capital balance is reported in the owners' equity section.
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
12 - 63
S-A E 211 A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and distributing the remaining assets to the partners. Explain why gains and losses on the realization of non-cash assets are distributed to the partners based on their income ratios, whereas cash is distributed to the partners based on their equity as shown in their capital accounts. What effects does the payment or nonpayment of a capital deficiency have on the distribution of cash to the partners? Ans: N/A, SO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 211 Gains and losses on the realization of non-cash assets are like income and losses; that is, they are income statement items and, therefore, are distributed to partners based on their income and loss ratios. Cash is a balance sheet item and is the basis for any residual equity after liquidation; therefore, the final asset amount cash should be distributed to partners in accordance with their equity balances. When the capital deficiency is paid, the payment is credited to the partner with the debit balance in the capital account. Then, the remaining cash is distributed to the partners with credit balances on the basis of their balances. If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances on the basis of their income ratios. The remaining cash is then distributed to these partners on the basis of their capital balances. S-A E 212 (Ethics) Three doctors, Terry Black, Mike Layne, and Danny Powell, opened a family medicine clinic. All three doctors had been lifelong friends. All belonged to the same religious faith. All were very active in church affairs, and tried to mold their professional behavior to their religious beliefs. About a year ago, Dr. Black announced that he was leaving the church. The others noticed that his personality also began to change. He began to dress in flamboyant styles, and he started wearing expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he might be throwing charts down the hall and screaming. He started coming to the office late, and forgetting to see some of his patients before he left again. The other two at first were stunned at the changes. His wife asked them whether they thought he might have a drinking problem. After finally deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical equipment. Frightened, Drs. Layne and Powell decided to act quickly. Their partnership agreement said nothing about dissolving the partnership—only about what to do if one of them died. They therefore secretly rented office space across town and began to move the most necessary equipment and supplies to the new office. A month later, they changed the locks on the old office and began seeing patients in the new office without any notice to Dr. Black at all. Dr. Black simply came in at around ten o'clock as usual, and found himself locked out of an empty office. Required: Did Drs. Layne and Powell act ethically in their ending of the partnership? Explain. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
FOR INSTRUCTOR USE ONLY
12 - 64 Test Bank for Accounting Principles, Tenth Edition Solution 212 No, Drs. Layne and Powell did not act ethically in the way they ended the partnership. It is important to distinguish between legal obligations and ethical obligations. The partnership may well be legally dissolved by their action. However, ethically, they had no right to act unilaterally, without giving Dr. Black a chance to defend himself or to correct his behavior. It also looks like they may have had an obligation to report their apparent cocaine "find" to the appropriate authorities, or at least to determine whether the substance was, in fact, cocaine. It is clear that the doctors had the right and obligation to protect Dr. Black's patients, but there is no evidence given that he was actually endangering his patients. Drs. Layne and Powell's actions seem to be cowardly, and an attempt to keep from facing unpleasant realities. S-A E 213 (Communication) Will Kelty and Steve Harlan began detail work on automobiles as a hobby. First, they used a mailorder kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge, respectively. Then Will added more flourishes, including his name. Steve practiced painting flames on his Judge. Gradually, their cars became recognized around town and others began to ask them to add a flourish here or there to their cars. They were talked into attending a "muscle car" show in a nearby large city to show off their cars. They had more requests for work than they could handle. Now, they are considering quitting their other jobs and making this a permanent business. Steve, for example, turns down more jobs than he accepts and still gets more requests every week. Will and Steve are unsure how to proceed. They like the idea of a partnership, but they only know they work well together—things like how to split payment have just been settled individually for each job, depending on which one did more work. Will's father suggests a written partnership agreement. Will disagrees. He believes that it will spoil the whole arrangement by reducing it to words. Required: Write a brief note to Will explaining why he needs a partnership agreement. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 213 Dear Will, Your dad asked me to write to you. I am an accountant with the CPA firm Clinton, Grant, and Thomas, and I do a lot of work for partnerships. I understand that you don't want a written partnership agreement. I'd like to share with you a few things you may not have considered. First, I completely agree that a written agreement won't solve all your problems. I would even say that a poorly written agreement is worse than none at all. However, I don't know any partnerships in this town that have lasted for more than a year or two that don't have a written agreement. If they didn't have one at first, they learned by hard experience exactly why they needed one. I'd say the biggest advantage is that it forces both of you to spell out what you expect of the other party. You have discussed, I understand, how profits are to be split. Do both of you agree entirely? What if you decide another method would be more fair? What do you plan to do if you want to add a partner? Who makes the decisions about which building to rent, and what kind of help to hire? All these things can be spelled out in a partnership agreement. I hope you will seriously consider drawing up a good partnership agreement. Otherwise, you may condemn yourselves to spending more time clearing up misunderstandings than on fixing up cars. Let me know if I can help. I know a couple of attorneys in town who could get the job done without charging an arm and a leg. Sincerely, (signature)
FOR INSTRUCTOR USE ONLY
12 - 65
CHAPTER 13 CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 1 1
K K K K K K K C
9. 10. 11. 12. 13. 14. 15. 16.
1 1 1 1 2 2 2 2
K K K K K K K K
Item
SO
BT
Item
SO
BT
Item
SO
BT
4 5 5 5 6 6 1 1
C K K K K K K K
sg
33. 34. sg 35. sg 36.
3 3 4 6
C C K K
109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.
4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6
K C K AP AP AP AP C K AP C K K K AP AP AP AP AP AP AP AP AP K
133. 134. 135. 136. 137. sg 138. st 139. sg 140. sg 141. st 142. sg 143. sg 144. st 145. sg 146. st 147. sg 148. 149. 150. 151. 152. 153. 154.
6 6 6 6 6 1 1 1 3 4 4 4 5 5 6 6 6 6 6 6 6 6
K K K K K C K C C K AP K K AP K K K K K K K K
161. 162.
5 6
AP AP
True-False Statements 17. 18. 19. 20. 21. 22. 23. 24.
2 2 3 3 4 4 4 4
K K K K C K C K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K C K K K K K K C K K K K K K K K K K K
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.
1 1 1 1 1 1 1 1 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3
K K K C C K C K K C K C C AP K K K K K K AP C K C
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 3 4 4 4 4 4 4
K K K K AP AP AP AP AN AN AP AP K C C AP AP AP AP K K C K C
Brief Exercises 155. 156. sg st
1 3
K AP
157. 158.
3,4 3,4
AP AP
159. 160.
4 3,5
AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
13 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 163. 164. 165. 166. 167.
3 3 3 3 3
AP AP AP AP AP
168. 169. 170. 171. 172.
1,4 3,4 3–6 4 4
C AP AN AP AP
173. 174. 175. 176. 177.
4 4 4 4 4
AP AP AN AP AP
178. 179. 180. 181. 182.
4–6 5 5 5 5
AP AP AP AP C
5 5 6
K K K
183. 184. 185. 186.
5 6 6 6
AP AP AP C
Completion Statements 187. 188. 189.
1 1 1
K K K
190. 191. 192.
1 1 1
K K K
193. 194. 195.
2 3 4
K K K
196. 197. 198.
Matching Statements 199.
2
K
Short-Answer Essay Statements 200. 201.
1 5
K K
202. 203.
2 3
K K
204. 205. 7.
4 4
K K
206.
6
K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 6. 7. 8. 9.
TF TF TF TF TF TF TF TF TF
10. 11. 12. 31. 32. 37. 38. 39. 40.
TF TF TF TF TF MC MC MC MC
41. 42. 43. 44. 45. 46. 47. 48. 49.
13. 14.
TF TF
15. 16.
TF TF
17. 18.
19. 20. 33. 34. 73. 74.
TF TF TF TF MC MC
75. 76. 77. 78. 79. 80.
MC MC MC MC MC MC
81. 82. 83. 84. 85. 86.
Type
Item
Type
Item
Study Objective 1 MC 50. MC 59. MC 51. MC 60. MC 52. MC 61. MC 53. MC 62. MC 54. MC 63. MC 55. MC 64. MC 56. MC 65. MC 57. MC 66. MC 58. MC 67. Study Objective 2 TF 69. MC 71. TF 70. MC 72. Study Objective 3 MC 87. MC 102. MC 88. MC 141. MC 89. MC 156. MC 90. MC 157. MC 91. MC 158. MC 92. MC 160.
Type
Item
Type
Item
Type
MC MC MC MC MC MC MC MC MC
68. 138. 139. 140. 155. 168. 187. 188. 189.
MC MC MC MC BE Ex C C C
190. 191. 192. 200.
C C C SA
MC MC
193. 199.
C Mat
202.
SA
MC MC BE BE BE BE
163. 164. 165. 166. 167. 169.
Ex Ex Ex Ex Ex Ex
170. 194. 203.
Ex C SA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
21. 22. 23. 24. 25. 35. 93.
TF TF TF TF TF TF MC
94. 95. 96. 97. 98. 99. 103.
MC MC MC MC MC MC MC
104. 105. 106. 107. 108. 109. 110.
26. 27. 28. 100. 101.
TF TF TF MC MC
114. 115. 116. 117. 118.
MC MC MC MC MC
119. 120. 121. 122. 123.
Study Objective 4 MC 111. MC 158. MC 112. MC 159. MC 113. MC 168. MC 142. MC 169. MC 143. MC 170. MC 144. MC 171. MC 157. BE 172. Study Objective 5 MC 124. MC 170. MC 145. MC 178. MC 146. MC 179. MC 160. BE 180. MC 161. BE 181.
132. 133. 134. 135. 136.
Study Objective 6 MC 137. MC 151. MC 147. MC 152. MC 148. MC 153. MC 149. MC 154. MC 150. MC 162.
29. 30. 36. 125. 126.
TF TF TF MC MC
127. 128. 129. 130. 131.
MC MC MC MC MC
Note: TF = True-False MC = Multiple Choice
BE BE Ex Ex Ex Ex Ex
173. 174. 175. 176. 177. 178. 195.
Ex Ex Ex Ex Ex Ex C
Ex Ex Ex Ex Ex
182. 183. 196. 197. 201.
Ex Ex C C SA
MC MC MC MC BE
170. 178. 184. 185.
Ex Ex Ex Ex
BE = Brief Exercise Ex = Exercise
204. 205.
SA SA
186. 198. 206.
Ex C SA
C = Completion
The chapter also contains one set of ten Matching questions and seven Short-Answer Essay questions.
CHAPTER STUDY OBJECTIVES 1. Identify the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes. 2. Differentiate between paid-in capital and retained earnings. Paid-in capital is the total amount paid in on capital stock. It is often called contributed capital. Retained earnings is net income retained in a corporation. It is often called earned capital. 3. Record the issuance of common stock. When companies record the issuance of common stock for cash, they credit the par value of the shares to Common Stock. They record in a separate paid-in capital account the portion of the proceeds that is above or below par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par stock does not have a stated value, companies credit the entire proceeds to Common Stock. 4. Explain the accounting for treasury stock. The cost method is generally used in accounting for treasury stock. Under this approach, companies debit Treasury Stock at the price paid to reacquire the shares. They credit the same amount to Treasury Stock when they FOR INSTRUCTOR USE ONLY
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Test Bank for Accounting Principles, Tenth Edition
sell the shares. The difference between the sales price and cost is recorded in stockholders’ equity accounts, not in income statement accounts. 5. Differentiate preferred stock from common stock. Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have a preference (1) to dividends and (2) to assets in liquidation. They usually do not have voting rights. 6. Prepare a stockholders' equity section. In the stockholders equity section, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, two classifications are shown: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to obtain total stockholders' equity.
TRUE-FALSE STATEMENTS 1.
A corporation is not an entity which is separate and distinct from its owners.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
2.
A corporation can be organized for the purpose of making a profit or it may be not-forprofit.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
3.
A corporation acts under its own name rather than in the name of its stockholders.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
4.
If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
5.
A corporation must be incorporated in each state in which it does business.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
6.
A stockholder has the right to vote in the election of the board of directors.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Interaction, IMA: FSA
7.
A proxy is a legal document that instructs a stockholder’s agent how to vote shares of stock for the stockholder.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Interaction, IMA: FSA
8.
As soon as a corporation is authorized to issue stock, an accounting journal entry should be made recording the total value of the shares authorized.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Corporate Finance
9.
The par value of common stock must always be equal to its market value on the date the stock is issued.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 10.
13 - 5
When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock becomes legal capital.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
11.
A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
12.
The market value of a corporation's stock is determined by the number of shares that the corporation has been authorized to issue.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
13.
Each stockholder in a corporation has a separate capital account in the stockholders' equity section of the balance sheet.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
14.
The stockholders' equity section of a corporation's balance sheet consists of (1) paid-in capital, (2) retained earnings, and (3) drawings.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
15.
Dividends are declared out of retained earnings.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
16.
When a corporation has only one class of capital stock, it is identified as preferred stock.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
17.
Retained earnings are a part of stockholders' equity.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
18.
Retained earnings is usually subtracted from paid-in capital to arrive at total stockholders' equity.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
19.
Stock can be issued only in exchange for cash.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
20.
The par value of stock issued for noncash assets is never a factor in determining the cost of the assets received.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
21.
The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 6
Test Bank for Accounting Principles, Tenth Edition
22.
Treasury stock should not be classified as a current asset.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
23.
Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
24.
Treasury stock is a contra stockholders' equity account.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
25.
The number of common shares outstanding can never be greater than the number of shares issued.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
26.
Preferred stock has contractual preference over common stock in certain areas.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
Preferred stockholders generally do not have the right to vote for the board of directors.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Investment Decisions
28.
Dividends in arrears on cumulative preferred stock are considered a liability.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
In published annual reports, subdivisions within the stockholders' equity section are seldom presented, but additional information is frequently included in the footnotes to the financial statements.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
The term “Capital surplus” can be used instead of “Additional Paid-in Capital”.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
A successful corporation can have a continuous and perpetual life.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
32.
Organizational costs are capitalized by debiting an intangible asset entitled Organization Costs.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
33.
The cash proceeds from issuing par value stock may be equal to or greater than, but not less than par value.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 34.
13 - 7
The cost of a noncash asset acquired in exchange for common stock should be either the fair market value of the consideration given up or the consideration received, whichever is more clearly determinable.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
35.
Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Stock when the shares are sold.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
36.
In the stockholders’ equity section, paid-in capital and retained earnings are reported and the specific sources of paid-in capital are identified.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1. 2. 3. 4. 5. 6.
F T T F F T
7. 8. 9. 10. 11. 12.
T F F T F F
13. 14. 15. 16. 17. 18.
F F T F T F
19. 20. 21. 22. 23. 24.
F T F T F T
25. 26. 27. 28. 29. 30.
T T T F T F
31. 32. 33. 34. 35. 36.
T F T T T T
MULTIPLE CHOICE QUESTIONS 37.
Which one of the following is a privately held corporation? a. Intel b. General Electric c. Caterpillar Inc. d. Cargill Inc.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is a. the sole proprietorship. b. the partnership. c. the corporation. d. not known.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
Under the corporate form of business organization a. a stockholder is personally liable for the debts of the corporation. b. stockholders' acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation. c. the corporation's life is stipulated in its charter. d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 8 40.
Test Bank for Accounting Principles, Tenth Edition Stockholders of a corporation directly elect a. the president of the corporation. b. the board of directors. c. the treasurer of the corporation. d. all of the employees of the corporation.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
The chief accounting officer in a company is known as the a. controller. b. treasurer. c. vice-president. d. president.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Leadership, IMA: None
42.
A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a a. corporation is organized for the purpose of making a profit. b. corporation is subject to more federal and state government regulations. c. corporation is an accounting economic entity. d. corporation’s temporary accounts are closed at the end of the accounting period.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
43.
Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of owners b. Separate legal existence c. Continuous life d. Government regulation
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
44.
The concept of an "artificial being" refers to which form of business organization? a. Partnership b. Sole proprietorship c. Corporation d. Limited partnership
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
The two ways that a corporation can be classified by purpose are a. general and limited. b. profit and not-for-profit. c. state and federal. d. publicly held and privately held.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
The two ways that a corporation can be classified by ownership are a. publicly held and privately held. b. stock and non-stock. c. inside and outside. d. majority and minority.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 47.
13 - 9
Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation. b. Its shares are regularly traded on the New York Stock Exchange. c. It does not offer its shares for sale to the general public. d. It is usually smaller than a publicly held company.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may enter into binding legal contracts in its own name.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Business Economics
49.
Jason Thomas has invested $200,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Tresh stand to lose? a. Up to his total investment of $200,000. b. Zero. c. The $200,000 plus any personal assets the creditors demand. d. $100,000.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions
50.
Which of the following statements reflects the transferability of ownership rights in a corporation? a. If a stockholder decides to transfer ownership, he must transfer all of his shares. b. A stockholder may dispose of part or all of his shares. c. A stockholder must obtain permission from the board of directors before selling shares. d. A stockholder must obtain permission from at least three other stockholders before selling shares.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Corporate Finance
51.
A corporate board of directors does not generally a. select officers. b. formulate operating policies. c. declare dividends. d. execute policy.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls
52.
A typical organization chart showing delegation of authority would show a. stockholders delegating to the board of directors. b. the board of directors delegating to stockholders. c. the chief executive officer delegating to the board of directors. d. the controller delegating to the chief executive officer.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
13 - 10 Test Bank for Accounting Principles, Tenth Edition 53.
The officer who is generally responsible for maintaining the cash position of the corporation is the a. controller. b. treasurer. c. cashier. d. internal auditor.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Corporate Finance
54.
The chief accounting officer in a corporation is the a. treasurer. b. president. c. controller. d. vice-president of finance.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Corporate Finance
55.
The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Corporate Finance
56.
Which of the following statements concerning taxation is accurate? a. Partnerships pay state income taxes but not federal income taxes. b. Corporations pay federal income taxes but not state income taxes. c. Corporations pay federal and state income taxes. d. Only the owners must pay taxes on corporate income.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Which of the following statements is not considered a disadvantage of the corporate form of organization? a. Additional taxes b. Government regulations c. Limited liability of stockholders d. Separation of ownership and management
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: None, IMA: None
58.
What is ordinarily the first step in the formation of a corporation? a. Development of by-laws for the corporation b. Issuance of the corporate charter c. Application for incorporation to the appropriate Secretary of State d. Registration with the SEC
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 59.
13 - 11
Which one of the following is not an ownership right of a stockholder in a corporation? a. To vote in the election of directors b. To declare dividends on the common stock c. To share in assets upon liquidation d. To share in corporate earnings
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
60.
If no-par stock is issued without a stated value, then a. the par value is automatically $1 per share. b. the entire proceeds are considered to be legal capital. c. there is no legal capital. d. the corporation is automatically in violation of its state charter.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
If a stockholder cannot attend a stockholder's meeting, he may delegate his voting rights by means of a. an absentee ballot. b. a proxy. c. a certified letter. d. a telegram.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Internal Controls
62.
If a corporation has only one class of stock, it is referred to as a. classless stock. b. preferred stock. c. solitary stock. d. common stock.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
The term residual claim refers to a stockholders’ right to a. receive dividends. b. share in assets upon liquidation. c. acquire additional shares when offered. d. exercise a proxy vote.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
64.
Which of the following factors does not affect the initial market price of a stock? a. The company's anticipated future earnings b. The par value of the stock c. The current state of the economy d. The expected dividend rate per share
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
13 - 12 Test Bank for Accounting Principles, Tenth Edition 65.
If an investment firm underwrites a stock issue, the a. risk of being unable to sell the shares stays with the issuing corporation. b. corporation obtains cash immediately from the investment firm. c. investment firm has guaranteed profits on the sale of the stock. d. issuance of stock is likely to be directly to creditors.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
The par value of a stock a. is legally significant. b. reflects the most recent market price. c. is selected by the SEC. d. is indicative of the worth of the stock.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
A corporation has the following account balances: Common stock, $1 par value, $60,000; Paid-in Capital in Excess of Par, $1,300,000. Based on this information, the a. legal capital is $1,360,000. b. number of shares issued are 60,000. c. number of shares outstanding are 1,360,000. d. average price per share issued is $22.50.
Ans: b, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
68.
The authorized stock of a corporation a. only reflects the initial capital needs of the company. b. is indicated in its by-laws. c. is indicated in its charter. d. must be recorded in a formal accounting entry.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
Owners' equity for a corporation is identified as each of the following except a. corporate capital. b. paid-in capital. c. partners' equity. d. stockholders' equity.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
Retained earnings a. is unique to the corporate form of business. b. is an optional account in the partnership form of business. c. reflects cash paid in by stockholders to date. d. is closed at the end of the year.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
Dividends are declared out of a. Capital Stock. b. Paid-in Capital in Excess of Par. c. Retained Earnings. d. Treasury Stock.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 72.
13 - 13
Retained earnings is a. always equal to the amount of cash that the corporation has generated from operations. b. a part of the paid-in capital of the corporation. c. a part of the stockholders' claim on the total assets of the corporation. d. closed at the end of each accounting period.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
When stock is issued for legal services, the transaction is recorded by debiting Organization Expense for the a. stated value of the stock. b. par value of the stock. c. market value of the stock. d. book value of the stock.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
If Vickers Company issues 4,000 shares of $5 par value common stock for $140,000, a. Common Stock will be credited for $140,000. b. Paid-In Capital in Excess of Par will be credited for $20,000. c. Paid-In Capital in Excess of Par will be credited for $120,000. d. Cash will be debited for $120,000.
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
If common stock is issued for an amount greater than par value, the excess should be credited to a. Cash. b. Retained Earnings. c. Paid-in Capital in Excess of Par. d. Legal Capital.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
76.
If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at a. fair value. b. cost. c. zero. d. a nominal amount.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
77.
If stock is issued for less than par value, the account a. Paid-In Capital in Excess of Par is credited. b. Paid-In Capital in Excess of Par is debited if a debit balance exists in the account. c. Paid-In Capital in Excess of Par is debited if a credit balance exists in the account. d. Retained Earnings is credited.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 14 Test Bank for Accounting Principles, Tenth Edition 78.
The sale of common stock below par a. is a common occurrence in most states. b. is not permitted in most states. c. is a practice that most stockholders encourage. d. requires that a liability be recorded for the difference between the sales price and the par value of the shares.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
Paid-In Capital in Excess of Stated Value a. is credited when no-par stock does not have a stated value. b. is reported as part of paid-in capital on the balance sheet. c. represents the amount of legal capital. d. normally has a debit balance.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
80.
A separate paid-in capital account is used to record each of the following except the issuance of a. no-par stock. b. par value stock. c. stated value stock. d. treasury stock above cost.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
81.
Barton Company is a publicly held corporation whose $1 par value stock is actively traded at $32 per share. The company issued 3,000 shares of stock to acquire land recently advertised at $100,000. When recording this transaction, Barton Company will a. debit Land for $100,000. b. credit Common Stock for $96,000. c. debit Land for $96,000. d. credit Paid-In Capital in Excess of Par for $98,000.
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
82.
Crain Company issued 2,000 shares of its $5 par value common stock in payment of its attorney's bill of $40,000. The bill was for services performed in helping the company incorporate. Crain should record this transaction by debiting a. Legal Expense for $10,000. b. Legal Expense for $40,000. c. Organization Expense for $10,000. d. Organization Expense for $40,000.
Ans: d, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83.
In the financial statements, organization costs appears a. immediately below Retained Earnings in the stockholders' equity section. b. in the income statement. c. as part of paid-in capital in the stockholders' equity section. d. as an intangible asset.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 84.
13 - 15
Which of the following represents the largest number of common shares? a. Treasury shares b. Issued shares c. Outstanding shares d. Authorized shares
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
New Corp. issues 2,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to a. Common Stock $20,000 and Paid-in Capital in Excess of Stated Value $8,000. b. Common Stock $28,000. c. Common Stock $20,000 and Paid-in Capital in Excess of Par $8,000. d. Common Stock $20,000 and Retained Earnings $8,000.
Ans: c, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
86.
If Keene Company issues 4,500 shares of $5 par value common stock for $80,000, the account a. Common Stock will be credited for $22,500. b. Paid-in Capital in Excess of Par will be credited for $22,500. c. Paid-in Capital in Excess of Par will be credited for $80,000. d. Cash will be debited for $57,500.
Ans: a, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
87.
Carson Packaging Corporation began business in 2012 by issuing 25,000 shares of $3 par common stock for $8 per share and 10,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $12. On its December 31, 2012 balance sheet, Carson Packaging would report a. Common Stock of $300,000. b. Common Stock of $75,000. c. Common Stock of $200,000. d. Paid-In Capital of $75,000.
Ans: b, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
88.
Hsu, Inc. issued 7,500 shares of stock at a stated value of $8/share. The total issue of stock sold for $15 per share. The journal entry to record this transaction would include a a. debit to Cash for $60,000. b. credit to Common Stock for $60,000. c. credit to Paid-in Capital in Excess of Par for $112,500. d. credit to Common Stock for $112,500.
Ans: b, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
13 - 16 Test Bank for Accounting Principles, Tenth Edition 89.
S. Lamar performed legal services for E. Garr. Due to a cash shortage, an agreement was reached whereby E. Garr. would pay S. Lamar a legal fee of approximately $8,000 by issuing 2,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $4.50 per share. Given this information, the journal entry for E. Garr. to record this transaction is: a. Legal Expense 9,000 Common Stock 9,000 b. c.
d.
Legal Expense Common Stock
8,000
Legal Expense Common Stock Paid-in Capital in Excess of Par – Common
8,000
Legal Expense Common Stock Paid-in Capital in Excess of Par – Common
9,000
8,000 2,000 6,000 2,000 7,000
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
90.
Jarrett Company issued 600 shares of no-par common stock for $8,800. Which of the following journal entries would be made if the stock has no stated value? a. Cash 8,800 Common Stock 8,800 b.
Cash
8,800 Common Stock Paid-in Capital in Excess of Par
c.
Cash
600 8,200 8,800
Common Stock Paid-in Capital in Excess of Stated Value d.
Common Stock Cash
600 8,200 8,800 8,800
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
91.
Darman Company issued 500 shares of no-par common stock for $5,500. Which of the following journal entries would be made if the stock has a stated value of $2 per share? a. Cash 5,500 Common Stock 5,500 b.
Cash
5,500 Common Stock Paid-in Capital in Excess of Par
c.
Cash
1,000 4,500 5,500
Common Stock Paid-in Capital in Excess of Stated Value d.
Common Stock Cash
1,000 4,500 5,500 5,500
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 92.
13 - 17
Ralston Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ralston issues 6,000 shares of common stock to pay its recent attorney’s bill of $25,000 for legal services on a land access dispute, which of the following would be the journal entry for Ralston to record? a. Legal Expense 6,000 Common Stock 6,000 b.
c.
d.
Legal Expense Common Stock
25,000 25,000
Legal Expense 25,000 Common Stock Paid-in Capital in Excess of Stated Value – Common
6,000 19,000
Legal Expense Common Stock Paid-in Capital in Excess of Par – Preferred
6,000 19,000
25,000
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
93.
The following data is available for Blaine Corporation at December 31, 2012: Common stock, par $10 (authorized 25,000 shares) $200,000 Treasury Stock (at cost $15 per share) 900 Based on the data, how many shares of common stock are outstanding? a. 25,000 b. 20,000 c. 24,940 d. 19,940
Ans: d, SO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
94.
The following data is available for Blaine Corporation at December 31, 2012: Common stock, par $10 (authorized 25,000 shares) $200,000 Treasury Stock (at cost $15 per share) $ 900 Based on the data, how many shares of common stock have been issued? a. 25,000 b. 20,000 c. 24,940 d. 19,940
Ans: b, SO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 18 Test Bank for Accounting Principles, Tenth Edition 95.
Aaron, Inc. paid $90,000 to buy back 10,000 shares of its $1 par value common stock. This stock was sold later at a selling price of $6 per share. The entry to record the sale includes a a. debit to Retained Earnings for $30,000. b. credit to Retained Earnings for $10,000. c. debit to Paid-in Capital from Treasury Stock for $90,000. d. credit to Paid-in Capital from Treasury Stock for $10,000.
Ans: a, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
96.
Karl Corporation was organized on January 2, 2010. During 2012, Karl issued 20,000 shares at $24 per share, purchased 3,000 shares of treasury stock at $26 per share, and had net income of $300,000. What is the total amount of stockholders’ equity at December 31, 2012? a. $640,000 b. $702,000 c. $708,000 d. $720,000
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
97.
Evergreen Manufacturing Corporation purchased 4,000 shares of its own previously issued $10 par common stock for $92,000. As a result of this event, a. Evergreen’s Common Stock account decreased $40,000. b. Evergreen’s total stockholders’ equity decreased $92,000. c. Evergreen’s Paid-in Capital in Excess of Par account decreased $52,000. d. All of the above.
Ans: b, SO: 4, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
98.
A corporation purchases 30,000 shares of its own $30 par common stock for $45 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $1,350,000 b. Decrease by $900,000 c. Decrease by $1,350,000 d. Increase by $900,000
Ans: c, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
99.
A corporation purchases 20,000 shares of its own $15 par common stock for $30 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $300,000 b. Decrease by $600,000 c. Increase by $600,000 d. Decrease by $300,000
Ans: b, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 100.
13 - 19
Brown Company has 1,000 shares of 6%, $100 par cumulative preferred stock outstanding at December 31, 2012. No dividends have been paid on this stock for 2011 or 2012. Dividends in arrears at December 31, 2012 total a. $0. b. $600. c. $6,000. d. $12,000.
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
101.
Era Company has 3,000 shares of 5%, $100 par non-cumulative preferred stock outstanding at December 31, 2012. No dividends have been paid on this stock for 2011 or 2012. Dividends in arrears at December 31, 2012 total a. $0. b. $1,500. c. $15,000. d. $30,000.
Ans: a, SO:5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
102.
Roxy Inc. issued 3,000 shares of no-par common stock with a stated value of $5 per share. The market price of the stock on the date of issuance was $14 per share. The entry to record this transaction includes a a. debit to Cash for $15,000. b. credit to Common Stock for $42,000. c. credit to Common Stock for $15,000. d. debit to Paid-in Capital in Excess of Par for $42,000.
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
Ramos Corporation sold 200 shares of treasury stock for $45 per share. The cost for the shares was $35. The entry to record the sale will include a a. credit to Gain on Sale of Treasury Stock for $7,000. b. credit to Paid-in Capital from Treasury Stock for $2,000. c. debit to Paid-in Capital in Excess of Par for $2,000. d. credit to Treasury Stock for $9,000.
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
104.
Each of the following is correct regarding treasury stock except that it has been a. issued. b. fully paid for. c. reacquired. d. retired.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
Treasury stock is a. stock issued by the U.S. Treasury Department. b. stock purchased by a corporation and held as an investment in its treasury. c. corporate stock issued by the treasurer of a company. d. a corporation's own stock which has been reacquired but not retired.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 20 Test Bank for Accounting Principles, Tenth Edition 106.
The acquisition of treasury stock by a corporation a. increases its total assets and total stockholders' equity. b. decreases its total assets and total stockholders' equity. c. has no effect on total assets and total stockholders' equity. d. requires that a gain or loss be recognized on the income statement.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
107.
Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment. b. liability. c. deduction from total paid-in capital. d. deduction from total paid-in capital and retained earnings.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
108.
A company would not acquire treasury stock a. in order to reissue shares to officers. b. as an asset investment. c. in order to increase trading of the company's stock. d. to have additional shares available to use in acquisitions of other companies.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
109.
Accounting for treasury stock is done by the a. FIFO method. b. LIFO method. c. cost method. d. lower of cost or market method.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
110.
Treasury stock is generally accounted for by the a. cost method. b. market value method. c. par value method. d. stated value method.
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
111.
Treasury Stock is a(n) a. contra asset account. b. retained earnings account. c. asset account. d. contra stockholders’ equity account.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
112.
Five thousand shares of treasury stock of Marker, Inc., previously acquired at $14 per share, are sold at $20 per share. The entry to record this transaction will include a a. credit to Treasury Stock for $100,000. b. debit to Paid-In Capital from Treasury Stock for $30,000. c. debit to Treasury Stock for $70,000. d. credit to Paid-In Capital from Treasury Stock for $30,000.
Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 113.
13 - 21
Salon Company originally issued 3,000 shares of $10 par value common stock for $90,000 ($30 per share). Salon subsequently purchases 300 shares of treasury stock for $27 per share and resells the 300 shares of treasury stock for $29 per share. In the entry to record the sale of the treasury stock, there will be a a. credit to Common Stock for $8,100. b. credit to Treasury Stock for $3,000. c. debit to Paid-In Capital in Excess of Par of $9,000. d. credit to Paid-In Capital from Treasury Stock for $600.
Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
114.
Ranier Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ranier issues 5,000 shares of preferred stock for land with an asking price of $600,000 and a market value of $540,000, which of the following would be the journal entry for Ranier to record? a. Land 500,000 Preferred Stock 500,000 b. Land 540,000 Preferred Stock 540,000 c. Land 600,000 Preferred Stock 500,000 Paid-in Capital in Excess of Par-Preferred 100,000 d. Land 540,000 Preferred Stock 500,000 Paid-in Capital Excess of Par-Preferred 40,000
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
115.
Lakeland, Inc. has 25,000 shares of 8%, $100 par value, noncumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2012. There were no dividends declared in 2011. The board of directors declares and pays a $250,000 dividend in 2012. What is the amount of dividends received by the common stockholders in 2012? a. $0 b. $200,000 c. $250,000 d. $50,000
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
116.
When preferred stock is cumulative, preferred dividends not declared in a period are a. considered a liability. b. called dividends in arrears. c. distributions of earnings. d. never paid.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 22 Test Bank for Accounting Principles, Tenth Edition 117.
Which of the following is not a right or preference associated with preferred stock? a. The right to vote b. First claim to dividends c. Preference to corporate assets in case of liquidation d. To receive dividends in arrears before common stockholders receive dividends
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
118.
Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $90 per share. The entry to record the transaction will consist of a debit to Cash for $900,000 and a credit or credits to a. Preferred Stock for $900,000. b. Preferred Stock for $500,000 and Paid-in Capital in Excess of Par—Preferred Stock for $400,000. c. Preferred Stock for $400,000 and Paid-in Capital from Preferred Stock for $500,000. d. Paid-in Capital from Preferred Stock for $900,000.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
119.
Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders' equity section, the effects of the transaction above will be reported a. entirely within the capital stock section. b. entirely within the additional paid-in capital section. c. under both the capital stock and additional paid-in capital sections. d. entirely under the retained earnings section.
Ans: c, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120.
Dividends in arrears on cumulative preferred stock a. are shown in stockholders’ equity of the balance sheet. b. must be paid before common stockholders can receive a dividend. c. should be recorded as a current liability until they are paid. d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
Dividends in arrears on cumulative preferred stock a. are considered to be a non-current liability. b. are considered to be a current liability. c. only occur when preferred dividends have been declared. d. should be disclosed in the notes to the financial statements.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
If preferred stock is cumulative, the a. preferred dividends not declared in a given year are called dividends in arrears. b. preferred stockholders and the common stockholders receive equal dividends. c. preferred stockholders and the common stockholders receive the same total dollar amount of dividends. d. common stockholders will share in the preferred dividends.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 123.
13 - 23
The Northern Corporation issues 8,000 shares of $100 par value preferred stock for cash at $120 per share. The entry to record the transaction will consist of a debit to Cash for $960,000 and a credit or credits to a. Preferred Stock for $960,000. b. Paid-in Capital from Preferred Stock for $960,000. c. Preferred Stock for $800,000 and Retained Earnings for $160,000. d. Preferred Stock for $800,000 and Paid-in Capital in Excess of Par—Preferred Stock for $160,000.
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
124.
Vega Corporation’s December 31, 2012 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 10,000 shares authorized; 7,500 shares issued $ 150,000 Common stock, $10 par value, 1,000,000 shares authorized; 975,000 shares issued, 960,000 shares outstanding 9,750,000 Paid-in capital in excess of par—preferred stock 30,000 Paid-in capital in excess of par—common stock 13,500,000 Retained earnings 3,750,000 Treasury stock (15,000 shares) 315,000 Vega declared and paid a $48,000 cash dividend on December 15, 2012. If the company’s dividends in arrears prior to that date were $10,000, Vega’s common stockholders received a. $38,000. b. $22,000. c. $26,000. d. no dividend.
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
125.
Vega Corporation’s December 31, 2012 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 15,000 shares authorized; 10,000 shares issued $ 200,000 Common stock, $10 par value, 1,000,000 shares authorized; 975,000 shares issued, 960,000 shares outstanding 9,750,000 Paid-in capital in excess of par—preferred stock 30,000 Paid-in capital in excess of par—common stock 13,500,000 Retained earnings 3,750,000 Treasury stock (15,000 shares) 315,000 Vega’s total paid-in capital was a. $23,480,000. b. $23,795,000. c. $23,165,000. d. $13,530,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
13 - 24 Test Bank for Accounting Principles, Tenth Edition 126.
Vega Corporation’s December 31, 2012 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 10,000 shares authorized; 8,500 shares issued $ 170,000 Common stock, $10 par value, 1,000,000 shares authorized; 950,000 shares issued, 940,000 shares outstanding 9,500,000 Paid-in capital in excess of par—preferred stock 34,000 Paid-in capital in excess of par—common stock 13,500,000 Retained earnings 3,750,000 Treasury stock (15,000 shares) 315,000 Vega’s total stockholders’ equity was a. $26,669,000. b. $46,690,000. c. $27,269,000. d. $26,639,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
127.
Bacon Corporation began business by issuing 150,000 shares of $5 par value common stock for $25 per share. During its first year, the corporation sustained a net loss of $25,000. The year-end balance sheet would show a. Common stock of $750,000. b. Common stock of $3,750,000. c. Total paid-in capital of $3,725,000. d. Total paid-in capital of $775,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
128.
Realistic Corporation’s December 31, 2012 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 20,000 shares authorized; 10,000 shares issued $ 200,000 Common stock, $10 par value, 2,000,000 shares authorized; 1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000 Paid-in capital in excess of par—preferred stock 60,000 Paid-in capital in excess of par—common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (20,000 shares) 630,000 Realistic’s total paid-in capital was a. $46,760,000. b. $47,390,000. c. $46,130,000. d. $27,060,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 129.
13 - 25
Rouse Corporation’s December 31, 2012 balance sheet showed the following: 8% preferred stock, $10 par value, cumulative, 20,000 shares authorized; 15,000 shares issued $ 150,000 Common stock, $10 par value, 2,000,000 shares authorized; 1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000 Paid-in capital in excess of par—preferred stock 60,000 Paid-in capital in excess of par—common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (20,000 shares) 630,000 Rouse’s total stockholders’ equity was a. $54,990,000. b. $46,710,000. c. $54,360,000. d. $53,730,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
Adams Corporation began business by issuing 300,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $30,000. The year-end balance sheet would show a. Common stock of $1,500,000. b. Common stock of $7,200,000. c. Total paid-in capital of $7,170,000. d. Total paid-in capital of $5,700,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
The trial balance of Houston Inc. includes the following balances: Common Stock, $28,000; Paid-in Capital in Excess of Par, $64,000; Treasury Stock, $6,000; Preferred Stock, $30,000. Capital stock totals a. $58,000. b. $96,000. c. $122,000. d. $128,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Each of the following is reported for common stock except the a. par value. b. shares issued. c. shares outstanding. d. liquidation value.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
133.
Paid-in capital from treasury stock would appear on a balance sheet under the category a. capital stock. b. treasury stock. c. additional paid-in capital. d. contra to owners' equity.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 26 Test Bank for Accounting Principles, Tenth Edition 134.
Two classifications appearing in the paid-in capital section of the balance sheet are a. preferred stock and common stock. b. paid-in capital and retained earnings. c. capital stock and additional paid-in capital. d. capital stock and treasury stock.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
Information that is not generally reported for each class of stock on the balance sheet is a. the market value. b. the par value. c. shares authorized. d. shares issued.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
136.
In published annual reports a. subdivisions within the stockholders’ equity section are routinely reported in detail. b. capital surplus is used in place of retained earnings. c. the individual sources of additional paid-in capital are often combined. d. retained earnings is often not shown separately.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
Additional paid-in capital includes all of the following except a. paid-in capital from treasury stock. b. paid-in capital in excess of par. c. paid-in capital in excess of stated value. d. paid-in capital in excess of book value.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
Which of the following is an incorrect statement about a corporation? a. A corporation is an entity separate and distinct from its owners. b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their claims. c. A corporation may be formed in writing, orally, or implied. d. A corporation is subject to numerous state and federal regulations.
Ans: c, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
139.
Capital stock to which the charter has assigned a value per share is called a. par value stock. b. no-par value stock. c. stated value stock. d. assigned value stock.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
140.
Legal capital per share cannot be equal to the a. par value per share of par value stock. b. total proceeds from the sale of par value stock above par value. c. stated value per share of no-par value stock. d. total proceeds from the sale of no-par value stock.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 141.
13 - 27
When common stock is issued for services or non-cash assets, cost should be a. only the fair value of the consideration given up. b. only the fair value of the consideration received. c. the book value of the common stock issued. d. either the fair value of the consideration given up or the consideration received, whichever is more clearly evident.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
142.
When the selling price of treasury stock is greater than its cost, the company credits the difference to a. Gain on Sale of Treasury Stock. b. Paid-in Capital from Treasury Stock. c. Paid-in Capital in Excess of Par. d. Treasury Stock.
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
143.
Sandoz Corporation was organized on January 1, 2012, with authorized capital of 500,000 shares of $10 par value common stock. During 2012, Sandoz issued 20,000 shares at $12 per share, purchased 2,000 shares of treasury stock at $13 per share, and sold 2,000 shares of treasury stock at $14 per share. What is the amount of additional paid-in capital at December 31, 2012? a. $0 b. $2,000 c. $40,000 d. $42,000
Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
144.
The purchase of treasury stock a. decreases common stock authorized. b. decreases common stock issued. c. decreases common stock outstanding. d. has no effect on common stock outstanding.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
145.
Preferred stockholders have a priority over common stockholders as to a. dividends only. b. assets in the event of liquidation only. c. voting rights. d. both dividends and assets in the event of liquidation.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
On January 2, 2009, Porter Corporation issued 30,000 shares of 6% cumulative preferred stock at $100 par value. On December 31, 2012, Porter Corporation declared and paid its first dividend. What dividends are the preferred stockholders entitled to receive in the current year before any distribution is made to common stockholders? a. $0 b. $180,000 c. $540,000 d. $720,000
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
13 - 28 Test Bank for Accounting Principles, Tenth Edition 147.
Additional paid-in capital includes all of the following except the amounts paid in a. over par value. b. over stated value. c. from treasury stock. d. for the par value of common stock.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
148.
In the stockholders' equity section of the balance sheet, the classification of capital stock consists of a. additional paid-in capital and common stock. b. common stock and treasury stock. c. common stock, preferred stock, and treasury stock. d. common stock and preferred stock.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
149.
Under IFRS, the term reserves relates to each of the following except a. asset revaluations. b. contributed (paid-in) capital. c. fair value differences. d. retained earnings.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
IFRS uses each of the following terms to describe retained earnings except a. accumulated profit or loss. b. retained earnings. c. retained profits. d. share earnings.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
A major difference between IFRS and GAAP relates to the a. Retained Earnings account. b. Revaluation Surplus account. c. Share Capital account. d. Share Premium account.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
IFRS treats the purchase of treasury stock as any of the following except a. an increase to a contra equity account. b. a decrease to retained earnings. c. a decrease to share capital. d. a decrease to share premium.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
153.
Under IFRS, Revaluation Surplus is part of a. share premium. b. retained earnings. c. general reserves. d. contributed capital.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions 154.
13 - 29
Under IFRS, equity is described as each of the following except a. retained equity. b. shareholders' funds. c. owners' equity. d. capital and reserves.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.
d c c b a b d c b a b c a b d a b
54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.
c a c c c b b b d b b b a b c c a
71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
c c c c c a c b b a c d b d c a b
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
b d a c c d b a b b c b d a c b d
105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.
d b d b c a d d d d d b a b c b d
122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138.
a d c a d a a d a a d c c a c d c
139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154.
a b d b d c d d d d b d b d c a
FOR INSTRUCTOR USE ONLY
13 - 30 Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 155 Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not applicable to the corporate form of business organization. A = Advantage D = Disadvantage N = Not Applicable Characteristics _____ 1. Separate legal entity _____ 2. Taxable entity resulting in additional taxes _____ 3. Continuous life _____ 4. Unlimited liability of owners _____ 5. Government regulation _____ 6. Separation of ownership and management _____ 7. Ability to acquire capital _____ 8. Ease of transfer of ownership Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 155 1. 2. 3. 4.
A D A N
(4 min.) 5. 6. 7. 8.
D D A A
BE 156 On July 6, Clayton Corporation issued 2,000 shares of its $1.50 par common stock. The market price of the stock on that date was $18 per share. Journalize the issuance of the stock. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 156 July 6
(3 min.)
Cash (2,000 × $18) ................................................................ Common Stock ............................................................. Paid in Capital in Excess of Par ....................................
FOR INSTRUCTOR USE ONLY
36,000 3,000 33,000
Corporations: Organization and Capital Stock Transactions
13 - 31
BE 157 Domaine Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2012, the company has the following stock transactions. Jan. 15
Issued 400,000 shares of stock at $7 per share.
Sept. 5
Purchased 30,000 shares of common stock for the treasury at $9 per share.
Instructions Journalize the transactions for Domaine Corporation. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 157 Jan. 15
Sept. 5
(5 min.)
Cash ................................................................................... 2,800,000 Common Stock .......................................................... Paid-in Capital in Excess of Par ................................. Treasury Stock ................................................................... Cash ..........................................................................
400,000 2,400,000
270,000 270,000
BE 158 An inexperienced accountant for Douglas Corporation made the following entries. July 1
Sept. 1
Cash ................................................................................... Common Stock .......................................................... (Issued 25,000 shares of common stock, par value $6 per share)
180,000
Common Stock ................................................................... Retained Earnings .............................................................. Cash .......................................................................... (Purchased 4,000 shares issued on July 1 for the treasury at $10 per share)
24,000 16,000
180,000
40,000
Instructions On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 158 July 1
Sept. 1
(5 min.)
Cash .................................................................................... Common Stock .......................................................... Paid-in Capital in Excess of Par .................................
180,000
Treasury Stock ..................................................................... Cash ..........................................................................
40,000
FOR INSTRUCTOR USE ONLY
150,000 30,000
40,000
13 - 32 Test Bank for Accounting Principles, Tenth Edition BE 159 On September 5, Borton Corporation acquired 2,500 shares of its own $1 par common stock for $23 per share. On October 15, 1,000 shares of the treasury stock is sold for $25 per share. Instructions Journalize the purchase and sale of the treasury stock assuming that the company uses the cost method. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 159 Sept. 5
Oct. 15
(5 min.)
Treasury Stock (2,500 × $23) ............................................. Cash ..........................................................................
57,500
Cash (1,000 × $25) ............................................................. Treasury Stock (1,000 × $23) ..................................... Paid-in Capital from Treasury Stock ...........................
25,000
57,500
23,000 2,000
BE 160 Wise Company had the following transactions. 1. Issued 5,000 shares of common stock with a stated value of $10 for $130,000. 2. Issued 2,000 shares of $100 par preferred stock at $108 for cash. Instructions Prepare the journal entries to record the above stock transactions. Ans: N/A, SO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160
(5 min.)
1. Cash .............................................................................................. Common Stock ...................................................................... Paid-in Capital in Excess of Stated Value—Common Stock ..
130,000
2. Cash .............................................................................................. Preferred Stock...................................................................... Paid-in Capital in Excess of Par—Preferred Stock.................
216,000
50,000 80,000
200,000 16,000
BE 161 On February 1, Barton Corporation issued 5,000 shares of its $20 par value preferred stock for $26 per share. Instructions Journalize the transaction. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions Solution 161 Feb. 1
13 - 33
(3 min.)
Cash ..................................................................................... Preferred Stock ............................................................ Paid-in Capital in Excess of Par—Preferred Stock .......................................................................... (Issued 5,000 shares at $26 per share)
130,000 100,000 30,000
BE 162 James Corporation has the following accounts at December 31: Common Stock, $10 par 7,000 shares issued, $70,000; Paid-in Capital in Excess of Par $10,000; Retained Earnings $45,000; and Treasury Stock—Common, 500 shares, $10,000. Prepare the stockholders' equity section of the balance sheet. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 162
(6-8 min.)
Stockholders' equity Paid-in capital Capital stock Common stock, $10 par value, 7,000 shares issued and 6,500 shares outstanding Additional paid-in capital In excess of par—common stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common (500 shares) Total stockholders' equity
$70,000 10,000 80,000 45,000 125,000 10,000 $115,000
EXERCISES Ex. 163 The following selected transactions pertain to Sinclair Corporation: Jan.
3
Feb. 10
Issued 100,000 shares, $10 par value, common stock for $25 per share. Issued 6,000 shares, $10 par value, common stock in exchange for special purpose equipment. Sinclair Corporation's common stock has been actively traded on the stock exchange at $30 per share.
Instructions Journalize the transactions. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
13 - 34 Test Bank for Accounting Principles, Tenth Edition Solution 163
(8–10 min.)
January 3 Cash .................................................................................................... 2,500,000 Common Stock ........................................................................... Paid-in Capital in Excess of Par ................................................. (To record issuance of common stock in excess of par) February 10 Equipment ........................................................................................... Common Stock ........................................................................... Paid-in Capital in Excess of Par ................................................. (To record issuance of stock for equipment)
1,000,000 1,500,000
180,000 60,000 120,000
Ex. 164 The corporate charter of Martin Corporation allows the issuance of a maximum of 3,000,000 shares of $1 par value common stock. During its first three years of operation, Martin issued 2,200,000 shares at $15 per share. It later acquired 30,000 of these shares as treasury stock for $25 per share. Instructions Based on the above information, answer the following questions: (a) How many shares were authorized? (b) How many shares were issued? (c) How many shares are outstanding? (d) What is the balance of the Common Stock account? (e) What is the balance of the Treasury Stock account? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164 (a) (b) (c) (d) (e)
(8–11 min.)
3,000,000 shares are authorized. 2,200,000 shares were issued. 2,170,000 shares are outstanding (2,200,000 issued less 30,000 in treasury). The balance of the Common Stock account is $2,200,000 ($1 × 2,200,000 shares = $2,200,000). The balance of the Treasury Stock account is $750,000 ($25 × 30,000 shares = $750,000).
Ex. 165 Halpern Corporation is authorized to issue 1,000,000 shares of $5 par value common stock. During 2012, its first year of operation, the company has the following stock transactions. Jan. 1 Paid the state $5,000 for incorporation fees. Jan. 15 Issued 500,000 shares of stock at $6 per share. Jan. 30 Attorneys for the company accepted 500 shares of common stock as payment for legal services rendered in helping the company incorporate. The legal services are estimated to have a value of $7,000. July 2 Issued 100,000 shares of stock for land. The land had an asking price of $900,000. The stock is currently selling on a national exchange at $8 per share. Sept. 5 Purchased 15,000 shares of common stock for the treasury at $9 per share. Dec. 6 Sold 11,000 shares of the treasury stock at $11 per share. FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 35
Instructions Journalize the transactions for Halpern Corporation. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: None, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: FSA Solution 165 Jan.
1
Jan. 15
Jan. 30
July
2
Sept. 5 Dec.
6
(12–14 min.)
Organization Expense ........................................................ Cash ..........................................................................
5,000 5,000
Cash ................................................................................... 3,000,000 Common Stock .......................................................... Paid-In Capital in Excess of Par ................................. Organization Expense ........................................................ Common Stock .......................................................... Paid-in Capital in Excess of Par .................................
7,000
Land ................................................................................... Common Stock .......................................................... Paid-In Capital in Excess of Par .................................
800,000
Treasury Stock ................................................................... Cash ..........................................................................
135,000
Cash ................................................................................... Treasury Stock ........................................................... Paid-In Capital from Treasury Stock ...........................
121,000
2,500,000 500,000 2,500 4,500 500,000 300,000 135,000 99,000 22,000
Ex. 166 Prepare the necessary journal entry for each of the following transactions for Zenia Corporation. (a) Issued 2,000 shares of its $10 par value common stock for $20 per share. (b) Issued 5,000 shares of its stock for land advertised for sale at $90,000. Zenia's stock is actively traded at a market price of $16 per share. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 166
(5 min.)
(a) Cash (2,000 × $20) ....................................................................... Common Stock ................................................................... Paid-in Capital in Excess of Par ..........................................
40,000
(b) Land (5,000 × $15) ....................................................................... Common Stock ................................................................... Paid-in Capital in Excess of Par ..........................................
80,000
FOR INSTRUCTOR USE ONLY
20,000 20,000
50,000 30,000
13 - 36 Test Bank for Accounting Principles, Tenth Edition Ex. 167 Lange Corporation issued 5,000 shares of stock. Instructions Prepare the entry for the issuance under the following assumptions. (a) The stock had a par value of $5 per share and was issued for a total of $65,000. (b) The stock had a stated value of $5 per share and was issued for a total of $65,000. (c) The stock had a par value of $5 per share and was issued to attorneys for services during incorporation valued at $65,000. (d) The stock had a par value of $5 per share and was issued for land worth $65,000. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 167
(8–10 min.)
(a) Cash Common Stock (5,000 $5) Paid-in Capital in Excess of Par
65,000
(b) Cash Common Stock (5,000 $5) Paid-in Capital in Excess of Stated Value
65,000
(c) Organization Expense Common Stock (5,000 $5) Paid-in Capital in Excess of Par
65,000
(d) Land Common Stock (5,000 $5) Paid-in Capital in Excess of Par
65,000
25,000 40,000 25,000 40,000 25,000 40,000 25,000 40,000
Ex. 168 1. Name at least three factors that influence the market value of stock. 2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why treasury stock may be acquired by a corporation. Ans: N/A, SO: 1, 4, Bloom: C, Difficulty: Easy, Min: 9, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 168
(9–12 min.)
1. Factors that influence the market value of stock: (a) (b) (c) (d) (e)
Anticipated future earnings of the company. Expected dividend rate per share. Current financial position. Current state of the economy. Current state of the securities market.
2. Reasons why a company may acquire treasury stock: (a) To reissue the shares to officers and employees under bonus and stock compensation plans. (b) (c) (d) (e)
To signal to the stock market that management believes the stock is underpriced, in the hope of enhancing its market value To have additional shares available for use in the acquisition of other companies. To reduce the number of shares outstanding and, thereby, increase earnings per share. To rid the company of disgruntled investors, perhaps to avoid a takeover.
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 37
Ex. 169 The following items were shown on the balance sheet of Easton Corporation on December 31, 2012: Stockholders’ equity Paid-in capital Capital stock Common stock, $5 par value, 400,000 shares authorized; ______ shares issued and ______ outstanding .................. $1,850,000 Additional paid-in capital In excess of par ..................................................................................... Total paid-in capital ..........................................................................
165,000 2,015,000
Retained earnings ............................................................................................. 750,000 Total paid-in capital and retained earnings ............................................ 2,765,000 Less: Treasury stock (18,000 shares) .............................................................. (180,000) Total stockholders' equity ...................................................................... $2,585,000 Instructions Complete the following statements and show your computations. (a) The number of shares of common stock issued was _______________. (b) The number of shares of common stock outstanding was ____________. (c) The sales price of the common stock when issued was $____________. (d) The cost per share of the treasury stock was $_______________. (e) The average issue price of the common stock was $______________. (f)
Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the Treasury Stock account would be $_______________.
Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 169 (a)
(10–15 min.)
The number of shares of common stock issued was 370,000. $1,850,000 ÷ $5 par value = 370,000 shares issued.
(b)
The number of shares of common stock outstanding was 352,000. 370,000 issued less 18,000 in treasury = 352,000 shares outstanding
(c)
The sales price of the common stock when issued was $2,015,000. Common stock $1,850,000 Plus: In excess of par 165,000 Total $2,015,000
(d)
The cost per share of the treasury stock was $ 10. $180,000 ÷ 18,000 = $10 per share.
FOR INSTRUCTOR USE ONLY
13 - 38 Test Bank for Accounting Principles, Tenth Edition Solution 169 (e)
(cont.)
The average issue price of the common stock was $5.45. $2,015,000 ÷ 370,000 shares = $5.45 per share.
(f)
Assuming 25% of the treasury stock is sold at $20 per share, the balance in the Treasury stock account would be $135,000. 13,500 shares × $10 = $135,000.
Ex. 170 The stockholders’ equity section of Morton Corporation at December 31 is as follows. MORTON CORPORATION Balance Sheet (partial) Paid-in capital Preferred stock, cumulative, 10,000 shares authorized, 5,000 shares issued and outstanding Common Stock, no par, 750,000 shares authorized, 300,000 shares issued Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (5,000 common shares) Total stockholders' equity
$ 300,000 1,500,000 1,800,000 2,050,000 3,850,000 (64,000) $3,786,000
Instructions From a review of the stockholders’ equity section, answer the following questions. (a) How many shares of common stock are outstanding? (b) Assuming there is a stated value, what is the stated value of the common stock? (c) What is the par value of the preferred stock? (d) If the annual dividend on preferred stock is $18,000, what is the dividend rate on preferred stock? (e) If dividends of $36,000 were in arrears on preferred stock, what would be the balance in Retained Earnings? Ans: N/A, SO: 3, 4, 5, 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 170
(4 min.)
(a) Common stock outstanding is 295,000 shares. (Issued shares 300,000 less treasury shares 5,000.) (b) The stated value of common stock is $5 per share. (Common stock issued $1,500,000 300,000 shares.) (c) The par value of preferred stock is $60 per share. (Preferred stock $300,000 5,000 shares.) (d) The dividend rate is 6%, or ($18,000 $300,000). (e) The Retained Earnings balance is still $2,050,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements.
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 39
Ex. 171 On January 1, 2012, the stockholders’ equity section of Nance Corporation shows: Common stock ($5 par value) $1,500,000; paid-in capital in excess of par value $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred. Mar. 1 Purchased 30,000 shares for cash at $20 per share. July 1 Sold 6,000 treasury shares for cash at $27 per share. Sept. 1 Sold 5,000 treasury shares for cash at $19 per share. Instructions (a) Journalize the treasury stock transactions. (b) Restate the entry for September 1, assuming the treasury shares were sold at $10 per share. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 171 (a) Mar. 1
July
1
(4 min.) Treasury Stock (30,000 $20) Cash
600,000
Cash (6,000 $27) Treasury Stock (6,000 $20) Paid-in Capital from Treasury Stock (6,000 $7)
162,000
600,000
120,000 42,000
Sept. 1 Cash (5,000 $19) Paid-in Capital from Treasury Stock (5,000 $1) Treasury Stock (5,000 $20)
95,000
(b) Sept. 1 Cash (5,000 $10) Paid-in Capital from Treasury Stock Retained Earnings Treasury Stock (5,000 $20)
50,000 42,000 8,000
5,000 100,000
100,000
Ex. 172 On May 1, Howard Corporation purchased 2,000 shares of its $10 par value common stock at a cash price of $13/share. On July 15,900 shares of the treasury stock were sold for cash at $17/share. Instructions Journalize the two transactions. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 172
(5–7 min.)
May 1 Treasury Stock ...................................................................... Cash ..........................................................................
26,000
Jul. 15 Cash (900 × $17) ................................................................... Treasury Stock ........................................................... Paid-in Capital from Treasury Stock ...........................
15,300
FOR INSTRUCTOR USE ONLY
26,000
11,700 3,600
13 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 173 Yates Corporation has the following stockholders' equity accounts on January 1, 2012: Common Stock, $10 par value .......................................... $1,500,000 Paid-in Capital in Excess of Par.......................................... 200,000 Retained Earnings .............................................................. 500,000 Total Stockholders' Equity ............................................ $2,200,000 The company uses the cost method to account for treasury stock transactions. During 2012, the following treasury stock transactions occurred: April August October
1 1 1
Purchased 10,000 shares at $18 per share. Sold 4,000 shares at $22 per share. Sold 4,000 shares at $15 per share.
Instructions (a)
Journalize the treasury stock transactions for 2012.
(b)
Prepare the Stockholders' Equity section of the balance sheet for Yates Corporation at December 31, 2012. Assume net income was $110,000 for 2012.
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 173
(15–20 min.)
(a)
Treasury Stock ........................................................... Cash.................................................................. (To record purchase of treasury stock)
180,000
Cash .......................................................................... Treasury Stock (4,000 × $18) ............................ Paid-in Capital from Treasury Stock (4,000 × $4) (To record sale of treasury stock)
88,000
Cash .......................................................................... Paid-in Capital from Treasury Stock (4,000 × $3) ....... Treasury Stock (4,000 × $18) ............................ (To record sale of treasury stock)
60,000 12,000
Apr. 1
Aug. 1
Oct. 1
(b)
180,000
72,000 16,000
72,000
Stockholders' equity Paid-in capital Capital stock Common stock, $10 par ............................................. Additional paid-in capital In excess of par.......................................................... $200,000 From treasury stock ................................................... 4,000 Total paid-in capital .............................................. Retained earnings ($500,000 + $110,000)............................. Total paid-in capital and retained earnings ........... Less: Treasury stock (2,000 shares) ..................................... Total stockholders' equity .....................................
FOR INSTRUCTOR USE ONLY
$1,500,000
204,000 1,704,000 610,000 2,314,000 (36,000) $2,278,000
Corporations: Organization and Capital Stock Transactions
13 - 41
Ex. 174 Arens Corporation purchased 3,000 shares of its $5 par value common stock for a cash price of $10 per share. Two months later, Arens sold the treasury stock for a cash price of $8 per share. Instructions Prepare the journal entry to record the sale of the treasury stock assuming (a) No balance in Paid-in Capital from Treasury Stock. (b) A $4,000 balance in Paid-in Capital from Treasury Stock. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 174
(7–9 min.)
(a) Cash ............................................................................................. Retained Earnings [($10 – $8) × 3,000] ........................................ Treasury Stock ...................................................................
24,000 6,000
(b) Cash ............................................................................................. Paid-in Capital from Treasury Stock.............................................. Retained Earnings ........................................................................ Treasury Stock ...................................................................
24,000 4,000 2,000
30,000
30,000
Ex. 175 An inexperienced accountant for Olsen Corporation made the following entries. July 1
Cash ................................................................................... 240,000 Common Stock .......................................................... 240,000 (Issued 15,000 shares of no-par common stock, stated value $10 per share)
Sept. 1
Common Stock ................................................................... 32,000 Retained Earnings .............................................................. 4,000 Cash .......................................................................... 36,000 (Purchased 2,000 shares issued on July 1 for the treasury at $18 per share)
Dec. 1
Cash ................................................................................... 20,000 Common Stock .......................................................... Gain on Sale of Stock ................................................ (Sold 1,000 shares of the treasury stock at $20 per share)
16,000 4,000
Instructions (a) On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.) (b) Prepare the correcting entries that should be made to correct the accounts of Olsen Corporation. (Do not reverse the original entry.) Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
13 - 42 Test Bank for Accounting Principles, Tenth Edition Solution 175 (a) July 1
Sept. 1 Dec. 1
(b) July 1 Sept. 1
Dec. 1
(15–20 min.) Cash ............................................................................. Common Stock..................................................... Paid-in Capital in Excess of Stated Value.............
240,000
Treasury Stock .............................................................. Cash ....................................................................
36,000
Cash ............................................................................. Treasury Stock ..................................................... Paid-in Capital from Treasury Stock .....................
20,000
Common Stock ............................................................. Paid-in Capital in Excess of Stated Value.............
90,000
Treasury Stock .............................................................. Common Stock..................................................... Retained Earnings ................................................
36,000
Common Stock ............................................................. Gain on Sale of Stock ................................................... Treasury Stock ..................................................... Paid-in Capital from Treasury Stock .....................
16,000 4,000
150,000 90,000 36,000 18,000 2,000 90,000 32,000 4,000
18,000 2,000
Ex. 176 On January 1, 2012, Dreamy Company issued 30,000 shares of $2 par value common stock for $150,000. On March 1, 2012, the company purchased 6,000 shares of its common stock for $8 per share for the treasury. On June 1, 2012, 1,500 of the treasury shares are sold for $10 per share. On September 1, 2012, 3,000 treasury shares are sold at $6 per share. Instructions Journalize the stock transactions of Dreamy Company in 2012. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 176 Jan.
1
March 1 June 1
(8–12 min.)
Cash ................................................................................... Common Stock .......................................................... Paid-In Capital in Excess of Par .................................
150,000
Treasury Stock ................................................................... Cash ..........................................................................
48,000
Cash ................................................................................... Treasury Stock ........................................................... Paid-In Capital from Treasury Stock ...........................
15,000
FOR INSTRUCTOR USE ONLY
60,000 90,000 48,000 12,000 3,000
Corporations: Organization and Capital Stock Transactions Solution 176 Sept. 1
13 - 43
(cont.)
Cash ................................................................................... Paid-In Capital from Treasury Stock ................................... Retained Earnings .............................................................. Treasury Stock ...........................................................
18,000 3,000 3,000 24,000
Ex. 177 Wave Company originally issued 30,000 shares of $5 par common stock for $240,000 on January 3, 2012. Wave purchased 1,500 shares of treasury stock for $15,000 on November 2, 2010. On December 6, 2012, 600 shares of the treasury stock are sold for $7,200. Instructions Prepare journal entries to record these stock transactions. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 177 Jan.
Nov.
Dec.
3
2
6
(9–13 min.)
Cash ................................................................................... Common Stock .......................................................... Paid-In Capital in Excess of Par .................................
240,000
Treasury Stock ................................................................... Cash ..........................................................................
15,000
Cash ................................................................................... Treasury Stock ........................................................... Paid-In Capital from Treasury Stock ...........................
7,200
150,000 90,000
15,000
6,000 1,200
Ex. 178 The stockholders' equity section of Barrel Corporation's balance sheet at December 31, 2011, appears below: Stockholders' equity Paid-in capital Common stock, $10 par value, 400,000 shares authorized; 250,000 issued and outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders' equity
$2,500,000 1,200,000 3,700,000 600,000 $4,300,000
During 2012, the following stock transactions occurred: Jan.
18
Issued 50,000 shares of common stock at $32 per share.
Aug. 20
Purchased 25,000 shares of Barrel Corporation's common stock at $26 per share to be held in the treasury.
Nov.
Reissued 9,000 shares of treasury stock for $28 per share.
5
FOR INSTRUCTOR USE ONLY
13 - 44 Test Bank for Accounting Principles, Tenth Edition Instructions (a) Prepare the journal entries to record the above stock transactions. (b) Prepare the stockholders' equity section of the balance sheet for Barrel Corporation at December 31, 2012. Assume that net income for the year was $100,000 and that no dividends were declared. Ans: N/A, SO: 4, 5, 6, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 178 (a) Jan. 18
(16–22 min.) Cash ............................................................................. 1,600,000 Common Stock..................................................... Paid-in Capital in Excess of Par ........................... (To record issuance of 50,000 shares of common stock)
500,000 1,100,000
Aug. 20
Treasury Stock .............................................................. 650,000 Cash .................................................................... 650,000 (To record purchase of 25,000 shares of treasury stock at cost)
Nov. 5
Cash ............................................................................. 252,000 Treasury Stock ..................................................... 234,000 Paid-in Capital from Treasury Stock ..................... 18,000 (To record sale of 9,000 shares of treasury stock at $28 per share)
(b) Stockholders' equity Paid-in capital Capital stock Common stock, $10 par value, 400,000 shares authorized, 300,000 shares issued, and 284,000 shares outstanding Additional paid-in capital In excess of par From treasury stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (16,000 shares) Total stockholders' equity
$3,000,000 $2,300,000 18,000
2,318,000 5,318,000 700,000 6,018,000 (416,000) $5,602,000
Ex. 179 Sloman Corporation has 100,000 shares of $40 par value preferred stock authorized. During the year, it had the following transactions related to its preferred stock. (a) Issued 20,000 shares at $55 per share. (b) Issued 10,000 shares for equipment having a $700,000 asking price. The stock had a market value of $75 per share Instructions Journalize the transactions. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions Solution 179
13 - 45
(5–7 min.)
(a) Cash ............................................................................................. 1,100,000 Preferred Stock................................................................... Paid-in Capital in Excess of Par—Preferred........................
800,000 300,000
(b) Equipment (10,000 × $75) ............................................................ Preferred Stock................................................................... Paid-in Capital in Excess of Par—Preferred........................
400,000 350,000
750,000
Ex. 180 Desert Corporation has the following capital stock outstanding at December 31, 2012: 7% Preferred stock, $100 par value, cumulative 15,000 shares issued and outstanding ...................................................
$1,500,000
Common stock, no par, $10 stated value, 500,000 shares authorized, 350,000 shares issued and outstanding .................................................
3,500,000
The preferred stock was issued at $120 per share. The common stock was issued at an average per share price of $14. Instructions Prepare the paid-in capital section of the balance sheet at December 31, 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(10–15 min.)
Stockholders' equity Paid-in capital Capital stock 7% Preferred stock, $100 par value, cumulative 15,000 shares issued and outstanding Common stock, no par, $10 stated value, 500,000 shares authorized, 350,000 shares issued and outstanding Total capital stock Additional paid-in capital In excess of par—preferred stock $ 300,000* In excess of stated value—common stock 1,400,000** Total additional paid-in capital Total paid-in capital *15,000 shares × $20 = $300,000. **350,000 shares × $4 = $1,400,000.
FOR INSTRUCTOR USE ONLY
$1,500,000
3,500,000 5,000,000
1,700,000 $6,700,000
13 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 181 In its first year of operations, Arid Corporation had the following transactions pertaining to its $10 par value preferred stock. Feb. 1 Nov. 1
Issued 6,000 shares for cash at $43 per share. Issued 3,000 shares for cash at $45 per share.
Instructions (a) Journalize the transactions. (b) Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par — preferred stock at the end of the year. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181 (a) Feb. 1
Nov. 1
(8–12 min.) Cash............................................................................... Preferred Stock .................................................... Paid-in Capital in Excess of Par—Preferred Stock .................................................................... (Issued 6,000 shares at $43 per share)
258,000
Cash............................................................................... Preferred Stock .................................................... Paid-in Capital in Excess of Par—Preferred Stock .................................................................... (Issued 3,000 shares at $45 per share)
135,000
60,000 198,000
30,000 105,000
(b) (1) Preferred stock: $60,000 + $30,000 = $90,000. (2) Paid-in Capital in Excess of Par—Preferred Stock: $198,000 + $105,000 = $303,000. Ex. 182 Trane Corporation has the following stockholders' equity accounts: Preferred Stock Paid-in Capital in Excess of Par—Preferred Stock Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capital from Treasury Stock—Common Retained Earnings Treasury Stock—Common Instructions Classify each account using the following tabular alignment. Account
Paid-in Capital Capital Stock Additional
Retained Earnings
Other
Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions Solution 182
13 - 47
(5–9 min.)
Account Preferred Stock Paid-in Capital in Excess of Par—Preferred Stock Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capital from Treasury Stock—Common Retained Earnings Treasury Stock—Common
Paid-in Capital Capital Stock Additional X
Retained Earnings
Other
X X X X X X
Ex. 183 Darling Corporation issued 200,000 shares of $20 par value, cumulative, 6% preferred stock on January 1, 2011, for $4,500,000. In December 2013, Darling declared its first dividend of $800,000. Instructions (a) (b) (c)
Prepare Darling's journal entry to record the issuance of the preferred stock. If the preferred stock is not cumulative, how much of the $800,000 would be paid to common stockholders? If the preferred stock is cumulative, how much of the $800,000 would be paid to common stockholders?
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 183 (a)
(5-8 min.)
Cash Preferred Stock (200,000 $20) Paid-in Capital in Excess of Par
4,500,000 4,000,000 500,000
(b)
Total Dividend Less: Preferred Stock Dividend ($4,000,000 6%) Common Stock Dividends
$ 800,000 240,000 $ 560,000
(c)
Total Dividend Less: Preferred Stock Dividend [($4,000,000 6%) 3] Common Stock Dividends
$ 800,000 720,000 $ 80,000
FOR INSTRUCTOR USE ONLY
13 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 184 The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Star Corporation at December 31, 2012. Common Stock ($5 stated value) Paid-in Capital in Excess of Par—Preferred Stock Paid-in Capital in Excess of Stated Value—Common Stock Preferred Stock (8%, $100 par, noncumulative) Retained Earnings Treasury Stock—Common (10,000 shares)
$2,200,000 280,000 800,000 500,000 1,334,000 120,000
Instructions Prepare the stockholders’ equity section of the balance sheet at December 31, 2012. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(4-6 min.) STAR CORPORATION Partial Balance Sheet December 31, 2012
Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 5,000 shares issued Common stock, no par, $5 stated value, 440,000 shares issued and 430,000 shares outstanding Total capital stock Additional paid-in capital In excess of par— preferred stock In excess of stated value— common stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (10,000 common shares) Total stockholders’ equity
FOR INSTRUCTOR USE ONLY
$ 500,000
2,200,000 2,700,000
$280,000 800,000 1,080,000 3,780,000 1,334,000 5,114,000 (120,000) $4,994,000
Corporations: Organization and Capital Stock Transactions
13 - 49
Ex. 185 The following information is available for Macon Corporation: Common Stock ($10 par) Paid-in Capital in Excess of Par—Preferred Paid-in Capital in Excess of Stated Value—Common Preferred Stock Retained Earnings Treasury Stock—Common
$1,500,000 200,000 750,000 450,000 800,000 50,000
Instructions Based on the preceding information, calculate each of the following: (a) Total paid-in capital. (b) Total stockholders' equity. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 185 (5 min.) (a) Total paid-in capital = $2,900,000 ($1,500,000 + $200,000 + $750,000 + $450,000) (b) Total stockholders' equity = $3,650,000 ($2,900,000 + $800,000 – $50,000) Ex. 186 Place each of the items listed below in the appropriate subdivision of the stockholders' equity section of a balance sheet. Common stock, $10 stated value Retained earnings 8% Preferred stock, $100 par value Paid-in capital in excess of par Paid-in capital in excess of stated value Treasury stock—Common Paid-in capital from treasury stock Stockholders' equity Paid-in capital Capital stock Additional paid-in capital Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Total stockholders' equity Ans: N/A, SO: 6, Bloom: C, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 186
(6–9 min.)
Stockholders' equity Paid-in capital Capital stock 8% Preferred stock, $100 par value Common stock, $10 stated value Additional paid-in capital In excess of par—preferred stock In excess of stated value—common stock From treasury stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common Total stockholders' equity
COMPLETION STATEMENTS 187. A corporation has a separate __________________________ apart from its owners. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
188. The major advantages of the corporate form of organization include (1) limited _________________ of owners, (2) continuous ____________________ and (3) ease of transferring ___________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
189. Stockholders elect the _______________, who in turn hire the ______________ of the company who have day to day responsibility for running the corporation. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
190. If a corporation's stock is traded on the major stock exchanges, the corporation must generally report periodically to a federal agency known as the ____________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
191. Stockholders generally have the right to share in corporate _______________ and in ______________ upon liquidation. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
192. Par value of stock represents the __________________ per share that must be retained in the business for the protection of corporate ___________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
193. The stockholders' equity section of a corporation's balance sheet is generally divided in two major sections: (1) _____________ and (2) _______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 51
194. If stock is issued in exchange for noncash assets, the assets should be valued at the ____________________ of the consideration ___________________ or the assets ____________________, whichever is more clearly evident. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
195. A corporation's own stock that has been reacquired by the corporation but not canceled is called ___________________ and is deducted from total _______________________ on the balance sheet. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
196. The _______________ feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
197. Preferred stock has contractual provisions that give it a preference over common stock as to ___________________ and to ___________________ in the event of liquidation. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
198. The paid-in capital section of the balance sheet consists of two classifications: ______________________ and ______________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 187. legal existence 188. liability, life, ownership rights 189. board of directors, officers 190. Securities and Exchange Commission (SEC) 191. earnings, assets 192. legal capital, creditors 193. Paid-in capital, Retained earnings
194. fair value, given up, received 195. treasury stock, paid-in capital and retained earnings 196. cumulative 197. dividends, assets 198. capital stock, additional paid-in capital
FOR INSTRUCTOR USE ONLY
13 - 52 Test Bank for Accounting Principles, Tenth Edition
MATCHING 199. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Limited liability Capital stock Board of directors Paid-in capital Retained earnings
F. G. H. I. J.
Preemptive right Par value Legal capital Treasury stock Cumulative feature
____ 1. Net income retained in the corporation. ____ 2. The amount that must be retained in the business for the protection of creditors. ____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends before common stockholders receive any dividends. ____ 4. Creditors only have corporate assets to satisfy their claims. ____ 5. Responsible to stockholders for corporate activity. ____ 6. The amount assigned to each share of stock in the corporate charter. ____ 7. Unit of ownership in a corporation. ____ 8. Enables stockholders to maintain their same percentage ownership when new shares are issued. ____ 9. Corporation's own stock that has been reacquired by the corporation but not retired. ____ 10. Total amount paid-in on capital stock. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
E H J A C
6. 7. 8. 9. 10.
G B F I D
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 53
SHORT-ANSWER ESSAY QUESTIONS S-A E 200 Identify at least six characteristics of the corporate form of business organization. Contrast each one with the partnership form of organization. Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Research, AICPA PC: Communication, IMA: FSA
Solution 200 (a) (b) (c) (d)
Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital
(e) (f) (g) (h)
Continuous life Corporation management Government regulations Additional taxes
A partnership is not a separate legal entity because the act of any partner is binding on all other partners. A partnership has unlimited liability because each partner is personally and individually liable for all partnership liabilities. A partnership requires the approval of all the partners before ownership rights can be transferred. A partnership cannot acquire capital as easily as a corporation can. Investors are fearful of investing in a partnership because they then become liable for all partnership liabilities. The life of a corporation, which may be perpetual, is stated in the charter. The life of a partnership is dependent on the partners and any changes in the composition of the partnership. Corporations allow the owners (stockholders) to indirectly manage the corporation through the board of directors and the corporate officers. On the other hand, partners not only are the owners of their business but they also manage the daily operations. A partnership is not subject to as many regulations as a corporation. Many of these regulations are designed to protect the stockholders of the corporation who are not involved in the daily management of the company. Corporations must pay federal and state income taxes and the stockholders must pay taxes on the dividends received. Partners avoid this double taxation because they only have to pay taxes on the income reported on their personal income tax form. S-A E 201 Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock? Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 201 Common stockholders have the right to vote on corporate actions that require stockholders approval while preferred stockholders generally do not have voting rights. However, preferred stockholders will receive (1) dividends and (2) assets in the event of liquidation prior to common stockholders. Preferred stockholders may also have a cumulative dividend feature or a participating dividend feature. Both of these features increase the amount of dividends paid to the preferred stockholders. S-A E 202 Define par value, and discuss its significance in accounting. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
13 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 202 Par value is an arbitrary amount established for a share of stock and printed on each stock certificate. It represents the legal capital of the corporation and constitutes a minimum cushion that must remain for the protection of the corporate creditors. Par value is also used for the calculation of preferred dividends. S-A E 203 Land appraised at $60,000 is purchased by issuing 1,000 shares of $25 par value common stock. The market price of the shares at the time of the exchange, based on active trading in the securities market, is $75 per share. Should the land be recorded at $25,000, $60,000, or $75,000? Explain. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 203 When stock is issued for services or noncash assets, the cost should be measured at either the fair value of the consideration given up (in this case, the stock) or the fair value of the consideration received (in this case, the land), whichever is more clearly evident. In this case, the fair market value of the stock is more objectively determinable than that of the land, since the stock is actively traded in the securities market. The appraised value of the land is merely an estimate of the land's value, while the market price of the stock is the amount the stock was actually worth on the date of exchange. Therefore, the land should be recorded at $75,000, the common stock at $25,000, and the excess ($50,000) as paid-in capital in excess of par value. S-A E 204 Lang, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $15,000. The treasury stock is resold by Lang, Inc. for $20,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity? Ans: N/A, SO: 4, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 204 When treasury stock is resold at a price above original cost, Cash is debited for the amount of the proceeds ($20,000), Treasury Stock is credited at cost ($15,000), and the excess ($5,000) is credited to Paid-in Capital from Treasury Stock. Cash is an asset, and the other two accounts are part of stockholders’ equity. Therefore, this transaction: (a) has no effect on net income, (b) increases total assets, (c) increases total paid-in capital, and (d) increases total stockholders’ equity.
FOR INSTRUCTOR USE ONLY
Corporations: Organization and Capital Stock Transactions
13 - 55
S-A E 205 (Ethics) Mark Ludwig, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Ludwig had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Dick Markley, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company's available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Markley's suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, SO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Investment Decisions
Solution 205 1. There is no definite answer as to whether Mr. Markley's suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO, and made entirely to boost stock price. It is not clear what the long-term benefit to the company will be, even if it is successful. Thus, a student might argue that the large purchase of treasury stock, using up most of the available cash, might be unethical because of the potential damage done to the company, without a large enough potential reward. On the other hand, the company might benefit by keeping its stock price high (and supposing that this purchase will enhance the stock price) by being able to issue additional shares of stock to finance future expansion. It is to be hoped that the students can articulate the concept that legality of an action is not the only determinate of whether an action is ethical. 2. A company may discontinue its dividend at will. Holders of common stock should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no expressed or implied contract to pay a dividend to holders of common stock, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury stock.
FOR INSTRUCTOR USE ONLY
13 - 56 Test Bank for Accounting Principles, Tenth Edition S-A E 206 (Communication) As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet. Required: Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Research, AICPA PC: Communication, IMA: Business Economics
Solution 206 Common Stock: When investors invest in our company, they purchase common stock. Part of the purchase price is shown in this section, and is called "par" value. Par value is a legal term, denoting the amount of money that the company must retain in order to satisfy creditors’ claims, if the company should become insolvent. Additional Paid-in Capital: The remainder of the amount paid by investors who purchase shares of stock in our company is shown in this section. Thus, the Common Stock section and the Additional Paid-in Capital section together show the amount paid by investors to purchase shares of our stock. Retained Earnings: This shows the earnings that have been retained in the firm to finance future growth. The other earnings were paid to our stockholders as dividends.
FOR INSTRUCTOR USE ONLY
CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
4 4 5 5 5 5
K K K K K K
25. 26. sg 27. sg 28. sg 29. sg 30.
5 1 1 2 4 5
K K K K C K
97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118.
2 2 2 2 2 2 2 3 3 3 3 3 5 3 5 4 4 4 4 4 4 5
C K K C K C C K K K AP AP AP AP AP C C C K AP AP AP
119. 120. 121. 122. 123. sg 124. st 125. sg 126. sg 127. st 128. sg 129. st 130. sg 131. sg 132. sg 133. 134. 135. 136. 137. 138.
5 5 5 5 5 1 1 1 2 2 3 3 5 5 5 5 5 5 5 5
AP K K AP K C K K C K AP K AP K K K K K K K
145. 146.
2 3
AP AP
147.
4
AP
163. 164. 165. 166. 167.
3 3 3,4 3,5 4,5
AP AP P AP AP AP
168. 169. 170. 171.
4 5 5 5
AP AP AP AP
True-False Statements 1. 2. 3. 4. 5. 6.
1 1 1 1 1 2
K K K C C K
7. 8. 9. 10. 11. 12.
2 2 2 2 2 2
K K K K K K
13. 14. 15. 16. 17. 18.
2 3 3 3 3 4
C K K K K C
19. 20. 21. 22. 23. 24.
sg
Multiple Choice Questions 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K C C K C C C C K K K K K K K C K C
53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
C C C AP AP AP AP AP K K C C K K K C C C AP AP AP C
75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2
C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K K C C
Brief Exercises 139. 140.
1 1
AP AP
141. 142.
1 1
AP AP
143. 144.
1 2
C K
Exercises 148. 149. 150. 151. 152. sg st
1 1 1 1 1
AP AP AP AP AP
153. 154. 155. 156. 157.
1–3 1 1,3 1 2
C AP AP AP AN
158. 159. 160. 161. 162.
2 2 2 3 3
AP AP AP AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
14 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Completion Statements 172. 173.
1 1
K K
174. 175.
1 2
K K
176. 177.
2 3
K K
178. 179.
3 4
K K
1 3
K K
180. 181.
5 5
K K
Matching Statements 182.
2
K
Short-Answer Essay 183. 184.
3 3
K K
185. 186.
1 1
K K
187. 188.
1 2
K K
189. 190.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 26. 27. 31. 32. 33. 34. 35. 36.
TF TF TF TF TF TF TF MC MC MC MC MC MC
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.
MC MC MC MC MC MC MC MC MC MC MC MC MC
50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
6. 7. 8. 9. 10.
TF TF TF TF TF
11. 12. 13. 28. 91.
TF TF TF TF MC
92. 93. 94. 95. 96.
14. 15. 16. 17.
TF TF TF TF
104. 105. 106. 107.
MC MC MC MC
108. 110. 129. 130.
18. 19. 20.
TF TF TF
29. 112. 113.
TF MC MC
114. 115. 116.
Note: TF = True-False MC = Multiple Choice
Type
Item
Type
Item
Study Objective 1 MC 63. MC 76. MC 64. MC 77. MC 65. MC 78. MC 66. MC 79. MC 67. MC 80. MC 68. MC 81. MC 69. MC 82. MC 70. MC 83. MC 71. MC 84. MC 72. MC 85. MC 73. MC 86. MC 74. MC 87. MC 75. MC 88. Study Objective 2 MC 97. MC 102. MC 98. MC 103. MC 99. MC 127. MC 100. MC 128. MC 101. MC 144. Study Objective 3 MC 146. BE 162. MC 153. Ex 163. MC 155. Ex 164. MC 161. Ex 165. Study Objective 4 MC 117. MC 167. MC 147. BE 168. MC 165. Ex 179.
Type
Item
Type
Item
Type
MC MC MC MC MC MC MC MC MC MC MC MC MC
89. 90. 124. 125. 126. 139. 140. 141. 142. 143. 148. 149. 150.
MC MC MC MC MC BE BE BE BE BE Ex Ex Ex
151. 152. 153. 154. 155. 156. 172. 173. 174. 185. 186. 187. 189.
Ex Ex Ex Ex Ex Ex C C C SA SA SA SA
MC MC MC MC BE
145. 153. 157. 158. 159.
BE Ex Ex Ex Ex
160. 175. 176. 182. 188.
Ex C C M SA
Ex Ex C Ex
166. 177. 178. 183.
Ex C C SA
184. 190.
SA SA
BE = Brief Exercise Ex = Exercise
FOR INSTRUCTOR USE ONLY
Ex Ex C C =
Completion
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
21. 22. 23. 24. 25.
TF TF TF TF TF
30. 109. 111. 118. 119.
TF MC MC MC MC
120. 121. 122. 123. 131.
Note: TF = True-False MC = Multiple Choice
Study Objective 5 MC 132. MC 137. MC 133. MC 138. MC 134. MC 166. MC 135. MC 167. MC 136. MC 169.
MC MC Ex Ex Ex
BE = Brief Exercise Ex = Exercise
170. 171. 180. 181.
C =
Ex Ex C C
Completion
The chapter also contains one set of ten Matching questions and eight Short-Answer Essay questions.
CHAPTER STUDY OBJECTIVES 1.
Prepare the entries for cash dividends and stock dividends. Companies make entries for both cash and stock dividends at the declaration date and at the payment date. At the declaration date the entries are: cash dividend—debit Cash Dividends, and credit Dividends Payable; small stock dividend—debit Stock Dividends, credit Paid-in Capital in Excess of Par (or Stated) Value, and credit Common Stock Dividends Distributable. At the payment date, the entries for cash and stock dividends are: cash dividend—debit Dividends Payable and credit Cash; small stock dividend—debit Common Stock Dividends Distributable and credit Common Stock.
2.
Identify the items reported in a retained earnings statement. Companies report each of the individual debits and credits to retained earnings in the retained earnings statement. Additions consist of net income and prior period adjustments to correct understatements of prior years' net income. Deductions consist of net loss, adjustments to correct overstatements of prior years' net income, cash and stock dividends, and some disposals of treasury stock.
3.
Prepare and analyze a comprehensive stockholders' equity section. A comprehensive stockholders' equity section includes all stockholders' equity accounts. It consists of two sections: paid-in capital and retained earnings. It should also include notes to the financial statements that explain any restrictions on retained earnings and any dividends in arrears. One measure of profitability is the return on common stockholders’ equity. It is calculated by dividing net income minus preferred stock dividends by average common stockholders’ equity.
4.
Describe the form and content of corporation income statements. The form and content of corporation income statements are similar to the statements of proprietorships and partnerships with one exception: Corporations must report income taxes or income tax expense in a separate section before net income in the income statement.
5.
Compute earnings per share. Companies compute earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. When preferred stock dividends exist, they must be deducted from net income in order to calculate EPS.
FOR INSTRUCTOR USE ONLY
14 - 4
Test Bank for Accounting Principles, Tenth Edition
TRUE-FALSE STATEMENTS 1.
Dividends may be declared and paid in cash or stock.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
2.
Cash dividends are not a liability of the corporation until they are declared by the board of directors.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
3.
The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
4.
A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
5.
A 3-for-1 common stock split will increase total stockholders' equity but reduce the par or stated value per share of common stock.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
6.
Retained earnings represents the amount of cash available for dividends.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
7.
Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8.
A debit balance in the Retained Earnings account is identified as a deficit.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
9.
A correction in income of a prior period involves either a debit or credit to the Retained Earnings account.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
10.
Prior period adjustments to income are reported in the current year's income statement.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
11.
Retained earnings that are restricted are unavailable for dividends.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
12.
Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 13.
14 - 5
A retained earnings statement shows the same information as a corporation income statement.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
14.
A detailed stockholders' equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
15.
Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
16.
Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
17.
Many companies prepare a stockholders’ equity statement instead of presenting a detailed stockholders’ equity section in the balance sheet.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
18.
A major difference among corporations, proprietorships, and partnerships is that a corporation's income statement reports income tax expense.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
19.
A corporation incurs income tax expense only if it pays dividends to stockholders.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
20.
Income tax expense usually appears as a separate section on a corporation income statement.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
21.
Earnings per share is calculated by dividing net income by the weighted average number of shares of preferred stock and common stock outstanding.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
22.
Preferred dividends paid are added back to net income in calculating earnings per share for common stockholders.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
23.
Earnings per share indicates the net income earned by each share of outstanding common stock.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
24.
Earnings per share is reported for both preferred and common stock.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
14 - 6 25.
Test Bank for Accounting Principles, Tenth Edition Most companies are required to report earnings per share on the face of the income statement.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
26.
A dividend based on paid-in capital is termed a liquidating dividend.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
27.
Common Stock Dividends Distributable is reported as additional paid-in capital in the stockholders' equity section.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
28.
A prior period adjustment is reported as an adjustment of the beginning balance of Retained Earnings.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
29.
Income tax expense and the related liability for income taxes payable are recorded when taxes are paid.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
30.
Earnings per share is reported only for common stock.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T T F T F
6. 7. 8. 9. 10.
F F T T F
11. 12. 13. 14. 15.
T F F F T
16. 17. 18. 19. 20.
F T T F T
21. 22. 23. 24. 25.
F F T F T
26. 27. 28. 29. 30.
T F T F T
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 7
MULTIPLE CHOICE QUESTIONS 31.
Each of the following decreases retained earnings except a a. cash dividend. b. liquidating dividend. c. stock dividend. d. All of these decrease retained earnings.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
32.
Each of the following decreases total stockholders' equity except a a. cash dividend. b. liquidating dividend. c. stock dividend. d. All of these decrease total stockholders' equity.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
33.
Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of stockholders c. Declaration of dividends by the board of directors d. Retained earnings
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
If a corporation declares a dividend based upon paid-in capital, it is known as a a. scrip dividend. b. property dividend. c. paid dividend. d. liquidating dividend.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
35.
The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date. b. date of record. c. payment date. d. last day of the fiscal year-end.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
36.
The effect of the declaration of a cash dividend by the board of directors is to Increase a. Stockholders' equity b. Assets c. Liabilities d. Liabilities
Decrease Assets Liabilities Stockholders' equity Assets
Ans: c, SO: 1, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 8 37.
Test Bank for Accounting Principles, Tenth Edition The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to a. decrease total liabilities and stockholders' equity. b. increase total expenses and total liabilities. c. increase total assets and stockholders' equity. d. decrease total assets and stockholders' equity.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
38.
Common Stock Dividends Distributable is classified as a(n) a. asset account. b. stockholders' equity account. c. expense account. d. liability account.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
39.
The effect of a stock dividend is to a. decrease total assets and stockholders' equity. b. change the composition of stockholders' equity. c. decrease total assets and total liabilities. d. increase the book value per share of common stock.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
40.
If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is a. Common Stock Dividends Distributable. b. Common Stock. c. Paid-in Capital in Excess of Par. d. Retained Earnings.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
41.
Which one of the following events would not require a formal journal entry on a corporation's books? a. 2 for 1 stock split b. 100% stock dividend c. 2% stock dividend d. $1 per share cash dividend
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
42.
Stock dividends and stock splits have the following effects on retained earnings: a. b. c. d.
Stock Splits Increase No change Decrease No change
Stock Dividends No change Decrease Decrease No change
Ans: b, SO: 1, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 43.
14 - 9
Dividends are predominantly paid in a. earnings. b. property. c. cash. d. stock.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
44.
If a stockholder receives a dividend that reduces retained earnings by the fair market value of the stock, the stockholder has received a a. large stock dividend. b. cash dividend. c. contingent dividend. d. small stock dividend.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
45.
Of the various dividends types, the two most common types in practice are a. cash and large stock. b. cash and property. c. cash and small stock. d. property and small stock.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
46.
Regular dividends are declared out of a. Paid-in Capital in Excess of Par. b. Treasury Stock. c. Common Stock. d. Retained Earnings.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
47.
A corporation is not committed to a legal obligation when it declares a. a cash dividend. b. either a cash dividend or a stock dividend. c. a stock dividend. d. a distribution date.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
48.
Which of the following is not a significant date with respect to dividends? a. The declaration date b. The incorporation date c. The record date d. The payment date
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 10 Test Bank for Accounting Principles, Tenth Edition 49.
On the dividend record date, a. a dividend becomes a current obligation. b. no entry is required. c. an entry may be required if it is a stock dividend. d. Dividends Payable is debited.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
50.
Which of the following statements regarding the date of a cash dividend declaration is not accurate? a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation. c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
51.
Dividends Payable is classified as a a. long-term liability. b. contra stockholders' equity account to Retained Earnings. c. current liability. d. stockholders' equity account.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
52.
Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: a. b. c. d.
Total Assets Increase No change Decrease Decrease
Total Liabilities Decrease Increase Increase No change
Total Stockholders' Equity No change Decrease Decrease Increase
Ans: b, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
53.
Which of the following statements about dividends is not accurate? a. Many companies declare and pay cash quarterly dividends. b. Low dividends may mean high stock returns. c. The board of directors is obligated to declare dividends. d. A legal dividend may not be a feasible one.
Ans: c, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
54.
The cumulative effect of the declaration and payment of a cash dividend on a company's balance sheet is to a. decrease current liabilities and stockholders' equity. b. increase total assets and stockholders' equity. c. increase current liabilities and stockholders' equity. d. decrease stockholders' equity and total assets.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 55.
14 - 11
The declaration and distribution of a stock dividend will a. increase total stockholders' equity. b. increase total assets. c. decrease total assets. d. have no effect on total assets.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
56.
Xeris, Inc. has 1,000 shares of 5%, $10 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2012. What is the annual dividend on the preferred stock? a. $5 per share b. $500 in total c. $5,000 in total d. $.05 per share
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Win, Inc. has 10,000 shares of 7%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2012. If the board of directors declares a $60,000 dividend, the a. preferred shareholders will receive 1/10th of what the common shareholders will receive. b. preferred shareholders will receive the entire $60,000. c. $60,000 will be held as restricted retained earnings and paid out at some future date. d. preferred shareholders will receive $30,000 and the common shareholders will receive $30,000.
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
58.
Marion, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2012. There were no dividends declared in 2011. The board of directors declares and pays a $55,000 dividend in 2012. What is the amount of dividends received by the common stockholders in 2012? a. $0 b. $25,000 c. $55,000 d. $30,000
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Library, Inc. has 2,500 shares of 4%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2011, and December 31, 2012. The board of directors declared and paid a $4,000 dividend in 2011. In 2012, $15,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2012? a. b. c. d.
Preferred $9,000 $7,500 $6,000 $5,000
Common $6,000 $7,500 $9,000 $10,000
Ans: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 12 Test Bank for Accounting Principles, Tenth Edition 60.
Township, Inc. has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2012, and December 31, 2013. The board of directors declared and paid a $50,000 dividend in 2012. In 2013, $110,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2013? a. b. c. d.
Preferred $0 $50,000 $55,000 $70,000
Common $110,000 $60,000 $55,000 $40,000
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
The board of directors must assign a per share value to a stock dividend declared that is a. greater than the par or stated value. b. less than the par or stated value. c. equal to the par or stated value. d. at least equal to the par or stated value.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
62.
Corporations generally issue stock dividends in order to a. increase the market price per share. b. exceed stockholders' dividend expectations. c. increase the marketability of the stock. d. decrease the amount of capital in the corporation.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
63.
A stockholder who receives a stock dividend would a. expect the market price per share to increase. b. own more shares of stock. c. expect retained earnings to increase. d. expect the par value of the stock to change.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
64.
When stock dividends are distributed, a. Common Stock Dividends Distributable is decreased. b. Retained Earnings is decreased. c. Paid-in Capital in Excess of Par is debited if it is a small stock dividend. d. no entry is necessary if it is a large stock dividend.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
65.
A small stock dividend is defined as a. less than 30% but greater than 25% of the corporation's issued stock. b. between 50% and 100% of the corporation's issued stock. c. more than 30% of the corporation's issued stock. d. less than 20–25% of the corporation's issued stock.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 66.
14 - 13
The per share amount normally assigned by the board of directors to a large stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
67.
The per share amount normally assigned by the board of directors to a small stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
68.
Identify the effect the declaration and distribution of a stock dividend has on the par value per share. a. b. c. d.
Par Value per Share Increase Decrease Increase or decrease No effect
Ans: d, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
69.
The declaration of a stock dividend will a. increase paid-in capital. b. change the total of stockholders' equity. c. increase total liabilities. d. increase total assets.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
70.
Which of the following show the proper effect of a stock split and a stock dividend? Item a. Total paid-in capital b. Total retained earnings c. Total par value (common) d. Par value per share
Stock Split Increase Decrease Decrease Decrease
Stock Dividend Increase Decrease Increase No change
Ans: d, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
71.
A stock split a. may occur in the absence of retained earnings. b. will increase total paid-in capital. c. will increase the total par value of the stock. d. will have no effect on the par value per share of stock.
Ans: a, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 14 Test Bank for Accounting Principles, Tenth Edition 72.
Outstanding stock of the Zone Corporation included 20,000 shares of $5 par common stock and 5,000 shares of 5%, $10 par noncumulative preferred stock. In 2011, Zone declared and paid dividends of $2,000. In 2012, Zone declared and paid dividends of $6,000. How much of the 2012 dividend was distributed to preferred shareholders? a. $3,000 b. $3,500 c. $2,500 d. None of the above
Ans: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
73.
Outstanding stock of the Core Corporation included 20,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par noncumulative preferred stock. In 2011, Core declared and paid dividends of $4,000. In 2012, Core declared and paid dividends of $12,000. How much of the 2012 dividend was distributed to preferred shareholders? a. $7,000 b. $4,000 c. $5,000 d. None of the above
Ans: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
74.
On January 1, Collins Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 15% stock dividend. Market value of the stock was $15/share. As a result of this event, a. Collins’ Paid-in Capital in Excess of Par account increased $600,000. b. Collins’ total stockholders’ equity was unaffected. c. Collins’ Stock Dividends account increased $1,800,000. d. All of the above.
Ans: d, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
75.
On January 1, Edison Corporation had 1,000,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 20% stock dividend. Market value of the stock was $15/share. As a result of this event, a. Edison’s Paid-in Capital in Excess of Par account increased $1,000,000. b. Edison’s total stockholders’ equity was unaffected. c. Edison’s Stock Dividends account increased $3,000,000. d All of the above.
Ans: d, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
76.
Start Inc. has 5,000 shares of 6%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2012. What is the annual dividend on the preferred stock? a. $60 per share b. $30,000 in total c. $50,000 in total d. $0.60 per share
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 77.
14 - 15
Arm, Inc., has 10,000 shares of 6%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2012. If the board of directors declares a $200,000 dividend, the a. preferred stockholders will receive 1/10th of what the common stockholders will receive. b. preferred stockholders will receive the entire $200,000. c. $60,000 will be held as restricted retained earnings and paid out at some future date. d. preferred stockholders will receive $60,000 and the common stockholders will receive $140,000.
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
78.
Aim, Inc., has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2012. There were no dividends declared in 2011. The board of directors declares and pays a $120,000 dividend in 2012. What is the amount of dividends received by the common stockholders in 2012? a. $0 b. $50,000 c. $20,000 d. $70,000
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
79.
Last Inc., has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2012, and December 31, 2011. The board of directors declared and paid a $5,000 dividend in 2011. In 2012, $24,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2012? a. $17,000 b. $12,000 c. $7,000 d. $6,000
Ans: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
80.
Art, Inc., has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2013. There were no dividends declared in 2011. The board of directors declares and pays a $45,000 dividend in 2012 and in 2013. What is the amount of dividends received by the common stockholders in 2013? a. $15,000 b. $25,000 c. $45,000 d. $0
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
14 - 16 Test Bank for Accounting Principles, Tenth Edition 81.
Crawl Inc., has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2011, and December 31, 2012. The board of directors declared and paid a $2,000 dividend in 2011. In 2012, $12,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2012? a. $8,000 b. $6,000 c. $4,000 d. $3,000
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
82.
On January 1, Sway Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 15% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Stock Dividends for $27,000. b. credit to Cash for $117,000. c. credit to Common Stock Dividends Distributable for $90,000. d. debit to Common Stock Dividends Distributable for $90,000.
Ans: c, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
83.
On January 1, Sway Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 18% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for $108,000. b. debit to Common Stock Dividends Distributable for $108,000. c. credit to Paid-in Capital in Excess of Par for $32,400. d. debit to Stock Dividends for $32,400.
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84.
On January 1, Soft Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 15% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The entry to record the transaction of June 17 would include a a. debit to Stock Dividends for $180,000. b. credit to Cash for $180,000. c. credit to Common Stock Dividends Distributable for $180,000. d. credit to Common Stock Dividends Distributable for $60,000.
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 85.
14 - 17
On January 1, Soft Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 15% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The stock was distributed on June 30. The entry to record the transaction of June 30 would include a a. credit to Common Stock for $120,000. b. debit to Common Stock Dividends Distributable for $180,000. c. credit to Paid-in Capital in Excess of Par for $60,000. d. debit to Stock Dividends for $60,000.
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
86.
Cork Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 7%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Cork distribute to the common stockholders? a. $76,000. b. $84,000. c. $118,000. d. None.
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
87.
Land Inc. has retained earnings of $800,000 and total stockholders' equity of $2,000,000. It has 200,000 shares of $5 par value common stock outstanding, which is currently selling for $30 per share. If Land declares a 10% stock dividend on its common stock: a. net income will decrease by $100,000. b. retained earnings will decrease by $100,000 and total stockholders' equity will increase by $100,000. c. retained earnings will decrease by $600,000 and total stockholders' equity will increase by $600,000. d. retained earnings will decrease by $600,000 and total paid-in capital will increase by $600,000.
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
On December 31, 2012, Stock, Inc. has 3,000 shares of 6% $100 par value cumulative preferred stock and 45,000 shares of $10 par value common stock outstanding. On December 31, 2012, the directors declare a $15,000 cash dividend. The entry to record the declaration of the dividend would include: a. a credit of $3,000 to Cash Dividends. b. a note in the financial statements that dividends of $3 per share are in arrears on preferred stock for 2012. c. a debit of $15,000 to Common Stock. d. a credit of $15,000 to Dividends Payable.
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 18 Test Bank for Accounting Principles, Tenth Edition 89.
Saint, Inc. declares a 10% common stock dividend when it has 30,000 shares of $10 par value common stock outstanding. If the market value of $24 per share is used, the amounts debited to Stock Dividends and credited to Paid-in Capital in Excess of Par are: Paid-in Capital in Stock Dividends Excess of Par a. $30,000 $0 b. $72,000 $42,000 c. $72,000 $30,000 d. $30,000 $42,000
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
90.
Cloud Manufacturing declared a 10% stock dividend when it had 350,000 shares of $3 par value common stock outstanding. The market price per common share was $12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to a. Stock Dividends for $105,000. b. Paid-in Capital in Excess of Par for $315,000. c. Common Stock for $105,000. d. Common Stock Dividends Distributable for $420,000.
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
91.
The following selected amounts are available for Clark Company. Retained earnings (beginning) Net loss Cash dividends declared Stock dividends declared
$800 150 100 100
What is its ending retained earnings balance? a. $650 b. $700 c. $450 d. $600 Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
Car and Auto Sisters had retained earnings of $15,000 on the balance sheet but disclosed in the footnotes that $3,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends? a. $11,000 b. $12,000 c. $15,000 d. $9,000
Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 93.
14 - 19
Moore, Inc. had 250,000 shares of common stock outstanding before a stock split occurred, and 750,000 shares outstanding after the stock split. The stock split was a. 2-for-5. b. 5-for-1. c. 1-for-5. d. 3-for-1.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
94.
Restricting retained earnings for the cost of treasury stock purchased is a a. contractual restriction. b. legal restriction. c. stock restriction. d. voluntary restriction.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
95.
A prior period adjustment that corrects income of a prior period requires that an entry be made to a. an income statement account. b. a current year revenue or expense account. c. the retained earnings account. d. an asset account.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
96.
If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to a. decrease total assets and total stockholders' equity. b. increase stockholders' equity and decrease total liabilities. c. decrease total retained earnings and increase total liabilities. d. reduce the amount of retained earnings available for dividend declarations.
Ans: d, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
97.
A credit balance in retained earnings represents a. the amount of cash retained in the business. b. a claim on specific assets of the corporation. c. a claim on the aggregate assets of the corporation. d. the amount of stockholders' equity exempted from the stockholders' claim on total assets.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
98.
A net loss a. occurs if operating expenses exceed cost of goods sold. b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance. d. is closed to the paid-in capital account of the stockholders' equity section of the balance sheet.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 20 Test Bank for Accounting Principles, Tenth Edition 99.
Prior period adjustments are reported a. in the footnotes of the current year's financial statements. b. on the current year's balance sheet. c. on the current year's income statement. d. on the current year's retained earnings statement.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
100.
Retained earnings are occasionally restricted a. to set aside cash for dividends. b. to keep the legal capital associated with paid-in capital intact. c. due to contractual loan restrictions. d. if preferred dividends are in arrears.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
101.
Retained earnings is increased by each of the following except a. net income. b. prior period adjustments. c. some disposals of treasury stock. d. All of these increase retained earnings.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
102.
A prior period adjustment for understatement of net income will a. be credited to the Retained Earnings account. b. be debited to the Retained Earnings account. c. show as a gain on the current year's Income Statement. d. show as an asset on the current year's Balance Sheet.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
103.
The retained earnings statement a. is the owners' equity statement for a corporation. b. will show an addition to the beginning retained earnings balance for an understatement of net income in a prior year. c. will not reflect net losses. d. will, in some cases, fail to reconcile the beginning and ending retained earnings balances.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
104.
In the stockholders' equity section of the balance sheet, a. Common Stock Dividends Distributable will be classified as part of additional paid-in capital. b. Common Stock Dividends Distributable will appear in its own subsection of the stockholders' equity. c. Additional Paid-in Capital appears under the subsection Paid-in Capital. d. Dividends in arrears will appear as a restriction of Retained Earnings.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 105.
14 - 21
The return on common stockholders' equity is computed by dividing net income available to common stockholders by a. ending total stockholders' equity. b. ending common stockholders' equity. c. average total stockholders' equity. d. average common stockholders' equity.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
106.
The return on common stockholders’ equity is computed by dividing a. net income by ending common stockholders’ equity. b. net income by average common stockholders’ equity. c. net income less preferred dividends by ending common stockholders’ equity. d. net income less preferred dividends by average common stockholders’ equity.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
107.
Kong Inc. reported net income of $270,000 during 2012 and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value preferred stock outstanding. Common stockholders' equity was $1,200,000 on January 1, 2012, and $1,600,000 on December 31, 2012. The company's return on common stockholders' equity for 2012 is: a. 17.4% b. 15.0% c. 13.1% d. 19.3%
Ans: b, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
108.
King Corporation had net income of $250,000 and paid dividends of $40,000 to common stockholders and $10,000 to preferred stockholders in 2012. King Corporation’s common stockholders’ equity at the beginning and end of 2012 was $870,000 and $1,130,000, respectively. There are 100,000 weighted-average shares of common stock outstanding. King Corporation’s return on common stockholders’ equity was a. 10%. b. 24%. c. 20%. d. 17.7%.
Ans: b, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
Darren Corporation had net income of $250,000 and paid dividends of $50,000 to common stockholders and $10,000 to preferred stockholders in 2012. Darren Corporation’s common stockholders’ equity at the beginning and end of 2012 was $870,000 and $1,130,000, respectively. There are 200,000 weighted-average shares of common stock outstanding. Darren Corporation’s earnings per share for 2012 was a. $6.20. b. $1.20. c. $1.25. d. $5.00.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 22 Test Bank for Accounting Principles, Tenth Edition 110.
Assume that all balance sheet amounts for Marley Company represent average balance figures. Stockholders’ equity—common $150,000 Total stockholders’ equity 200,000 Sales 100,000 Net income 27,000 Number of shares of common stock 10,000 Common stock dividends 10,000 Preferred stock dividends 4,000 What is the return on common stockholders’ equity ratio for Marley? a. 18.0% b. 15.3% c. 11.3% d. 8.7%
Ans: b, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
111.
Assume that all balance sheet amounts for Texas Company represent average balance figures. Stockholders’ equity—common Total stockholders’ equity Sales Net income Number of shares of common stock Common stock dividends Preferred stock dividends What is the earnings per share for Texas? a. $1.90 b. $1.80 c. $1.20 d. $2.00
$180,000 400,000 200,000 38,000 20,000 12,000 2,000
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
A corporation differs from a proprietorship and a partnership in that a. assets and liabilities are presented differently on the balance sheet. b. a corporation is considered a separate legal entity for taxation purposes. c. the cost principle only applies to proprietorships and partnerships. d the owners of the corporation do not have a claim on the net assets of the business.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
113.
Income statements for corporations are the same as the statements for proprietorships except for the reporting of a. gross profit. b. income from operations. c. income tax expense. d. other revenues and gains.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 114.
14 - 23
Corporations report which of the following in a separate section of the income statement? a. cost of goods sold. b. income tax expense. c. gross profit. d. other revenues and gains.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
115.
Corporation income tax expense is a. usually accrued in the adjusting entry process. b. not usually accrued because it is not known what the exact liability will be until the tax return is filed. c. not reported in a separate section of a corporate income statement. d. reported similarly for corporations and partnerships.
Ans: a, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
116.
Dakota Company reports the following amounts for 2012. Net income Average, stockholders' equity Preferred dividends Par value preferred stock
$150,000 1,000,000 42,000 200,000
The 2012 rate of return on common stockholders' equity is a. 18.8%. b. 13.5%. c. 15.0%. d. 10.8%. Ans: b, SO: 4, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
117.
During 2012 Maine Inc. had sales revenue $664,000, gross profit $364,000, operating expenses $199,000, cash dividends $45,000, other expenses and losses $20,000. Its corporate tax rate is 30%. What was Maine's income tax expense for the year? a. $30,000 b. $90,000 c. $199,200 d. $43,500 Ans: d, SO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
118.
Winston Corporation had 400,000 shares of common stock outstanding during the year. Winston declared and paid cash dividends of $200,000 on the common stock and $160,000 on the preferred stock. Net income for the year was $880,000. What is Winston's earnings per share? a. $1.75 b. $1.70 c. $1.80 d. $1.30
Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
14 - 24 Test Bank for Accounting Principles, Tenth Edition 119.
The income statement for Miracle Inc. shows income before income taxes $800,000, income tax expenses $410,000, and net income $390,000. If Miracle declared $150,000 of cash dividends on preferred stock and has 100,000 shares of common stock outstanding throughout the year, earnings per share is: a. $8.00 b. $2.40 c. $1.50 d. $3.90
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120.
When computing earnings per share, a. an adjustment related to preferred stock dividends is made in the numerator and denominator of the earnings per share formula. b. an adjustment for the preferred dividends is made in the denominator of the earnings per share formula. c. the dividends for cumulative preferred stock are deducted from net income only if the preferred dividends have been declared. d. the dividends for cumulative preferred stock are deducted from net income whether or not preferred dividends have been declared.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
121.
Each of the following statements is correct except that earnings per share is reported a. below net income. b. for both common and preferred stock. c. on the face of the income statement. d. based on the weighted-average number of common shares outstanding.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
Marx, Inc. has a net income of $600,000 for 2012, and there are 400,000 weightedaverage shares of common stock outstanding. Dividends declared and paid during the year amounted to $80,000 on the preferred stock and $120,000 on the common stock. The earnings per share for 2012 is a. $2.50. b. $1.20. c. $1.30. d. $1.00.
Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA
123.
The formula for computing earnings per share is net income a. divided by the ending common shares outstanding. b. divided by the weighted-average number of common shares outstanding. c. less preferred dividends divided by the ending common shares outstanding. d. less preferred dividends divided by the weighted-average number of common shares outstanding.
Ans: d, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 124.
14 - 25
Which of the following statements about a cash dividend is incorrect? a. The legality of a cash dividend depends on state corporation laws. b. The legality of a dividend does not indicate a company's ability to pay a dividend. c. Dividends are not a liability until declared. d. Shareholders usually vote to determine the amount of income to be distributed in the form of a dividend.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
The date a cash dividend becomes a binding legal obligation to a corporation is the a. declaration date. b. earnings date. c. payment date. d. record date.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
Dillon Corporation splits its common stock 2 for 1, when the market value is $40 per share. Prior to the split, Dillon had 50,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock a. remains the same. b. is reduced to $2 per share. c. is reduced to $5 per share. d. is reduced to $20 per share.
Ans: c, SO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
127.
Which of the following statements about retained earnings restrictions is incorrect? a. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased. b. Long-term debt contracts may impose a restriction on retained earnings as a condition for the loan. c. The board of directors of a corporation may voluntarily create retained earnings restrictions for specific purposes. d. Retained earnings restrictions are generally disclosed through a journal entry on the books of a company.
Ans: d, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
128.
Prior period adjustments a. may only increase retained earnings. b. may only decrease retained earnings. c. may either increase or decrease retained earnings. d. do not affect retained earnings.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
14 - 26 Test Bank for Accounting Principles, Tenth Edition 129.
Farmer Company reports the following amounts for 2012: Net income Average, stockholders' equity Preferred dividends Par value preferred stock
$135,000 500,000 35,000 100,000
The 2012 rate of return on common stockholders' equity is a. 25.0%. b. 22.5%. c. 27.0%. d. 33.8%. Ans: a, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
The return on common stockholders' equity is computed by dividing a. net income by ending common stockholders' equity. b. net income by average common stockholders' equity. c. net income minus preferred dividends by ending common stockholders' equity. d. net income minus preferred dividends by average common stockholders' equity.
Ans: d, SO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
Lance Corporation had 220,000 shares of common stock outstanding during the year. Norman declared and paid cash dividends of $200,000 on the common stock and $160,000 on the preferred stock. Net income for the year was $880,000. What is Lance’s earnings per share? a. $3.09 b. $4.00 c. $3.27 d. $2.36
Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
When a corporation has both preferred and common stock outstanding, earnings per share is computed by dividing net income a. by ending common shares outstanding. b. by weighted average common shares outstanding. c. less preferred dividends by ending common shares outstanding. d. less preferred dividends by the weighted average of common shares outstanding.
Ans: d, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
133.
In determining earnings per share, dividends for the current year on noncumulative preferred stock should be a. disregarded. b. added back to net income whether declared or not. c. deducted from net income only if declared. d. deducted from net income whether declared or not.
Ans: c, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting 134.
14 - 27
Reserves include each of the following except a. other comprehensive income items. b. revaluation surplus. c. share premium. d. unrealized gains on available-for-sale securities.
Ans: c, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
Previously issued financial statements with errors are required to be restated under a. GAAP only. b. IFRS only. c. Both GAAP and IFRS. d. Neither GAAP or IFRS.
Ans: c, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
136.
The accounting is essentially the same under IFRS and GAAP for a. prior period adjustments. b. revaluation surplus. c. treasury stock. d. All of the above.
Ans: a, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
The income statement using IFRS is called the statement of a. profit and loss. b. financial position. c. earnings. d. comprehensive income.
Ans: d, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
A statement of comprehensive income is presented in a. a single-statement format only. b. a two-statement format only. c. an operating format. d. either a one- or two-statement format.
Ans: d, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
14 - 28 Test Bank for Accounting Principles, Tenth Edition
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.
b c b d a c d b b d a b c d c d
47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
d b b a c b c d d b b d c b d c
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.
b a d c a d a d a c c d d b d d
79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.
c a a c b a a a d d b b c a d b
95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.
c d c c d c c a b c d d b b b b
111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.
b b c b a b d c b d b c d d a c
127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138.
d c a d c d c c c a d d
BRIEF EXERCISES BE 139 On November 27, the board of directors of Armstrong Company declared a $.60 per share dividend. The dividend is payable to shareholders of record on December 7 on December 24. Armstrong has 25,500 shares of $1 par common stock outstanding at November 27. Journalize the entries needed on the declaration and payment dates. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 139 (4 min.) Nov. 27 Cash Dividends .................................................................. Dividends Payable ..................................................
15,300
Dec. 24
15,300
Dividends Payable .............................................................. Cash .......................................................................
15,300
15,300
BE 140 On October 10, the board of directors of Pattern Corporation declared a 10% stock dividend. On October 10, the company had 10,000 shares of $1 par common stock issued and outstanding with a market price of $16 per share. The stock dividend will be distributed on October 31 to shareholders of record on October 25. Journalize the entries needed for the declaration and distribution of the stock dividend. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 29
Solution 140 (5 min.) Number of shares to be issued: 1,000 shares (small stock dividend) Oct. 10
Oct. 31
Stock Dividends (1,000 × $16) ............................................ Common Stock Dividends Distributable .................. Paid in Capital in Excess of Par ..............................
16,000
Common Stock Dividends Distributable .............................. Common Stock .......................................................
1,000
1,000 15,000
1,000
BE 141 Parker Company has 24,000 shares of $1 par common stock issued and outstanding. The company also has 2,000 shares of $100 par 4% cumulative preferred stock outstanding. The company did not pay the preferred dividends in 2011 or 2012. What amount of dividends must the company pay the preferred shareholders in 2013 if they wish to pay the common stockholders a dividend? Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 141 (4 min.) Annual preferred dividend: 2,000 × $100 × 4% = $8,000 Dividends for 2011, 2012 and 2013: $8,000 × 3 = $24,000 BE 142 On November 1, 2012, Nate Corporation’s stockholders’ equity section is as follows: Common stock, $10 par value Paid-in capital in excess of par Retained earnings Total stockholders’ equity
$600,000 180,000 200,000 $980,000
On November 1, Nate declares and distributes an 18% stock dividend when the market value of the stock is $14 per share. Instructions Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 142 (5 min.) Common Stock Paid-in Capital in Excess of Par Retained Earnings Total Stockholders’ Equity
$708,000* 223,200** 48,800*** $980,000
*$600,000 + (60,000 × .18 × $10) **$180,000 + (60,000 × .18 × $4) ***$200,000 – (60,000 × .18 × $14) FOR INSTRUCTOR USE ONLY
14 - 30 Test Bank for Accounting Principles, Tenth Edition BE 143 Match each item/event pair below with the indicated change in the item. An individual classification may be used more than once, or not at all. For each dividend, assume that both declaration and payment or distribution has occurred. Classifications A. Item increases B. Item decreases C. Item is unchanged D. Direction of change cannot be determined Item
Event
____ 1.
Par value per share
Stock split
____ 2.
Total retained earnings
Stock dividend
____ 3.
Total stockholders’ equity
Prior period adjustment increases last year’s net income
____ 4.
Earnings per common share
Restriction of retained Earnings
____ 5.
Total retained earnings
Cash dividend
____ 6.
Total paid-in capital
Stock dividend
Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 143 (3 min.) 1. B 4. C 2 B 5. B 3. A 6. A BE 144 Identify which of the following items would be reported as additions (A) or deductions (D) in a Retained Earnings Statement. 1. Net Income 2. Net Loss 3. Cash Dividends 4. Stock Dividends 5. Prior period adjustments to correct for overstatement of prior years’ net income 6. Prior period adjustments to correct for understatement of prior years’ net income Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 144 (3 min.) 1. A 4. D 2. D 5. D 3. D 6. A
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 31
BE 145 The balance in retained earnings on January 1, 2012, for Booker Inc., was $575,000. During the year, the corporation paid cash dividends of $70,000 and distributed a stock dividend of $15,000. In addition, the company determined that it had overstated its depreciation expense in prior years by $50,000. Net income for 2012 was $120,000. Instructions Prepare the retained earnings statement for 2012. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 145 (5 min.) BOOKER INC. Retained Earnings Statement For the Year Ended December 31, 2012 Balance, January 1 as reported Correction for understatement of net income in prior period (depreciation expense error) Balance, January 1, as adjusted Add: Net income
$575,000 50,000 625,000 120,000 745,000
Less: Cash dividends Stock dividend Balance, December 31
$70,000 15,000
85,000 $660,000
BE 146 The following information is available for Evans Corporation: Average common stockholders’ equity Average total stockholders’ equity Common dividends declared and paid Preferred dividends declared and paid Net income
2012 $1,500,000 2,000,000 72,000 30,000 350,000
2011 $1,000,000 1,500,000 50,000 30,000 300,000
Instructions Compute the return on common stockholders’ equity ratio for both years. Briefly comment on your findings. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 146 (5 min.) Return on common stockholders’ equity ratio:
2011
2012
$300,000 – $30,000 ————————— = 27% $1,000,000
$350,000 – $30,000 ————————— = 21.3% $1,500,000
Evans’ return on common stockholders’ equity ratio decreased approximately 5.7% during 2012. Evans’ earnings increased during 2012 by 16.7%, but its average common stockholders’ equity increased by 50%, causing the return on common stockholders’ equity to decline by 5.7%. FOR INSTRUCTOR USE ONLY
14 - 32 Test Bank for Accounting Principles, Tenth Edition BE 147 The following information is available for Tinto Corporation for the year ended December 31, 2012: Corrected overstatement of 2011 depreciation expense Cost of goods sold Declared cash dividends Operating expenses Other expenses and losses Other revenues and gains Sales revenue Tax rate
$
15,000 700,000 50,000 170,000 40,000 50,000 1,200,000 40%
Instructions Prepare a corporate income statement in good form. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 147 (5 min.) TINTO CORPORATION Income Statement For the Year Ended December 31, 2012 Sales revenue Cost of goods sold Gross profit Operating expenses Income from operations Other revenues and gains Other expenses and losses Income before income taxes Income tax expense ($340,000 × 40%) Net Income
$1,200,000 700,000 500,000 170,000 330,000 $50,000 40,000
FOR INSTRUCTOR USE ONLY
10,000 340,000 136,000 $ 204,000
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 33
EXERCISES Ex. 148 The stockholders' equity section of Maria Corporation at December 31, 2011, included the following: 5% preferred stock, $100 par value, cumulative, 10,000 shares authorized, 8,000 shares issued and outstanding ......
$ 800,000
Common stock, $10 par value, 250,000 shares authorized, 200,000 shares issued and outstanding ...........................................
$2,000,000
Dividends were not declared on the preferred stock in 2011 and are in arrears. On September 15, 2012, the board of directors of Maria Corporation declared dividends on the preferred stock for 2011 and 2012, to stockholders of record on October 1, 2012, payable on October 15, 2012. On November 1, 2012, the board of directors declared a $.75 per share dividend on the common stock, payable November 30, 2012, to stockholders of record on November 15, 2012. Instructions Prepare the journal entries that should be made by Maria Corporation on the dates indicated below: September 15, 2012 November 1, 2012 October 1, 2012 November 15, 2012 October 15, 2012 November 30, 2012 Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 148 (12–15 min.) 9/15/12 Cash Dividends ($800,000 × .05 × 2).................................. Dividends Payable ..................................................... (To record declaration of dividends in arrears and the current year's preferred dividend) 10/1/12
80,000 80,000
(No entry required.)
10/15/12 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of cash preferred dividend)
80,000
11/1/12
150,000
Cash Dividends .................................................................. Dividends Payable ..................................................... (To record declaration of cash dividend on common stock)
80,000
150,000
11/15/12 (No entry required.) 11/30/12 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of common cash dividends)
FOR INSTRUCTOR USE ONLY
150,000 150,000
14 - 34 Test Bank for Accounting Principles, Tenth Edition Ex. 149 Stockton Corporation has 120,000 shares of $5 par value common stock outstanding. It declared a 15% stock dividend on June 1 when the market price per share was $13. The shares were issued on June 30. Instructions Prepare the necessary entries for the declaration and payment of the stock dividend. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 149 (6–8 min.) June 1 Stock Dividends (120,000 × .15 × $13) ............................... Common Stock Dividends Distributable ..................... Paid-in Capital in Excess of Par ................................. June 30
Common Stock Dividends Distributable .............................. Common Stock ..........................................................
234,000 90,000 144,000 90,000 90,000
Ex. 150 Jungle Corporation's stockholders' equity section at December 31, 2011 appears below: Stockholders' equity Paid-in capital Common stock, $10 par, 60,000 outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders' equity
$600,000 150,000 $750,000 150,000 $900,000
On June 30, 2012, the board of directors of Kenner Corporation declared a 20% stock dividend, payable on July 31, 2012, to stockholders of record on July 15, 2012. The fair value of Kenner Corporation's stock on June 30, 2012, was $15. On December 1, 2012, the board of directors declared a 2 for 1 stock split effective December 15, 2012. Jungle Corporation's stock was selling for $20 on December 1, 2012, before the stock split was declared. Par value of the stock was adjusted. Net income for 2012 was $190,000 and there were no cash dividends declared. Instructions (a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. (b) Fill in the amount that would appear in the stockholders' equity section for Jungle Corporation at December 31, 2012, for the following items: 1. Common stock
$____________
2. Number of shares outstanding
_____________
3. Par value per share
$____________
4. Paid-in capital in excess of par
$____________
5. Retained earnings
$____________
6. Total stockholders' equity
$____________
Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting Solution 150 (12–16 min.) (a) 6/30/12 Stock Dividends ............................................................ Common Stock Dividends Distributable................ Paid-in Capital in Excess of Par ........................... (To record declaration of 20% stock dividend, 60,000 × 20% = 12,000 × $15 = $180,000) 7/15/12
(No entry required.)
7/31/12
Common Stock Dividends Distributable ........................ Common Stock..................................................... (To record issuance of 12,000 shares in a stock dividend)
12/1/12
14 - 35
180,000 120,000 60,000
120,000 120,000
(No entry required.)
12/15/12 Memo: 144,000 common shares outstanding $5 par value. (b)
1. 2. 3. 4. 5. 6.
Common stock Number of shares outstanding Par value per share Paid-in capital in excess of par Retained earnings Total stockholders' equity
$ 720,000 144,000 $ 5 $ 210,000 $ 160,000 $1,090,000
Ex. 151 Sleep Corporation was organized on January 1, 2011. During its first year, the corporation issued 40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock. At December 31, the company declared the following cash dividends: 2011 2012 2013
$ 8,000 $30,000 $70,000
Instructions (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 5% and not cumulative. (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and cumulative. (c) Journalize the declaration of the cash dividend at December 31, 2013 using the assumption of part (b). Ans: N/A, SO: 1, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
14 - 36 Test Bank for Accounting Principles, Tenth Edition Solution 151 (12–17 min.) (a) Preferred 2011 $ 8,000 2012 10,000 2013 10,000 (b) 2011 2012 2013 (c)
Preferred $ 8,000 16,000 12,000
Common $ -020,000 60,000
Total $ 8,000 30,000 70,000
Common $ -014,000 58,000
Total $ 8,000 30,000 70,000
Cash Dividends ........................................................................... Preferred Dividends Payable .............................................. Common Dividends Payable ...............................................
70,000 12,000 58,000
Ex. 152 On November 1, 2012, Tech Corporation's stockholders' equity section is as follows: Common stock, $10 par value Paid-in capital in excess of par Retained earnings Total stockholders' equity
$ 600,000 205,000 240,000 $1,045,000
On November 1, Tech declares and distributes a 15% stock dividend when the market value of the stock is $13 per share. Instructions Indicate the balances in the stockholders' equity accounts after the stock dividend has been distributed. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 152 (3–5 min.) Common Stock Paid-in Capital in Excess of Par Retained Earnings Total Stockholders' Equity
$ 690,000 232,000 123,000 $1,045,000
Ex. 153 During 2012, Pink Corporation had the following transactions and events: 1. Issued par value preferred stock for cash at par value. 2. Issued par value common stock for cash at an amount greater than par value. 3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock. 4. Declared a small stock dividend when the market value was higher than the par value. 5. Declared a cash dividend. 6. Made a prior period adjustment for understatement of net income. 7. Issued par value common stock for cash at par value. 8. Paid the cash dividend. 9. Issued the shares of common stock required by the stock dividend declaration in 4. above. FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 37
Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders' equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.
Item
Capital Stock
Paid-in Capital Additional Paid-in Capital
Retained Earnings
Ans: N/A, SO: 1, 2, 3, Bloom: C, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 153 (9–13 min.)
Item 1. 2. 3. 4. 5. 6. 7. 8. 9.
Paid-in Capital Capital Additional Stock Paid-in Capital I NE I I NE NE I I NE NE NE NE I NE NE NE NE NE
Retained Earnings NE NE NE D D I NE NE NE
Ex. 154 The following information is available for Pencil Corporation: Common Stock ($5 par) Retained Earnings
$1,600,000 1,200,000
A 18% stock dividend is declared and paid when the market value was $16 per share. Instructions Compute each of the following after the stock dividend. (a) Total stockholders' equity. (b) Number of shares outstanding. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 154 (6–8 min.) (a) Total stockholders' equity = $2,800,000 ($1,600,000 + $1,200,000)* *or ($1,600,000 × 118%) + [($16 – $5) × 57,600] + [$1,200,000 – (57,600 × $16)] (b) Number of shares outstanding = 377,600 [($1,600,000 $5) × 118%]
FOR INSTRUCTOR USE ONLY
14 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 155 On January 1, 2012, Ralph Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and retained earnings of $1,000,000. The company issued 200,000 shares of common stock at $12 per share on July 1. On December 15, the board of directors declared a 15% stock dividend to stockholders of record on December 31, 2012, payable on January 15, 2011. The market value of Ralph Corporation stock was $15 per share on December 15 and $16 per share on December 31. Net income for 2012 was $500,000. Instructions (1) Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December 15. (2) Prepare the stockholders' equity section of the balance sheet for Ralph Corporation at December 31, 2012. Ans: N/A, SO: 1, 3, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 155 (10–15 min.) (1) July 1 Cash ............................................................................. 2,400,000 Common Stock .................................................. Paid-in Capital in Excess of Par ........................ Dec. 15 Stock Dividends (60,000 × $15/sh) ............................... Common Stock Dividends Distributable ............. Paid-in Capital in Excess of Par ........................
2,000,000 400,000
900,000 600,000 300,000
($2,000,000 ÷ $10 = 200,000 + 200,000 = 400,000 shares × .15 = 60,000 shares) (2) Stockholders' equity Paid-in capital Capital stock Common stock, $10 par value, 400,000 shares issued and outstanding Common stock dividends distributable Total capital stock Additional paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders' equity
$4,000,000 600,000 4,600,000 700,000 5,300,000 600,000 $5,900,000
Ex. 156 On January 1, 2012, Magnus Corporation had 60,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred: Mar.
1
Issued 25,000 shares of common stock for $550,000.
June
1
Declared a cash dividend of $2.00 per share to stockholders of record on June 15.
June 30
Paid the $2.00 cash dividend.
Dec.
Purchased 5,000 shares of common stock for the treasury for $22 per share.
1
Dec. 15
Declared a cash dividend on outstanding shares of $2.25 per share to stockholders of record on December 31. FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
14 - 39
Instructions Prepare journal entries to record the above transactions. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 156 (12–17 min.) Mar. 1 Cash ................................................................................... Common Stock .......................................................... Paid-in Capital in Excess of Par ................................. June 1
June 30
Dec.
1
Dec. 15
550,000 25,000 525,000
Cash Dividends .................................................................. Dividends Payable ..................................................... (85,000 × $2 = $170,000)
170,000
Dividends Payable .............................................................. Cash ..........................................................................
170,000
Treasury Stock ................................................................... Cash ..........................................................................
110,000
Cash Dividends (80,000 × $2.25) ....................................... Dividends Payable .....................................................
180,000
170,000
170,000
110,000
180,000
Ex. 157 Record the following transactions for Quik Corporation on the dates indicated. 1. On March 31, 2012, Quik Corporation discovered that Depreciation Expense on equipment for the year ended December 31, 2011, had been recorded twice, for a total amount of $84,000 instead of the correct amount of $42,000. 2. On June 30, 2012, the company's internal auditors discovered that the April 2012 telephone bill for $3,700 had erroneously been charged to the Interest Expense account. 3. On August 14, 2012, cash dividends on preferred stock of $150,000 declared on July 1, 2012, were paid. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 157 (8–12 min.) 1. March 31, 2012 Accumulated Depreciation—Equipment ......................................... Retained Earnings ................................................................. (To adjust depreciation error in a prior period)
42,000
2. June 30, 2012 Utilities Expense............................................................................. Interest Expense.................................................................... (To correct current period error)
3,700
3. August 14, 2012 Dividends Payable ......................................................................... Cash ...................................................................................... (To record payment of preferred dividends)
150,000
FOR INSTRUCTOR USE ONLY
42,000
3,700
150,000
14 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 158 The following information is available for Zip Corporation: Retained Earnings, December 31, 2012 Net Income for the year ended December 31, 2013
$1,500,000 $ 200,000
The company accountant, in preparing financial statements for the year ending December 31, 2013, has discovered the following information: The company's previous bookkeeper, who has been fired, had recorded depreciation expense on equipment in 2011 and 2012 using the double-declining-balance method of depreciation. The bookkeeper neglected to use the straight-line method of depreciation which is the company's policy. The cumulative effects of the error on prior years was $25,000, ignoring income taxes. Depreciation was computed by the straight-line method in 2013. Instructions (a) Prepare the entry for the prior period adjustment. (b) Prepare the retained earnings statement for 2013. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 158 (12–15 min.) (a) Accumulated Depreciation—Equipment ...................................... Retained Earnings .............................................................. (To adjust for depreciation error in prior periods) (b)
25,000 25,000
ZIP CORPORATION Retained Earnings Statement For the Year Ended December 31, 2013 ———————————————————————————————————————— Balance January 1, as reported ............................................................... $1,500,000 Correction for overstatement of depreciation in prior period .................... 25,000 Balance, January 1, as adjusted .............................................................. 1,525,000 Add: Net income ..................................................................................... 200,000 Balance, December 31 ............................................................................ $1,725,000
Ex. 159 The following information is available for Matlin Inc.: Beginning retained earnings Cash dividends declared Net income for 2012 Stock dividend declared Understatement of last year's depreciation expense
$600,000 60,000 120,000 15,000 30,000
Instructions Based on the preceding information, prepare a retained earnings statement for 2012. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
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Solution 159 (10 min.) MATLIN INC. Retained Earnings Statement For the Year Ended December 31, 2012 Beginning balance Correction for overstatement of 2011 net income Beginning balance, as adjusted Add: Net income
$600,000 (30,000) 570,000 120,000 690,000
Less: Cash dividends Stock dividends Ending balance
$60,000 15,000
75,000 $615,000
Ex. 160 Rex Company reported retained earnings at December 31, 2011, of $410,000. Reese had 160,000 shares of common stock outstanding throughout 2012. The following transactions occurred during 2012. 1. An error was discovered in 2010, depreciation expense was recorded at $60,000, but the correct amount was $50,000. 2. A cash dividend of $0.50 per share was declared and paid. 3. A 5% stock dividend was declared and distributed when the market price per share was $15 per share. 4. Net income was $225,000. Instructions Prepare a retained earnings statement for 2012. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 160 REX COMPANY Retained Earnings Statement For the Year Ended December 31, 2012 Balance, January 1, as reported Correction for understatement of 2010 net income Balance, January 1, as adjusted Add: Net income $80,0001 120,0002
Less: Cash dividends Stock dividends Balance, December, 31 1
(160,000 X $.50/sh)
$410,000 10,000 420,000 225,000 645,000
2
(160,000 X .05 X $15/sh)
FOR INSTRUCTOR USE ONLY
(200,000) $445,000
14 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 161 Morgan Company reported the following balances at December 31, 2011: common stock $500,000; paid-in capital in excess of par value $100,000; retained earnings $250,000. During 2012, the following transactions affected stockholders’ equity. 1. 2. 3. 4.
Issued preferred stock with a par value of $150,000 for $200,000. Purchased treasury stock (common) for $40,000. Earned net income of $140,000. Declared and paid cash dividends of $75,000.
Instructions Prepare the stockholders' equity section of Morgan Company's December 31, 2012, balance sheet. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 161 MORGAN COMPANY Balance Sheet (Partial) December 31, 2012 Paid-in capital Capital stock Preferred stock Common stock Total capital stock Additional paid-in capital In excess of par–preferred stock In excess of par–common stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less treasury stock–common Total stockholder's equity *
$150,000 500,000 $ 650,000 $ 50,000 100,000 150,000 800,000 315,000* 1,115,000 (40,000) $1,075,000
$250,000 + $140,000 – $75,000
Ex. 162 On January 1, 2012, Catlin Corporation had Retained Earnings of $400,000. During the year, Catlin had the following selected transactions: 1. Declared stock dividends of $50,000. 2. Declared cash dividends of $90,000. 3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock. 4. Suffered a net loss of $70,000. 5. Corrected understatement of 2011 net income because of an inventory error of $48,000. Instructions Prepare a retained earnings statement for the year. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
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Solution 162 (15 min.) CATLIN CORPORATION Retained Earnings Statement For the Year Ended December 31, 2012 Balance, January 1, as reported ......................................................... Correction for understatement of 2011 net income (inventory error).... Balance, January 1, as adjusted ......................................................... Less: Net loss ................................................................................... Less: Cash dividends ........................................................................ Stock dividends ....................................................................... Balance, December 31........................................................................
$400,000 48,000 448,000 (70,000) 378,000 $90,000 50,000
(140,000) $238,000
Ex. 163 The following accounts appear in the ledger of Fall Inc. after the books are closed at December 31, 2012. Common Stock, $1 par value, 500,000 shares authorized, 400,000 shares issued Common Stock Dividends Distributable Paid-in Capital in Excess of Par—Common Stock Preferred Stock, $100 par value, 6%, 10,000 shares authorized; 2,000 shares issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par—Preferred Stock
$400,000 60,000 650,000 200,000 920,000 85,000 310,000
Instructions Prepare the stockholders' equity section at December 31, 2012, assuming that retained earnings is restricted for plant expansion in the amount of $200,000. Ans: N/A, SO: 3, Bloom: APP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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14 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 163 (15–20 min.) FALL INC. December 31, 2012 Stockholders' equity Paid-in capital Capital stock 6% preferred stock, $100 par value, 10,000 shares authorized, 2,000 shares issued Common stock, $1 par value, 500,000 shares authorized, 400,000 shares issued, 390,000 shares outstanding Common stock dividends distributable Total capital stock Additional paid-in capital In excess of par—preferred In excess of par—common Total additional paid-in capital Total paid-in capital Retained earnings (See note) Total paid-in capital and retained earnings Less: Treasury stock Total stockholders' equity
$ 200,000
$400,000 60,000
460,000 660,000
310,000 650,000 960,000 1,620,000 920,000 2,540,000 (85,000) $2,455,000
Note: Retained earnings is restricted in the amount of $200,000 for plant expansion. Ex. 164 The following information is available for Gaynor Corporation: Beginning common stockholders' equity Dividends paid to common stockholders Dividends paid to preferred stockholders Ending common stockholders' equity Net income
$700,000 50,000 30,000 1,000,000 200,000
Instructions Based on the preceding information, calculate return on common stockholders' equity. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164 (4 min.) $200,000 – $30,000 Return on common stockholders' equity = ————————— = .20 $850,000* *($700,000 + $1,000,000) 2
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Corporations: Dividends, Retained Earnings, and Income Reporting
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Ex. 165 In 2012, Tubb Corporation had net sales of $500,000 and cost of goods sold of $300,000. Operating expenses were $93,000, and interest expense was $7,500. The corporation's tax rate is 30%. The corporation declared preferred dividends of $7,000 in 2012, and its average common stockholders' equity during the year was $500,000. Instructions (a) Prepare an income statement for Tubb Corporation. (b) Compute Tubb Corporation's return on common stockholders' equity for 2012. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 165 (9 min.) (a) TUBB CORPORATION Income Statement For the Year Ended December 31, 2012 Net Sales Cost of goods sold Gross profit Operating expenses Income from operations Interest expense Income before income taxes Income tax expense (30% × $99,500) Net income (b)
Net income - preferred dividends Average common stockholders' equity
$500,000 300,000 200,000 93,000 107,000 7,500 99,500 29,850 $ 69,650 =
$69,650 - $7,000 $500,000
= 12.53%
Ex. 166 The following financial information is available for Downe Corporation. 2012 2011 Average common stockholders' equity $1,600,000 $1,200,000 Dividends paid to common stockholders 50,000 30,000 Dividends paid to preferred stockholders 20,000 20,000 Net income 260,000 182,000 The weighted average number of shares of common stock outstanding was 80,000 for 2011 and 100,000 for 2012. Instructions Calculate earnings per share and return on common stockholders' equity for 2012 and 2011. Ans: N/A, SO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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14 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 166 (8 min.) 2012 $260,000-$20,000 = $2.40 100,000 $260,000-$20,000 = 15% $1,600,000
Earnings per share Return on common stockholders' equity
00
2011 $182,000-$20,000 = $2.03 80,000 $182,000-$20,000 = 13.5% $1,200,000 0
Ex. 167 The following information is available for Karin Corporation for the year ended December 31, 2012: Sales $900,000; Other revenues and gains $72,000; Operating expenses $110,000; Cost of goods sold $520,000; Other expenses and losses $32,000; Preferred stock dividends $30,000. The company's tax rate was 20%, and it had 40,000 shares outstanding during the entire year. Instructions (a) Prepare a corporate income statement. (b) Calculate earnings per share. Ans: N/A, SO: 4, 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 167 (9 min.) (a) KARIN CORPORATION Income Statement For the Year Ended December 31, 2012 Sales Cost of goods sold Gross profit Operating expenses Income from operations Other revenues and gains Other expenses and losses Income before income taxes Income tax expense ($310,000 × 20%) Net income (b)
$900,000 520,000 380,000 110,000 270,000 $ 72,000 (32,000)
40,000 310,000 62,000 $248,000
Earnings per share = $5.45, or [($248,000 - $30,000) 40,000]
Ex. 168 Prepare a 2012 income statement for Skye Corporation based on the following information: Cost of goods sold Operating expenses Other expenses and losses Sales Tax rate
$490,000 100,000 30,000 700,000 30%
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Corporations: Dividends, Retained Earnings, and Income Reporting
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Solution 168 (7–10 min.) SKYE CORPORATION Income Statement For the Year Ended December 31, 2012 Sales Cost of goods sold Gross profit Operating expenses Income from operations Other expenses and losses Income before income taxes Income tax expense ($80,000 × .30) Net income
$700,000 490,000 210,000 100,000 110,000 30,000 80,000 24,000 $56,000
Ex. 169 Henson Corporation gathered the following information for the fiscal year ended December 31, 2012: Sales $1,500,000 Operating expenses 160,000 Cost of goods sold 960,000 Loss on sale of equipment 40,000 Henson Corporation is subject to a 30% income tax rate. Instructions Prepare a partial income statement, beginning with income from operations. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 169
(6–8 min.) HART CORPORATION Partial Income Statement For the Fiscal Year Ended December 31, 2012
Income from operations ($1,500,000 – $960,000 – $160,000) Loss on sale of equipment Income before income taxes Income tax expense ($340,000 × 30%) Net income
FOR INSTRUCTOR USE ONLY
$380,000 40,000 340,000 102,000 $238,000
14 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 170 At December 31, 2012, Floor Company has $500,000 of $100 par value, 6%, cumulative preferred stock outstanding and $2,000,000 of $10 par value common stock issued. Floor's net income for the year is $410,000. Instructions Compute earnings per share of common stock for 2012 under the following independent situations. (Round to two decimals.) (a) The dividend to preferred stockholders was declared, and there has been no change in the number of shares of common stock outstanding during the year. (b)
The dividend to preferred stockholders was not declared, and 10,000 shares of common treasury stock were held throughout the year. The preferred stock is cumulative.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 170 (9–12 min.) (a) ($410,000 – $30,000) ÷ 200,000 = $1.90 (b)
($410,000 – $30,000) ÷ 190,000 = $2.00 200,000 – 10,000 = 190,000 (Dividends on preferred stock that are cumulative must be deducted in the numerator, even if not declared.)
Ex. 171 The following information is available for Hanson Corporation: Dividends paid to common stockholders Dividends paid to preferred stockholders Net income Weighted average common shares outstanding
$ 45,000 20,000 295,000 100,000
Instructions Compute the earnings per share of common stock. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 171 (4 min.) Earnings per share = $2.75 [($295,000 – $20,000) 100,000]
COMPLETION STATEMENTS 172. Three important dates associated with dividends are the: (1)__________________, (2)__________________, and (3)__________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
173. The entry to record the declaration of a stock dividend increases _______________, and decreases ________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Corporations: Dividends, Retained Earnings, and Income Reporting
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174. Both a stock split and a stock dividend will _________________ the number of shares outstanding and have _________________ on total stockholders' equity. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
175.
Corporations sometimes segregate retained earnings into two categories: (1)________________ retained earnings and (2)________________ retained earnings.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
176. The correction of an error in previously issued financial statements is known as a _________________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
177. The return on ________________ shows how many dollars of net income were earned for each dollar invested by owners. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
178. The return on common stockholders’ equity is computed by dividing _____________ minus _______________ dividends by average common stockholders’ equity. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
179. Income statements for corporations report _______________ in a separate section before net income. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
180.
Earnings per share is reported only for ________________.
Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
181. Earnings per share is calculated by dividing _______________ available for common stockholders by the ________________ number of common shares outstanding. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Completion Statements 172. declaration date, record date, payment date 173. Paid-in Capital, Retained Earnings 174. increase, no effect 175. restricted, unrestricted 176. prior period adjustment 177. common stockholders’ equity 178. net income, preferred 179. income tax expense 180. common stock 181. net income, weighted average
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14 - 50 Test Bank for Accounting Principles, Tenth Edition
MATCHING 182.
Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Deficit Prior period adjustment Liquidating dividend Retained earnings restrictions Earnings per share
F. G. H. I. J.
Return on common stockholders’ equity Cash dividend Declaration date Stock dividend Stock split
____ 1. A dividend declared out of paid-in capital. ____ 2. Retained earnings currently unavailable for dividends. ____ 3. The correction of an error in previously issued financial statements. ____ 4. A pro rata distribution of cash to stockholders. ____ 5. A debit balance in retained earnings. ____ 6. A pro rata distribution of the corporation's own stock to stockholders. ____ 7. Shows how many dollars of net income were earned for each dollar invested by the owners. ____ 8. The date the board of directors formally declares the dividend and announces it to stockholders. ____ 9. The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share. ____ 10. Widely used by stockholders and potential investors in evaluating the profitability of a company. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
C D B G A
6. 7. 8. 9. 10.
I F H J E
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Corporations: Dividends, Retained Earnings, and Income Reporting
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SHORT-ANSWER ESSAY QUESTIONS S-A E 183 The ultimate effect of incurring an expense is to reduce stockholders' equity. The declaration of a cash dividend also reduces stockholders' equity. Explain the difference between an expense and a cash dividend and explain why they have the same effect on stockholders' equity. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 183 An expense is the cost of assets consumed or services used in the process of earning revenue. A cash dividend is part of the net income that is distributed to the stockholders. Thus, an expense is a cost incurred to earn net income while a cash dividend is a distribution to the stockholders of the net income earned. An expense and a cash dividend, however, both result in a decrease in stockholders' equity, or more specifically, retained earnings. Expenses and cash dividends both decrease the amount of earned capital that is retained in the corporation. S-A E 184 A large stock dividend and stock split can frequently have the same effect on the market price of a corporation's stock. Explain how stock dividends and stock splits affect the market price of a corporation's stock. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 184 Stock dividends and stock splits both involve the issuance of additional shares of stock to the stockholders. The market price of a corporation's stock is affected because of an increase in the stock's marketability. A small stock dividend does not result in a large increase in the number of shares outstanding and therefore will not increase the stock's marketability. Thus, a small stock dividend will have little effect on the market price per share. However, both a large stock dividend and a stock split will cause a large increase in the number of shares outstanding. This increase in the number of shares outstanding makes the stock marketable to a larger number of individuals. Consequently, the market price per share will decrease. S-A E 185 Why must a corporation have sufficient retained earnings before it may declare cash dividends? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 185 By definition, a dividend is the distribution of profits to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the stockholders’ investment and in many states is illegal. In addition, companies are frequently constrained by agreements with their lenders to pay dividends only from retained earnings.
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14 - 52 Test Bank for Accounting Principles, Tenth Edition S-A E 186 Three dates are important in connection with cash dividends. Identify these dates, and explain their significance to the corporation and its stockholders. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 186 The declaration date is the date when the board of directors formally declares the cash dividend and announces it to stockholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. The record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the corporation. The purpose of this date is to identify the persons or entities that will receive the dividend. The payment date is the date on which the dividend checks are mailed to the stockholders. S-A E 187 Jack Mordica asks, “Since stock dividends don't change anything, why declare them?" What is your answer to Jack? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 187 A corporation generally declares stock dividends for one of the following reasons: (1) To satisfy stockholders' dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes the shares easier to purchase for smaller investors. (3) To emphasize that a portion of stockholders' equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. S-A E 188 A prior period adjustment is occasionally reported in company financial statements. What is a prior period adjustment, and how is it reported in the financial statements? Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 188 A prior period adjustment is a correction of an error in previously issued financial statements. The correction is reported in the current year's retained earnings statement as an adjustment of the beginning balance of retained earnings.
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Corporations: Dividends, Retained Earnings, and Income Reporting S-A E 189
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(Ethics)
Mike Stephenson, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Stephenson had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Roger Carlson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company's available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Carlson’s suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 189 1. There is no definite answer as to whether Mr. Carlson's suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO, and made entirely to boost stock price. It is not clear what the long-term benefit to the company will be, even if it is successful. Thus, a student might argue that the large purchase of treasury stock, using up most of the available cash, might be unethical because of the potential damage done to the company, without a large enough potential reward. On the other hand, the company might benefit by keeping its stock price high (assuming that this purchase will enhance the stock price) by being able to issue additional shares of stock to finance future expansion. It is to be hoped that the students can articulate the concept that legality of an action is not the only determinate of whether an action is ethical. 2. A company may discontinue its dividend at will. Common shareholders should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no express or implied contract to pay a dividend to common shareholders, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury stock.
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14 - 54 Test Bank for Accounting Principles, Tenth Edition S-A E 190 (Communication) As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high-school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet. Required: Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 190 Common Stock: When investors invest in our company, they purchase common stock. Part of the purchase price is shown in this section, and is called "par" value. Par value is a legal term, denoting the amount of money that the company must retain in order to satisfy creditors’ claims, if the company should become insolvent. Additional Paid-in Capital: The remainder of the amount paid by investors who purchase shares of stock in our company is shown in this section. Thus, the Common Stock section and the Additional Paid-in Capital section together show the amount paid by investors to purchase shares of our stock. Retained Earnings: This shows the earnings that have been retained in the firm to finance future growth. The other earnings were paid to our stockholders as dividends.
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CHAPTER 15 LONG-TERM LIABILITIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
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1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 1 1
K K K K K C C K
9. 10. 11. 12. 13. 14. 15. 16.
1 1 1 2 2 2 2 2
K C C K C C C C
Item
SO
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Item
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Item
SO
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4 4 5 6 7 8 1 1
K K K K K K K K
sg
33. 34. sg 35. sg 36. sg 37. sg 38.
2 2 3 5 5 6
K K K K K K
120. 121. a 122. a 123. a 124. a 125. a 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145. a 146.
7 7 8,9 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9
K C C AP K C C AP AP AP AP AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP
a
9 9 9 9 9 9 9 1 2 2 3 3 4 4 5 5 6 7 7 7 7 7 7
AP AP AP AP C C C K AP K K AP K K K AP K K K K K K K
176. 177.
4 6
AP AP
8 9
AP AP
True-False Statements 17. 18. 19. 20. 21. 22. 23. 24.
2 2 2 2 3 3 3 3
C AP C K K C K K
25. 26. 27. 28. a 29. a 30. sg 31. sg 32.
sg
Multiple Choice Questions 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 55. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K C AP K K C K K K K K K K K K K K C K C K K K C K AP AP
66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. a 84. a 85. 86. 87. 88. 89. 90. 91. 92.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 9 9 3 3 3 3 3 3 3
K C AP C C C AP K C K C C C K AP C AP AP AP AP AP AP AP AP AP AP C
93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119.
3 3 3 3 3 3 4 4 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 6
C C C AP AP AP K K C C AP AP AP AP K K K K C K K K K AP AP AP AP
a a
147. 148. a 149. a 150. a 151. a 152. a 153. st 154. sg 155. sg 156. st 157. sg 158. st 159. sg 160. st 161. sg 162. st 163. a, sg 164. 165. 166. 167. 168. 169. a
Brief Exercises 170. 171. sg st a
1 2
AP AP
172. 173.
2 2
AP AP
174. 175.
2 3
AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.
a a
178. 179.
15 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 180. 181. 182. 183. 184.
1 1 1 1 2
AP AN AN AN AP
185. 186. 187. 188. 189.
2 2 2,3 3 3
AN AP AP AP AP
190. 191. 192. 193. 194.
3 4 4 4 5
AN AP AP AP AP
195. 196. 197. 198. a 199.
5 6 6 6 7
AP AP AP AN AP
a
7 8 9
K K K
a
5 2
N/A N/A
200. 201. a 202. a 203. a 204.
8 9 9 9 9
AN AN AN AN AN
217. 9
K
a
Completion Statements 205. 206. 207.
1 1 1
K K K
208. 209. 210.
2 2 2
K AP K
211. 212. 213.
2 3 5
AP K K
a
214. 215. a 216. a
Matching 218.
5
N/A
Short-Answer Essay 219. 220. sg st a
2 5
N/A N/A
221. 222.
2 3
N/A N/A
a
223. 224.
a
7 8
N/A N/A
225. 226.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
Type
1. 2. 3. 4. 5. 6. 7. 8.
TF TF TF TF TF TF TF TF
9. 10. 11. 31. 32. 39. 40. 41.
TF TF TF TF TF MC MC MC
42. 43. 44. 45. 46. 47. 48. 49.
12. 13. 14. 15. 16. 17. 18.
TF TF TF TF TF TF TF
19. 20. 33. 34. 66. 67. 68.
TF TF TF TF MC MC MC
69. 70. 71. 72. 73. 74. 75.
21. 22. 23. 24.
TF TF TF TF
35. 86. 87. 88.
TF MC MC MC
89. 90. 91. 92.
Note: TF = True-False MC = Multiple Choice
Item
Type
Item
Study Objective 1 MC 50. MC 58. MC 51. MC 59. MC 52. MC 60. MC 53. MC 61. MC 54. MC 62. MC 55. MC 63. MC 56. MC 64. MC 57. MC 65. Study Objective 2 MC 76. MC 83. MC 77. MC 155. MC 78. MC 156. MC 79. MC 171. MC 80. MC 172. MC 81. MC 173. MC 82. MC 174. Study Objective 3 MC 93. MC 97. MC 94. MC 98. MC 95. MC 157. MC 96. MC 158.
Type
Item
Type
Item
Type
MC MC MC MC MC MC MC MC
154. 170. 180. 181. 182. 183. 205. 206.
MC BE Ex Ex Ex Ex C C
207. 218.
C Ma
MC MC MC BE BE BE BE
184. 185. 186. 187. 208. 209. 210.
Ex Ex Ex Ex C C C
211. 218. 219. 221. 226.
C Ma S-A S-A S-A
MC MC MC MC
175. 187. 188. 189.
BE Ex Ex Ex
190. 212. 222.
Ex C S-A
BE = Brief Exercise Ex = Exercise FOR INSTRUCTOR USE ONLY
C = Completion S-A = Short-Answer
Long-Term Liabilities
15 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 25. TF 26. TF 99. MC TF TF TF
107. MC 108. MC 109. MC
110. 111. 112.
28. 38.
TF TF
113. MC 114. MC
115. 116.
29. TF a 120. MC a
30. TF 122. MC a 123. MC a
84. 85. a 122. a 135. a 136. a
103. 104. 105.
27. 36. 37.
a
a
100. MC 101. MC 102. MC
MC MC MC MC MC
a
121. MC a 164. MC
165. 166.
a
124. MC 125. MC a 126. MC
a
a
a
a
a
137. 138. a 139. a 140. a 141. a
MC MC MC MC MC
127. 128. a 129. 142. 143. a 144. a 145. a 146. a
Note: TF = True-False MC = Multiple Choice
Study Objective 4 MC 106. MC 176. MC 159. MC 191. MC 160. MC 192. Study Objective 5 MC 161. MC 195. MC 162. MC 213. MC 194. Ex 218. Study Objective 6 MC 117. MC 119. MC 118. MC 163. Study Objective a7 MC 167. MC 169. a MC 168. MC 199. a Study Objective 8 MC a130. MC a133. MC a131. MC a134. MC a132. MC a178. Study Objective a9 MC a147. MC a152. MC a148. MC a153. MC a149. MC a179. MC a150. MC a201. MC a151. MC a202.
BE Ex Ex
193.
Ex
Ex C Ma
220. 225.
S-A S-A
MC MC
177. 196.
BE Ex
214. 223.
C S-A
a
200. 215. a 224.
Ex C 8
a
Ex Ex C C
MC Ex MC MC BE MC MC BE Ex Ex
BE = Brief Exercise Ex = Exercise
a a
a
203. 204. a 216. a 217. a
197. 198.
Ex Ex
C = Completion S-A = Short-Answer
CHAPTER STUDY OBJECTIVES 1. Explain why bonds are issued. Companies may sell bonds to investors to raise long-term capital. Bonds offer the following advantages over common stock: (a) stockholder control is not affected, (b) tax savings result, (c) earnings per share of common stock may be higher. 2. Prepare the entries for the issuance of bonds and interest expense. When companies issue bonds, they debit Cash for the cash proceeds, and credit Bonds Payable for the face value of the bonds. The account Premium on Bonds Payable shows the bond premium; Discount on Bonds Payable shows a bond discount. 3. Describe the entries when bonds are redeemed or converted. When bondholders redeem bonds at maturity, the issuing company credits Cash and debits Bonds Payable for the face value of the bonds. When bonds are redeemed before maturity, the issuing company (a) eliminates the carrying value of the bonds at the redemption date, (b) records the cash paid, and (c) recognizes the gain or loss on redemption. When bonds are converted to common stock, the issuing company transfers the carrying (or book) value of the bonds to appropriate paid-in capital accounts; no gain or loss is recognized. FOR INSTRUCTOR USE ONLY
15 - 4
Test Bank for Accounting Principles, Tenth Edition
4. Describe the accounting for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases. 5. Contrast the accounting for operating and capital leases. For an operating lease, the lessee (renter) records lease (rental) payments as an expense. For a capital lease, the lessee records the asset and related obligation at the present value of the future lease payments. 6. Identify the methods for the presentation and analysis of long-term liabilities. Companies should report the nature and amount of each long-term debt in the balance sheet or in the notes accompanying the financial statements. Stockholders and long-term creditors are interested in a company’s long-run solvency. Debt to total assets and times interest earned are two ratios that provide information about debt-paying ability and long-run solvency. a
7. Compute the market price of a bond. Time value of money concepts are useful for pricing bonds. The present value (or market price) of a bond is a function of three variables: (1) the payment amounts, (2) the length of time until the amounts are paid, and (3) the interest rate.
a
8. Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. When the difference between the straight-line and effective-interest method is material, GAAP requires the use of the effective-interest method.
a
9. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period.
TRUE-FALSE STATEMENTS 1.
Each bondholder may vote for the board of directors in proportion to the number of bonds held.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
Registered bonds are bonds that are delivered to owners by U.S. registered mail service.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
A debenture bond is an unsecured bond which is issued against the general credit of the borrower.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Bonds are a form of interest-bearing notes payable.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 6.
15 - 5
Neither corporate bond interest nor dividends are deductible for tax purposes.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7.
A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
8.
The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
9.
The board of directors may authorize more bonds than are issued.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
10.
The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
11.
If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
12.
Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
13.
If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
15.
If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
16.
If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
17.
If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
15 - 6 18.
Test Bank for Accounting Principles, Tenth Edition If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.
Ans: T, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
19.
If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
20.
The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
23.
Gains and losses are not recognized when convertible bonds are converted into common stock.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
Generally, convertible bonds do not pay interest.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
25.
Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
26.
A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
27.
A capital lease requires the lessee to record the lease as a purchase of an asset.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
The times interest earned ratio is computed by dividing net income by interest expense.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
30.
The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 31.
15 - 7
Bonds that mature at a single specified future date are called term bonds.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
The terms of the bond issue are set forth in a formal legal document called a bond indenture.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
The carrying value of bonds at maturity should be equal to the face value of the bonds.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
Premium on Bonds Payable is a contra account to Bonds Payable.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
36.
Operating leases are leases that the lessee must capitalize on its balance sheet as an asset.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
Under a capital lease, the lease/asset is reported on the balance sheet under plant assets.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T F T T F
7. 8. 9. 10. 11. 12.
F F T F F T
13. 14. 15. 16. 17. 18.
F F F T T T
19. 20. 21. 22. 23. 24.
F F T T T F
25. 26. 27. 28. a 29. a 30.
F T T F F T
31. 32. 33. 34. 35. 36.
T T T F T F
37. 38.
T T
MULTIPLE CHOICE QUESTIONS 39.
Each of the following is correct regarding bonds except they are a. a form of interest-bearing notes payable. b. attractive to many investors. c. issued by corporations and governmental agencies. d. sold in large denominations.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
15 - 8 40.
Test Bank for Accounting Principles, Tenth Edition From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that a. bond interest is deductible for tax purposes. b. interest must be paid on a periodic basis regardless of earnings. c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
41.
If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a. $3,000,000 b. $90,000 c. $300,000 d. $210,000
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
42.
Secured bonds are bonds that a. are in the possession of a bank. b. are registered in the name of the owner. c. have specific assets of the issuer pledged as collateral. d. have detachable interest coupons.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called a. a bond indenture. b. a bond debenture. c. trading on the equity. d. a term bond.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
44.
Stockholders of a company may be reluctant to finance expansion through issuing more equity because a. leveraging with debt is always a better idea. b. their earnings per share may decrease. c. the price of the stock will automatically decrease. d. dividends must be paid on a periodic basis.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected. b. Earnings per share on common stock may be lower. c. Income to common shareholders may increase. d. Tax savings result.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 46.
15 - 9
Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. bearer bonds.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
Bonds that mature at a single specified future date are called a. coupon bonds. b. term bonds. c. serial bonds. d. debentures.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Bonds that may be exchanged for common stock at the option of the bondholders are called a. options. b. stock bonds. c. convertible bonds. d. callable bonds.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
Investors who receive checks in their names for interest paid on bonds must hold a. registered bonds. b. coupon bonds. c. bearer bonds. d. direct bonds.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
A bondholder that sends in a coupon to receive interest payments must have a(n) a. unsecured bond. b. bearer bond. c. mortgage bond. d. serial bond.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
Bonds that are not registered are a. bearer bonds. b. debentures. c. registered bonds. d. transportable bonds.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
15 - 10 Test Bank for Accounting Principles, Tenth Edition 53.
Bonds that are issued in the name of the owner are a. coupon bonds. b. bearer bonds. c. serial bonds. d. registered bonds.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
54.
Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
The party who has the right to exercise a call option on bonds is the a. investment banker. b. bondholder. c. bearer. d. issuer.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
56.
A major disadvantage resulting from the use of bonds is that a. earnings per share may be lowered. b. interest must be paid on a periodic basis. c. bondholders have voting rights. d. taxes may increase.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Bonds will always fall into all but which one of the following categories? a. Callable or convertible b. Term or serial c. Registered or bearer d. Secured or unsecured
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
Which of the following statements concerning bonds is not a true statement? a. Bonds are generally sold through an investment company. b. The bond indenture is prepared after the bonds are printed. c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
A bond trustee does not a. issue the bonds. b. keep a record of each bondholder. c. hold conditional title to pledged property. d. maintain custody of unsold bonds.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 60.
15 - 11
The contractual interest rate is always stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61.
When authorizing bonds to be issued, the board of directors does not specify the a. total number of bonds authorized to be sold. b. contractual interest rate. c. selling price. d. total face value of the bonds.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
62.
The following exhibit is for Kmart bonds. Bonds Close Yield Kmart 8 3/8 17 100¼ 8.4
Volume 35
Net Change +7/8
The contractual interest rate of the K mart bonds is a. greater than the market interest rate. b. less than the market interest rate. c. equal to the market interest rate. d. not determinable. Ans: b, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
63.
The following exhibit is for Kmart bonds. Bonds Close Yield Kmart 8 3/8 17 100¼ 8.4
Volume 35
Net Change +7/8
On the day of trading referred to above, a. no Kmart bonds were traded. b. bonds with market prices of $3,500 were traded. c. at closing, the selling price of the bond was higher than the previous day's price. d. the bond sold for $100.25 Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
A $1,000 face value bond with a quoted price of 97 is selling for a. $1,000. b. $970. c. $907. d. $97.
Ans: b, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
A bond with a face value of $200,000 and a quoted price of 102¼ has a selling price of a. $240,450. b. $204,050. c. $200,450. d. $204,500.
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 12 Test Bank for Accounting Principles, Tenth Edition 66.
Premium on Bonds Payable a. has a debit balance. b. is a contra account. c. is considered to be a reduction in the cost of borrowing. d. is deducted from bonds payable on the balance sheet.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated interest rate is increased.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
68.
On January 1, 2012, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 103. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2010 is a. Cash ................................................................................... 5,000,000 Bonds Payable ........................................................... 5,000,000 b. Cash ................................................................................... 5,150,000 Bonds Payable ...........................................................
5,150,000
c. Premium on Bonds Payable ................................................ 150,000 Cash ................................................................................... 5,000,000 Bonds Payable ...........................................................
5,150,000
d. Cash ................................................................................... 5,150,000 Bonds Payable ........................................................... Premium on Bonds Payable .......................................
5,000,000 150,000
Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
69.
The total cost of borrowing is increased only if the a. bonds were issued at a premium. b. bonds were issued at a discount. c. bonds were sold at face value. d. market interest rate is less than the contractual interest rate on that date.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
70.
If the market interest rate 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 face value. c. greater than face value. d. that cannot be determined.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 71.
15 - 13
The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual interest rate is less than the market interest rate. b. contractual interest rate is greater than the market interest rate. c. bond is convertible. d. contractual interest rate is equal to the market interest rate.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
72.
Hernandez Corporation issues 3,000, 10-year, 8%, $1,000 bonds dated January 1, 2012, at 98. The journal entry to record the issuance will show a a. debit to Cash of $3,000,000. b. credit to Discount on Bonds Payable for $60,000. c. credit to Bonds Payable for $3,040,000. d. debit to Cash for $2,960,000.
Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
The market interest rate is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
74.
If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual interest rate.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
75.
Each of the following accounts is reported as long-term liabilities except a. Interest Payable. b. Bonds Payable. c. Discount on Bonds Payable. d. Premium on Bonds Payable.
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the a. market interest rate increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market interest rate decreases, then bond prices will go up. d. contractual interest rate increases, the market interest rate will decrease.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
15 - 14 Test Bank for Accounting Principles, Tenth Edition 77.
The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
The sale of bonds above face value a. is a rare occurrence. b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on Interest Expense by the time the bonds mature.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
In the balance sheet, the account, Premium on Bonds Payable, is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
80.
Four thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issuance is a. Cash .................................................................................. 4,160,000 Bonds Payable .......................................................... 4,160,000 b. Cash .................................................................................. 4,000,000 Premium on Bonds Payable ............................................... 160,000 Bonds Payable ..........................................................
4,160,000
c. Cash .................................................................................. 4,160,000 Premium on Bonds Payable ...................................... Bonds Payable ..........................................................
160,000 4,000,000
d. Cash .................................................................................. 4,160,000 Discount on Bonds Payable ...................................... Bonds Payable ..........................................................
160,000 4,000,000
Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
Bond interest paid is a. higher when bonds sell at a discount. b. lower when bonds sell at a premium. c. the same whether bonds sell at a discount or a premium. d. higher when bonds sell at a discount and lower when bonds sell at a premium.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 82.
15 - 15
Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2012, at 104. The journal entry to record the issuance will show a a. debit to Cash of $5,000,000. b. credit to Premium on Bonds Payable for $200,000. c. credit to Bonds Payable for $5,040,000. d. credit to Cash for $5,020,000.
Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83.
Lake Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization. What is the amount of interest Lake must pay the bondholders in 2011? a. $15,080 b. $16,000 c. $17,150 d. $14,850
Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
84.
Hooke Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Hooke uses the straight-line method of amortization. What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2012? a. $16,000 b. $15,080 c. $17,150 d. $14,850
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA a
85.
Jarmin Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Jarmin uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2013? a. $200,000 b. $190,800 c. $197,700 d. $189,650
Ans: b, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
15 - 16 Test Bank for Accounting Principles, Tenth Edition 86.
Beonce Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straight-line method of amortization. Beonce Company decided to redeem the bonds on January 1, 2013. What amount of gain or loss would Beonce report on its 2013 income statement? a. $9,200 gain b. $11,200 gain c. $11,200 loss d. $9,200 loss
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
87.
Bargain Company has $1,600,000 of bonds outstanding. The unamortized premium is $21,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $5,600 gain b. $5,600 loss c. $16,000 gain d. $16,000 loss
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
The current carrying value of Kane’s $900,000 face value bonds is $897,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders? a. $897,000 b. $900,000 c. $906,000 d. $927,000
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
89.
Lark Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a a. credit of $10,040 to Loss on Bond Redemption. b. debit of $10,040 to Loss on Bond Redemption. c. credit of $10,040 to Premium on Bonds Payable. d. debit of $40,000 to Premium on Bonds Payable.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
90.
A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a a. gain on bond redemption of $18,000. b. loss on bond redemption of $12,000. c. loss on bond redemption of $18,000. d. gain on bond redemption of $4,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 91.
15 - 17
If sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is a. Bonds Payable .................................................................. 69,000 Common Stock ......................................................... 69,000 b. Bonds Payable .................................................................. Premium on Bonds Payable .............................................. Common Stock .........................................................
60,000 9,000
c. Bonds Payable .................................................................. Premium on Bonds Payable .............................................. Common Stock ......................................................... Paid-in Capital in Excess of Par ................................
60,000 9,000
d. Bonds Payable .................................................................. Discount on Bonds Payable ...................................... Common Stock ......................................................... Paid-in Capital in Excess of Par ................................
69,000
69,000
45,000 24,000
9,000 45,000 15,000
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
A corporation recognizes a gain or loss a. only when bonds are converted into common stock. b. only when bonds are redeemed before maturity. c. when bonds are redeemed at or before maturity. d. when bonds are converted into common stock and when they are redeemed before maturity.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
If there is a loss on bonds redeemed early, it is a. debited directly to Retained Earnings. b. reported as an "Other Expense" on the income statement. c. reported as an "Extraordinary Item" on the income statement. d. debited to Interest Expense, as a cost of financing.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
If bonds can be converted into common stock, a. they will sell at a lower price than comparable bonds without a conversion feature. b. they will carry a higher interest rate than comparable bonds without the conversion feature. c. they will be converted only if the issuer calls them in for conversion. d. the bondholder may benefit if the market price of the common stock increases substantially.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 18 Test Bank for Accounting Principles, Tenth Edition 95.
When bonds are converted into common stock, a. the market price of the stock on the date of conversion is credited to the Common Stock account. b. the market price of the bonds on the date of conversion is credited to the Common Stock account. c. the market price of the stock and the bonds is ignored when recording the conversion. d. gains or losses on the conversion are recognized.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
96.
If bonds with a face value of $150,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to a. Bonds Payable for $150,000. b. Bonds Payable for $135,000. c. Discount on Bonds Payable for $15,000. d. Bonds Payable equal to the market price of the bonds on the date of conversion.
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
97.
A $600,000 bond was retired at 98 when the carrying value of the bond was $592,000. The entry to record the retirement would include a a. gain on bond redemption of $8,000. b. loss on bond redemption of $8,000. c. loss on bond redemption of $4,000. d. gain on bond redemption of $4,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
98.
Thirty $1,000 bonds with a carrying value of $39,600 are converted into 3,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is a. Bonds Payable ................................................................... 39,600 Common Stock .......................................................... 15,000 Paid-in Capital in Excess of Par ................................. 24,600 b. Bonds Payable ................................................................... Premium on Bonds Payable ............................................... Common Stock .......................................................... Paid-in Capital in Excess of Par ................................
30,000 9,600
c. Bonds Payable ................................................................... Premium on Bonds Payable ............................................... Common Stock .......................................................... Paid-in Capital in Excess of Par .................................
30,000 9,600
d. Bonds Payable ................................................................... Common Stock .......................................................... Paid-in Capital in Excess of Par .................................
39,600
27,000 12,600
15,000 24,600
27,000 12,600
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 99.
15 - 19
Which one of the following amounts increases each period when accounting for long-term notes payable? a. Cash payment b. Interest expense c. Principal balance d. Reduction of principal
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
100.
In the balance sheet, mortgage notes payable are reported as a. a current liability only. b. a long-term liability only. c. both a current and a long-term liability. d. a current liability except for the reduction in principal amount.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
101.
A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.
a. b. c. d.
Portion Allocated to Interest Expense Increases Increases Decreases Decreases
Portion Allocated to Payment of Principal Increases Decreases Decreases Increases
Ans: d, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
102.
The entry to record an installment payment on a long-term note payable is a. Mortgage Payable Cash b. Interest Expense Cash c. Mortgage Payable Interest Expense Cash d. Bonds Payable Cash
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
103.
Winter Company purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a a. debit to the Cash account for $5,400. b. credit to the Cash account for $5,000. c. debit to the Interest Expense account for $5,000. d. credit to the Mortgage Payable account for $5,400.
Ans: c, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 20 Test Bank for Accounting Principles, Tenth Edition 104.
Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,400. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. $480,000. b. $479,600. c. $476,000. d. $475,600.
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
105.
Farris Company borrowed $800,000 from BankTwo on January 1, 2011 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Farris must recognize on its 2012 income statement? a. $76,000 b. $63,427 c. $56,206 d. $49,659
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
Farris Company borrowed $800,000 from BankTwo on January 1, 2011 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2012? a. $800,000 b. $522,729 c. $667,651 d. $648,000
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
The lessee has substantially all of the benefits and risks of ownership in a(n) a. apartment lease. b. capital lease. c. operating lease. d. operating lease and a capital lease.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
108.
A lease where the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor is called a. off-balance sheet financing. b. an operating lease. c. a capital lease. d. a purchase of property.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 109.
15 - 21
Which of the following is not a condition which would require the recording of a lease contract as a capital lease? a. The lease transfers ownership of the property to the lessee. b. The lease contains a bargain purchase option. c. The lease term is less than 75% of the economic life of the leased property. d. The present value of the lease payments equals or exceeds 90% of the fair market value of the leased property.
Ans: c, SO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
110.
In a lease contract, a. the owner of the property is called the lessee. b. the presence of a bargain purchase option indicates that it is a capital lease. c. the renter of the property is called the lessor. d. there is always a transfer of ownership at the end of the lease term.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
111.
Which of the following statements concerning leases is true? a. Capital leases are favored by lessees. b. The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease. c. The portion of a lease liability expected to be paid in the next year is reported as a current liability. d. Present value is irrelevant in accounting for leases.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
112.
If the present value of lease payments equals or exceeds 90% of the fair market value of the leased property, the a. conditions are met for the lease to be considered a capital lease. b. lease is uneconomical and should not be entered into. c. lease may be classified as an operating lease. d. recording of a lease liability is optional—that is, the off-balance sheet approach can be elected.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
Each of the following may be shown on a supporting schedule instead of on the balance sheet except the a. current maturities of long-term debt. b. conversion privileges. c. interest rates. d. maturity dates.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
114.
The times interest earned ratio is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before income taxes and interest expense by interest expense.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
15 - 22 Test Bank for Accounting Principles, Tenth Edition 115.
The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:
a. b. c. d.
Premium on Bonds Payable Add Deduct Add Deduct
Discount on Bonds Payable Add Add Deduct Deduct
Ans: c, SO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
116.
In a recent year Joey Corporation had net income of $140,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned ratio for the year? a. 5.00 b. 4.00 c. 3.50 d. 3.00
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cold Corporation’s income before taxes for the year? a. $500,000 b. $450,000 c. $400,000 d. None of the above.
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
The adjusted trial balance for Lamar Corp. at the end of the current year, 2012, contained the following accounts. 5-year Bonds Payable 8% Interest Payable Premium on Bonds Payable Notes Payable (3 mo.) Notes Payable (5 yr.) Mortgage Payable ($15,000 due currently) Salaries and Wages Payable Taxes Payable (due 3/15 of 2013)
$1,600,000 50,000 150,000 40,000 145,000 300,000 18,000 25,000
The total long-term liabilities reported on the balance sheet are a. $2,045,000. b. $2,100,000. c. $2,195,000. d. $2,180,000. Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 119.
15 - 23
The 2012 financial statements of Marker Co. contain the following selected data (in millions). Current Assets Total Assets Current Liabilities Total Liabilities Cash
$ 75 140 40 95 8
The debt to total assets ratio is a. 67.9%. b. 96.4%. c. 28.6%. d. 256%. Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
120. The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value.
Ans: b, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
121. $3 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of a. $240,000 received for 10 periods must be calculated. b. $3 million received in 10 periods must be calculated. c. $3 million received in 20 periods must be calculated. d. $120,000 received for 10 periods must be calculated.
Ans: c, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
122. Either the straight-line method or the effective-interest method of amortization will always result in a. the same amount of interest expense being recognized over the term of the bonds. b. the same amount of interest expense being recognized each year. c. more interest expense being recognized than if premium or discounts were not amortized. d. the same carrying value each year during the term of the bonds.
Ans: a, SO: 8,9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
123. A corporation issued $600,000, 10%, 5-year bonds on January 1, 2012 for $648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2012, is a. $30,000. b. $24,000. c. $32,434. d. $25,946.
Ans: d, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 24 Test Bank for Accounting Principles, Tenth Edition a
124. A bond discount must a. always be amortized using straight-line amortization. b. always be amortized using the effective-interest method. c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.
Ans: c, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
125. When the effective-interest method of bond discount amortization is used, a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. b. the carrying value of the bonds will decrease each period. c. interest expense will not be a constant dollar amount over the life of the bond. d. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.
Ans: c, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
126. When the effective-interest method of bond premium amortization is used, the a. amount of premium amortized will get larger with successive amortization. b. carrying value of the bonds will increase with successive amortization. c. interest paid to bondholders will increase after each interest payment date. d. interest rate used to calculate interest expense will be the contractual rate.
Ans: a, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
127. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually. What amount of discount (to the nearest dollar) should be amortized for the first interest period? a. $14,089 b. $6,815 c. $9,096 d. $4,548
Ans: d, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
128. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a a. debit to Interest Expense for $30,000. b. credit to Cash for $34,548. c. credit to Discount on Bonds Payable for $4,548. d. debit to Interest Expense for $40,000.
Ans: c, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities a
15 - 25
129. Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year? a. $34,639 b. $34,548 c. $34,457 d. $30,000
Ans: b, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
130. On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000.
Ans: b, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
131. On January 1, Dade Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for a. $360,000. b. $376,473. c. $385,955. d. $420,000.
Ans: c, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
132. On January 1, Jorge Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of: a. $164,700. b. $171,300. c. $154,830. d. $153,000.
Ans: b, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
15 - 26 Test Bank for Accounting Principles, Tenth Edition a
133. On January 1, Runner Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for: a. $120,000. b. $153,796. c. $131,825. d. $263,650.
Ans: c, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
134. Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false? a. GAAP always requires use of the effective interest method. b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used. c. Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method. d. The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense.
Ans: b, SO: 8, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
135. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The carrying value of the bonds at the end of the third interest period is: a. $972,000 b. $976,000 c. $944,000 d. $928,000
Ans: a, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
136. If bonds are originally sold at a discount using the straight-line amortization method: a. Interest expense in the earlier years of the bond’s life will be less than the interest to be paid. b. Interest expense in the earlier years of the bond’s life will be the same as interest to be paid. c. Unamortized discount is subtracted from the face value of the bond to determine its carrying value. d. Unamortized discount is added to the face value of the bond to determine its carrying value.
Ans: c, SO: 9, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities a
15 - 27
137. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2012 January 1, 2013
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium $8,000 (iv)
Bond Carrying Value $208,000 (v)
Which of the following amounts should be shown in cell (i)? a. $20,800 b. $21,600 c. $20,000 d. $4,000 Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
138. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2012 January 1, 2013
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium $8,000 (iv)
Bond Carrying Value $208,000 (v)
Which of the following amounts should be shown in cell (ii)? a. $21,600 b. $18,400 c. $20,800 d. $19,200 Ans: b, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
139. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2012 January 1, 2013
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium $12,000 (iv)
Bond Carrying Value $212,000 (v)
Which of the following amounts should be shown in cell (iii)? a. $6,000 b. $12,000 c. $2,400 d. $1,200 Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 28 Test Bank for Accounting Principles, Tenth Edition a
140. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2012 January 1, 2013
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium $12,000 (iv)
Bond Carrying Value $212,000 (v)
Which of the following amounts should be shown in cell (iv)? a. $10,800 b. $7,200 c. $14,400 d. $9,600 Ans: d, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
141. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2012 January 1, 2013
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium $8,000 (iv)
Bond Carrying Value $208,000 (v)
Which of the following amounts should be shown in cell (v)? a. $209,600 b. $208,800 c. $206,400 d. $207,200 Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
142. On January 1, Health Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a a. debit to Interest Expense, $180,000. b. debit to Interest Expense, $360,000. c. credit to Discount on Bonds Payable, $12,000. d. credit to Discount on Bonds Payable, $24,000.
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 143.
15 - 29
On January 1, 2012, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is a. $19,400. b. $6,000. c. $1,616. d. $500.
Ans: d, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
144.
A corporation issues $500,000, 10%, 5-year bonds on January 1, 2012, for $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2012’s adjusting entry is a. $54,200. b. $50,000. c. $45,800. d. $4,200.
Ans: a, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
145. Stable Company issued $600,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $180,000 b. $192,000 c. $168,000 d. $174,000
Ans: b, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
146. Pakota Company issued $800,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $784,000 b. $785,600 c. $787,200 d. $790,400
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
147. Trendy Company issued $600,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $48,000 b. $55,200 c. $40,800 d. $7,200
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 30 Test Bank for Accounting Principles, Tenth Edition a
148. Dart Company issued $600,000 of 8%, 5-year bonds at 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $636,000 b. $632,400 c. $628,800 d. $639,600
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
149. On January 1, 2012, $3,000,000, 5-year, 10% bonds, were issued for $2,910,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straightline method to amortize discount on bonds payable, the monthly amortization amount is a. $17,424. b. $18,000. c. $1,452. d. $1,500.
Ans: d, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
150. A corporation issues $500,000, 10%, 5-year bonds on January 1, 2012 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straightline method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2012 is a. $52,100. b. $25,000. c. $27,100. d. $22,900.
Ans: c, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
151. Over the term of the bonds, the balance in the Discount on Bonds Payable account will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature.
Ans: b, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
152. Bond discount should be amortized to comply with a. the historical cost principle. b. the matching principle. c. the revenue recognition principle. d. conservatism.
Ans: b, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
153. If bonds have been issued at a discount, over the life of the bonds, the a. carrying value of the bonds will decrease. b. carrying value of the bonds will increase. c. interest expense will increase, if the discount is being amortized on a straight-line basis. d. unamortized discount will increase.
Ans: b, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 154.
15 - 31
The market value (present value) of a bond is a function of all of the following except the a. dollar amounts to be received. b. length of time until the amounts are received. c. market rate of interest. d. length of time until the bond is sold.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
155.
On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits: Bonds Payable Discount on Bonds Payable a. $4,850,000 Cr. $0 Dr. b. $5,000,000 Cr. $150,000 Dr. c. $5,000,000 Cr. $1,250,000 Dr. d. $5,000,000 Cr. $15,000 Dr.
Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
156.
The market rate of interest for a bond issue which sells for more than its face value is a. independent of the interest rate stated on the bond. b. higher than the interest rate stated on the bond. c. equal to the interest rate stated on the bond. d. less than the interest rate stated on the bond.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
157.
When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the a. carrying value of the bonds. b. face value of the bonds. c. original selling price of the bonds. d. maturity value of the bonds.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
158.
Aire Corporation retires its bonds at 106 on January 1, following the payment of semiannual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a a. credit of $31,500 to Loss on Bond Redemption. b. debit of $36,000 to Premium on Bonds Payable. c. credit of $5,250 to Gain on Bond Redemption. d. debit of $31,500 to Premium on Bonds Payable.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
159.
Each payment on a mortgage note payable consists of a. interest on the original balance of the loan. b. reduction of loan principal only. c. interest on the original balance of the loan and reduction of loan principal. d. interest on the unpaid balance of the loan and reduction of loan principal.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 32 Test Bank for Accounting Principles, Tenth Edition 160.
Which of the following is not a condition under which the lessee must record the lease of an asset? a. The lease contains a bargain purchase option. b. The lease transfers ownership of the property to the lessee. c. The lease term is equal to 60% of the economic life of the lease property. d. The present value of the lease payments is 90% of the fair market value of the leased property.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
161.
The lessee must record a lease as an asset if the lease a. transfers ownership of the property to the lessor. b. contains a purchase option. c. term is 75% or more of the useful life of the leased property. d. payments equal or exceed 90% of the fair market value of the leased property.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
162.
Baker Electronics Company issues a $1,000,000, 10%, 20-year mortgage note on January 1. The terms provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $58,276. After the first installment payment, the principal balance is a. $1,000,000. b. $983,034. c. $991,724. d. $779,125.
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
163.
The debt to total assets ratio is computed by dividing a. long-term liabilities by total assets. b. total debt by total assets. c. total assets by total debt. d. total assets by long-term liabilities.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
164. The market price of a bond is the a. present value of its principal amount at maturity plus the present value of all future interest payments. b. principal amount plus the present value of all future interest payments. c. principal amount plus all future interest payments. d. present value of its principal amount only.
Ans: a, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
165.
Liabilities are generally presented in a. alphabetical order. b. order of liquidity. c. maturity date order. d. order of magnitude.
Ans: b, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities 166.
15 - 33
Preferred stock that is required to be redeemed at a specific point in time in the future is reported a. as equity. b. as debt. c. as debt or equity depending on the circumstances. d. in a "mezzanine" area between debt and equity.
Ans: b, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
167.
The effective-interest method for amortization of bond discounts is required under a. GAAP only. b. IFRS only. c. Both GAAP and IFRS. d. Neither GAAP or IFRS.
Ans: c, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
168.
Under IFRS, the proceeds from the issuance of convertible debt are reported as a. debt only. b. equity only. c. debt or equity depending on the circumstances. d. both debt and equity.
Ans: d, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
169.
Under IFRS, companies do not use a a. discount account. b. premium account. c. bonds payable account. d. discount or premium account.
Ans: d, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.
d b d c a b b a b c a a b a d b d b a b
59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.
a d c b c b d c c d b c a d b b a c c b
79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
a c c b b c b c a d b d c b b d c a d c
99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118.
d c d c c b b b b b c b c a a d c a c d
119. a 120. a 121. a 122. a 123. a 124. a 125. a 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138.
a b c a d c c a d c b b c b c b a c c b
FOR INSTRUCTOR USE ONLY
Item a
139. a 140. a 141. a 142. a 143. a 144. a 145. a 146. a 147. a 148. a 149. a 150. a 151. a 152. a 153. 154. 155. 156. 157. 158.
Ans.
Item
Ans.
c d c c d a b c c c d c b b b d b d a d
159. 160. 161. 162. 163. a 164. 165. 166. 167. 168. 169.
d c c c b a b b c d d
15 - 34 Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 170 Layton Inc. is considering two alternatives to finance its construction of a new $5 million plant. (a) Issuance of 500,000 shares of common stock at the market price of $10 per share. (b) Issuance of $5 million, 9% bonds at par. Instructions Complete the following table. Income before interest and taxes
Issue Stock $2,000,000
Issue Bonds $2,000,000
Interest expense from bonds
_________
_________
Income before income taxes
$
$
Income tax expense (30%)
_________
_________
Net income
$________
$________
Outstanding shares
_________
700,000
Earnings per share
_________
_________
Ans: N/A, SO: 1, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 170
(5 min.)
Income before interest and taxes Interest ($5,000,000 × 9%) Income before income taxes Income tax expense (30%) Net income (a)
Issue Stock $2,000,000 0 2,000,000 600,000 $1,400,000
Issue Bonds $2,000,000 450,000 1,550,000 465,000 $1,085,000
Outstanding shares (b) Earnings per share (a) ÷ (b)
1,200,000 $1.17
700,000 $1.55
BE 171 On January 1, 2012, Morris Enterprises issued 9%, 5-year bonds with a face amount of $800,000 at par. Interest is payable semiannually on June 30 and December 31. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities Solution 171 Jan.
1
June 30
15 - 35
(4 min.)
Cash ................................................................................... Bonds Payable ...........................................................
800,000
Interest Expense ................................................................. Cash .......................................................................... ($800,000 × .09 ÷ 2 = $36,000)
36,000
800,000
36,000
BE 172 On January 1, 2012, Bose Company issued bonds with a face value of $800,000. The bonds carry a stated interest of 7% payable each January 1 and July 1. Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 95. b. Prepare the journal entry for the issuance assuming the bonds are issued at 105. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 172 (a)
(b)
(5 min.)
Cash............................................................................................ Discount on Bonds Payable ........................................................ Bonds Payable ...................................................................
760,000 40,000
Cash............................................................................................ Bonds Payable ................................................................... Premium on Bonds Payable. ..............................................
840,000
800,000 800,000 40,000
BE 173 On July 1, 2012, Frog Corporation issued $600,000, 8%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1. Frog Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2012. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 173 2012 Jul. 1
Dec. 31
(4 min.)
Cash ................................................................................... Bonds Payable ...........................................................
600,000
Interest Expense ................................................................. Interest Payable .........................................................
24,000
FOR INSTRUCTOR USE ONLY
600,000
24,000
15 - 36 Test Bank for Accounting Principles, Tenth Edition BE 174 On January 1, 2012, Zappa Enterprises sold 8%, 20-year bonds with a face amount of $1,000,000 for $950,000. Interest is payable semiannually on July 1 and January 1. Instructions Calculate the carrying value of the bond at December 31, 2012 and 2013. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 174
(5 min.)
Annual amortization of discount: $50,000 ÷ 20 = $2,500 December 31, 2012: $1,000,000 – ($50,000 – $2,500) = $952,500 December 31, 2013: $1,000,000 – ($50,000 – $5,000) = $955,000 BE 175 Queen Company issued bonds with a face amount of $1,600,000 in 2007. As of January 1, 2012, the balance in Discount on Bonds Payable is $4,800. At that time, Queen redeemed the bonds at 102. Instructions Assuming that no interest is payable, make the entry to record the redemption. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 175 Jan. 1
(3 min.)
Bonds Payable....................................................................... 1,600,000 Loss on Bond Redemption ..................................................... 36,800 Discount on Bonds Payable .......................................... Cash .............................................................................
4,800 1,632,000
BE 176 Roxy Inc. issues a $1,300,000, 10%, 10-year mortgage note on December 31, 2012, to obtain financing for a new building. The terms provide for semiannual installment payments of $106,291. Instructions Prepare the entry to record the mortgage loan on December 31, 2012, and the first installment payment. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 176 Dec. 31
June 30
(5 min.)
Cash ................................................................................... 1,300,000 Mortgage Payable ...................................................... Interest Expense ................................................................. Mortgage Payable ............................................................... Cash...........................................................................
FOR INSTRUCTOR USE ONLY
1,300,000
65,000 41,291 106,291
Long-Term Liabilities
15 - 37
BE 177 Fresh Corporation reports the following selected financial statement information at December 31, 2012: Total Assets $120,000 Total Liabilities 75,000 Net Income 20,000 Interest Revenue 1,600 Interest Expense 800 Income Tax Expense 400 Instructions Calculate the debt to total assets and times interest earned ratios. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177 (4 min.) Debt to total assets: $75,000 ÷ $120,000 = 62.5% Times interest earned: ($20,000 + $800 + $400) ÷ $800 = 26.5 times BE 178 On January 1, 2012, Tape Enterprises issued 9%, 10-year bonds with a face amount of $900,000 at 96. Interest is payable semiannually on June 30 and December 31. The bonds were issued for an effective interest rate of 10%. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses effective-interest amortization. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 178 Jan. 1
June 30
(5 min.)
Cash ................................................................................... Discount on Bonds Payable ................................................ Bonds Payable ........................................................... ($900,000 × .96 = $864,000)
864,000 36,000
Interest Expense ................................................................. Discount on Bonds Payable ....................................... Cash .......................................................................... ($864,000 × .10 ÷ 2 = $43,200) ($900,000 × .09 ÷ 2 = $40,500)
43,200
900,000
2,700 40,500
BE 179 On January 1, 2012, Hogan Enterprises issued 8%, 20-year bonds with a face amount of $5,000,000 at 101. Interest is payable semiannually on June 30 and December 31. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses straight-line amortization. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 38 Test Bank for Accounting Principles, Tenth Edition Solution 179 Jan.
1
June 30
(5 min.)
Cash ................................................................................... 5,050,000 Premium on Bonds Payable ....................................... Bonds Payable ........................................................... ($5,000,000 × 1.01 = $5,050,000) Interest Expense ................................................................. Premium on Bonds Payable ................................................ Cash........................................................................... ($5,000,000 × .08 ÷ 2 = $200,000) ($50,000 ÷ 40 = $1,250)
50,000 5,000,000
198,750 1,250 200,000
EXERCISES Ex. 180 Sophia Company is considering two alternatives to finance its purchase of a new $4,000,000 office building. (a) Issue 400,000 shares of common stock at $10 per share. (b) Issue 8%, 10-year bonds at par ($4,000,000). Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing. Instructions Calculate each of the following for each alternative: (1) Net income. (2) Earnings per share. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(12–15 min.) (a) Issue Stock $3,000,000 — 3,000,000 900,000 $2,100,000
(b) Issue Bonds $3,000,000 320,000 2,680,000 804,000 $1,876,000
Shares outstanding
1,000,000
600,000
(2) Earnings per share
$2.10
$3.13
Income before interest and taxes Interest (8% × $4,000,000) Income before income taxes Income tax expense (1) Net income
Ex. 181 The board of directors of Moore Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Moore Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 35%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased. FOR INSTRUCTOR USE ONLY
Long-Term Liabilities Ex. 181
15 - 39
(Cont.)
Instructions Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 181
(10–12 min.) Plan #1 Issue Bonds $500,000 300,000 200,000 70,000 $130,000
Plan #2 Issue Stock $500,000 — 500,000 175,000 $325,000
Outstanding shares
100,000
200,000
Earnings per share
$1.30
$1.63
Income before interest and taxes Interest expense ($5,000,000 × 6%) Income before taxes Income taxes (35%) Net income
Ex. 182 Slotkin Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 50,000 shares of $10 par value common stock at $50 per share. 2. Issue $3,000,000, 10%, 10-year bonds at par. It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 40% and has 80,000 shares of common stock outstanding prior to the new financing. Instructions Determine the effect on net income and earnings per share for these two methods of financing. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 182
(10–15 min.)
The alternative effects on net income and earnings per share are as follows: Issue Stock $900,000 — 900,000 (360,000) $540,000
Issue Bonds $900,000 (300,000) 600,000 (240,000) $360,000
Outstanding shares
130,000
80,000
Earnings per share
$4.15
$4.50
Income before interest and taxes Interest (10% × $3,000,000) Income before income taxes Income tax expense Net income
Net income is higher if the equipment is financed through the issuance of stock. However, earnings per share is lower because of the additional number of shares of common stock that are outstanding. FOR INSTRUCTOR USE ONLY
15 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 183 Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%. Plan 1 Plan 2 Plan 3 9% Bonds — — $10,000,000 6% Preferred Stock, $100 par — $10,000,000 5,000,000 Common Stock, $10 par $20,000,000 10,000,000 5,000,000 Total $20,000,000 $20,000,000 $20,000,000 It is estimated that income before interest and taxes will be $5,000,000. Instructions Determine for each plan, the expected net income and the earnings per share on common stock. Ans: N/A, SO: 1, Bloom: AN, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(14–19 min.)
$3,500,000
Plan 2 $5,000,000 — 5,000,000 (1,500,000) 3,500,000 (600,000) $2,900,000
Plan 3 $5,000,000 (900,000) 4,100,000 (1,230,000) 2,870,000 (300,000) $2,570,000
Shares of common stock outstanding
2,000,000
1,000,000
500,000
Earnings per share on common stock
$1.75
$2.90
$5.14
Earnings before interest and income tax Deduct interest on bonds Income before income tax Deduct income tax Net Income Dividends on preferred stock Available for dividends on common stock
Plan 1 $5,000,000 — 5,000,000 (1,500,000) 3,500,000
Ex. 184 Korean Corporation issued $2 million, 10-year, 6% bonds on January 1, 2012. Instructions Prepare the entry to record the sale of these bonds, assuming they were issued at (a) 97. (b) 104. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 184
(5–7 min.)
(a) Cash ($2,000,000 × 97%) ............................................................. 1,940,000 Discount on Bonds Payable .......................................................... 60,000 Bonds Payable ....................................................................
2,000,000
(b) Cash ($2,000,000 × 104%) ........................................................... 2,080,000 Bonds Payable .................................................................... Premium on Bonds Payable ................................................
2,000,000 80,000
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities
15 - 41
Ex. 185 On January 1, 2012, Lost Corporation issued $800,000, 8%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Lost Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2012. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 185 2012 Jan. 1
July
1
Dec. 31
(6–10 min.)
Cash ................................................................................... Bonds Payable ..........................................................
800,000
Interest Expense ................................................................ Cash ......................................................................... ($800,000 × 8% × 1/2 = $32,000)
32,000
Interest Expense ................................................................ Interest Payable ........................................................
32,000
800,000
32,000
32,000
Ex. 186 On January 1, Focus Corporation issued $600,000, 12%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Instructions Prepare journal entries to record the (a) Issuance of the bonds. (b) Payment of interest on July 1, assuming no previous accrual of interest. (c) Accrual of interest on December 31. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 186 (a)
(b)
(c)
(8 min.)
Cash............................................................................................ Bonds Payable ...................................................................
600,000
Interest Expense ......................................................................... Cash ($600,000 × 6%) ........................................................
36,000
Interest Expense ......................................................................... Interest Payable ..................................................................
36,000
600,000
36,000
36,000
Ex. 187 The following section is taken from Blue Corp’s balance sheet at December 31, 2011. Current liabilities Interest Payable ......................................................... $ 90,000 Long-term liabilities Bonds Payable, 9%, due January 1, 2016 ................. 2,000,000 Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date. FOR INSTRUCTOR USE ONLY
15 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 187
(Cont.)
Instructions (a) Journalize the payment of the bond interest on January 1, 2012. (b) Assume that on January 1, 2010, after paying interest, Blue calls bonds having a face value of $800,000. The call price is 106. Record the redemption of the bonds. (c) Prepare the entry to record the payment of interest on July 1, 2012, assuming no previous accrual of interest on the remaining bonds. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 187 (a)
(b)
(c)
(7–10 min.)
Interest Payable........................................................................... Cash ...................................................................................
90,000
Bonds Payable ............................................................................ Loss on Bond Redemption........................................................... Cash ................................................................................... ($800,000 × 1.06 = $848,000) ($848,000 - $800,000 = $48,000)
800,000 48,000
Interest Expense.......................................................................... Cash ................................................................................... ([$2,000,000 - $800,000] × .09 × 6/12 = $54,000)
54,000
90,000
848,000
54,000
Ex. 188 Niebuhr Company issued $500,000 of bonds on January 1, 2012. Instructions (a) Prepare the journal entry to record the retirement of the bonds at maturity, assuming the bonds were issued at 100. (b) Prepare the journal entry to record the retirement of the bonds before maturity at 97. Assume the balance in Premium on Bonds Payable is $5,000. (c) Prepare the journal entry to record the conversion of the bonds into 15,000 shares of $10 par value common stock. Assume the bonds were issued at par. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 188
(9–12 min.) Retirement of bonds at maturity
(a)
Bonds Payable ............................................................................ Cash ......................................................................................
500,000 500,000
Retirement of bonds before maturity at 98 (b)
Bonds Payable ............................................................................ Premium on Bonds Payable ....................................................... Cash ..................................................................................... Gain on Bond Redemption .....................................................
FOR INSTRUCTOR USE ONLY
500,000 5,000 485,000 20,000
Long-Term Liabilities Solution 188
15 - 43
(Cont.) Conversion of bonds into common stock
(c)
Bonds Payable ............................................................................ Common Stock ...................................................................... Paid-in-Capital in Excess of Par ............................................
500,000 150,000 350,000
Ex. 189 Casey Company retired $500,000 face value, 9% bonds on June 30, 2012 at 96. The carrying value of the bonds at the redemption date was $508,000. Instructions Prepare the journal entry to record the redemption of the bonds. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189
(5–7 min.)
Bonds Payable ..................................................................................... Premium on Bonds Payable ................................................................. Gain on Bond Redemption .......................................................... Cash ($300,000 × 98%) ..............................................................
500,000 8,000 28,000 480,000
Ex. 190 Presented below are three independent situations: (a)
Strike Corporation purchased $350,000 of its bonds on June 30, 2012, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $339,500. The bonds pay semiannual interest and the interest payment due on June 30, 2012, has been made and recorded.
(b)
Worton, Inc. purchased $400,000 of its bonds at 97 on June 30, 2012, and immediately retired them. The carrying value of the bonds on the retirement date was $393,000. The bonds pay semiannual interest and the interest payment due on June 30, 2012, has been made and recorded.
(c)
Mountain Company has $80,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 40 shares of Mountain $5 par value common stock for each $1,000 par value bond. On December 31, 2012, after the bond interest has been paid, $20,000 par value of bonds were converted. The market value of Mountain’s common stock was $38 per share on December 31, 2012.
Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
15 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 190
(13–16 min.)
(a) June 30
Bonds Payable ............................................................ Loss on Bond Redemption ........................................... Discount on Bonds Payable ............................... Cash .................................................................. ($350,000 – $339,500 = $10,500) ($350,000 × 102% = $357,000)
350,000 17,500
Bonds Payable ............................................................ Discount on Bonds Payable ............................... Gain on Bond Redemption................................. Cash .................................................................. ($400,000 – $393,000 = $7,000) ($400,000 × 97% = $388,000)
400,000
Bonds Payable ............................................................ Common Stock ................................................. Paid-in Capital in Excess of Par ........................ ($5 × 40 × 20 = $4,000)
20,000
(b) June 30
(c) Dec. 31
10,500 357,000
7,000 5,000 388,000
4,000 16,000
Ex. 191 Douglas Company issued a $3,500,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2012. The terms provide for semiannual installment payments of $200,608. Instructions Prepare the entry to record: (a) the mortgage loan on December 31, 2012. (b) the first installment payment. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 191
(5–7 min.)
(a) Cash ............................................................................................. 3,500,000 Mortgage Payable ............................................................... (b) Interest Expense ($3,500,000 × 5%) ............................................. Mortgage Payable ......................................................................... Cash ...................................................................................
3,500,000
175,000 25,608 200,608
Ex. 192 Adams Corporation issues a $4,500,000, 12%, 20-year mortgage note payable on December 31, 2012, to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $309,409 on June 30 and December 31.
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities Ex. 192
15 - 45
(Cont.)
Instructions (a) Prepare the journal entries to record the mortgage loan on December 31, 2012, and the first installment payment. (b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment? Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 192
(5–8 min.)
(a)
Cash .......................................................................... 4,500,000 Mortgage Payable .............................................
Dec. 31
June 30
(b)
Interest Expense ........................................................ Mortgage Payable ...................................................... Cash.................................................................. ($4,500,000 × 12% × 1/2 = $270,000)
4,500,000
270,000 39,409 309,409
The amount of principal reduction will increase with each installment payment.
Ex. 193 Lucky Company borrowed $750,000 on January 1, 2012, by issuing $800,000, 8% mortgage note payable. The terms call for semiannual installment payments of $60,000 on June 30 and December 31. Instructions (a) Prepare the journal entries to record the mortgage loan and the first two installment payments. (b) Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2012. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193 (a)
(5–8 min.)
January 1, 2012 Cash .......................................................................................... Mortgage Payable .............................................................
800,000 800,000
June 30, 2012 Interest Expense ($800,000 × 8% × 6/12) .......................................................... 32,000 Mortgage Payable ..................................................................... 28,000 Cash..................................................................
60,000
December 31, 2012 Interest Expense ($772,000 × 8% × 6/12) .......................................................... 30,880 Mortgage Payable ..................................................................... 29,120 Cash..................................................................
60,000
FOR INSTRUCTOR USE ONLY
15 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 193 (b)
(Cont.)
Current : $56,960 [$60,000 – ($742,880 × 8% × 6/12)] + [$60,000 – ($681,122 × 8% × 6/12)] Long-term: $685,920 [($800,000 – $28,000 – $29,120) – $56,960]
Ex. 194 Presented below are three different aircraft lease transactions that occurred for Northwest Airways in 2012. All the leases start on January 1, 2012. In no case does Northwest receive title to the aircraft during or at the end of the lease period; nor is there a bargain purchase option.
Type of property Yearly rental Lease term Estimated economic life Fair value of leased asset Present value of lease rental payments
Oxford Insurance 747 Aircraft $8,508,645 15 years 25 years
Lessor Goin Leasing 727 Aircraft $6,357,660 15 years 25 years
Flagg Leasing L-1011 Aircraft $2,851,861 20 years 25 years
$79,200,000
$63,000,000
$32,000,000
$72,000,000
$54,000,000
$28,000,000
Instructions (a) Which of the above leases are operating leases and which are capital leases? Explain your answer. (b) How should the lease transaction with Oxford Insurance be recorded in 2012? (c) How should the lease transaction with Goin Leasing be recorded in 2012? Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 194
(10–14 min.)
(a)
The Oxford Insurance lease is a capital lease since it meets one of the four criteria; i.e., the present value of the lease payments exceeds 90% of the fair value of the leased asset. The Flagg Leasing lease is a capital lease since the lease term, 20 years, exceeds 75% of the estimated economic life of the leased asset. The Goin Leasing lease is an operating lease since it meets none of the criteria.
(b)
Leased Asset ............................................................................ 72,000,000 Lease Liability .................................................................. 72,000,000
(c)
Lease Liability ........................................................................... Cash ................................................................................
8,508,645
Rental Expense ........................................................................ Cash ................................................................................
6,357,660
FOR INSTRUCTOR USE ONLY
8,508,645
6,357,660
Long-Term Liabilities
15 - 47
Ex. 195 Echo Corporation entered into the following transactions: 1. On January 1, 2012 Grant Car Rental leased a car to Echo Corporation for one year. Terms of the operating lease call for monthly payments of $650. 2. On January 1, 2012, Echo Corporation entered into an agreement to lease 20 machines from Weiss Corporation. The terms of the lease agreement require an initial payment of $500,000 and then three annual rental payments of $600,000 beginning on December 31, 2012. The present value of the three rental payments is $1,492,108. The lease is a capital lease. Instructions Prepare the appropriate journal entries to be made by Echo Corporation in January related to the lease transactions. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 195 2012 Jan. 1
(5–7 min.)
Rental Expense ..................................................................... Cash .............................................................................
650 650
Leased Equipment................................................................. 1,992,108 Lease Liability ............................................................... Cash .............................................................................
1,492,108 500,000
Ex. 196 On January 1, 2012, Malcolm Inc. entered into an agreement to lease equipment from Finley Corporation. The lease agreement requires five annual rental payments of $90,000 beginning December 31, 2012. The present value of the rental payments is $341,172. The lease transfers substantially all the benefits and risks of ownership to Malcolm. Instructions Prepare the entry to record the lease agreement on the books of Malcolm Inc. on January 1, 2012. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196
(3 min.)
Jan. 1 Leased Equipment .................................................................. Lease Liability ...............................................................
341,172 341,172
Ex. 197 The adjusted trial balance for Perry Corporation at the end of 2012 contained the following accounts: Bonds payable, 10%........................................................... Interest payable .................................................................. Discount on bonds payable ................................................ Lease liability ...................................................................... Mortgage notes payable, 9%, due 2015 ............................. Accounts payable ...............................................................
FOR INSTRUCTOR USE ONLY
$700,000 20,000 40,000 50,000 90,000 120,000
15 - 48 Test Bank for Accounting Principles, Tenth Edition a
Ex. 197
(Cont.)
Instructions (a) Prepare the long-term liabilities section of the balance sheet. (b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197 (a)
(b)
(4–7 min.)
Long-term liabilities Bonds payable 10% Less: bond discount Mortgage payable 9% Lease liability Total long-term liabilities
$700,000 40,000
$660,000 90,000 50,000 $800,000
Bond interest payable and accounts payable should be classified as current liabilities.
Ex. 198 Ranger Corporation reports the following amounts in their 2012 financial statements: At December 31, 2012 Total assets Total liabilities Total stockholders’ equity Interest expense Income tax expense Net income
For the Year 2012
$2,000,000 1,130,000 ? $20,000 130,000 150,000
Instructions (a) Compute the December 31, 2012, balance in stockholders’ equity. (b) Compute the debt to total assets ratio at December 31, 2012. (c) Compute times interest earned for 2012. Ans: N/A, SO: 6, Bloom: AN, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198
(4–7 min.)
(a)
Total assets ................................................................................. Less : Total liabilities .................................................................... Total stockholders’ equity ............................................................
(b)
Debt to total assets ratio =
(c)
Times interest earned ratio =
$2,000,000 1,130,000 $ 870,000
Total liabilities $1,130,000 = = 56.5% Total assets $2,000,000
Net income + Income tax expense + Interest expense Interest expense
=
$150,000 + $130,000 + $20,000 = 15 times $ 20,000
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities a
15 - 49
Ex. 199
Boxer Corporation is issuing $600,000 of 8%, 5-year bonds when potential bond investors want a return of 10%. Interest is payable semiannually. The present value of 1 factors are 4%, .67556 and 5%, .61391. The present value of an annuity factors are 4%, 8.1109 and 5%, 7.72173. Instructions Compute the market price (present value) of the bonds. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 199
(5–7 min.)
Present value of principal ($600,000 × .61391) .................................... Present value of interest ($24,000 × 7.72173)...................................... Market price of bonds........................................................................... a
$368,346 185,322 $553,668
Ex. 200
On January 1, 2012, Plank Corporation issued $800,000, 9%, 5-year bonds for $769,112. The bonds were sold to yield an effective-interest rate of 10%. Interest is paid semiannually on June 30 and December 31. The company uses the effective-interest method of amortization. Instructions (a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.) (b) Prepare the journal entries that Plank Corporation would make on January 1, June 30, and December 31, 2012, related to the bond issue. Ans: N/A, SO: 8, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 200 (15–22 min.)
(a)
PLANK CORPORATION Bond Discount Amortization Effective-Interest Method—Semiannual Interest Payments 9% Bonds Issued at 10%
Interest Periods 1/01/12 6/30/12 12/31/12
(b)
Interest to be Paid (Issue date) $36,000 36,000
Interest Expense
Discount Amortization
$38,456 38,578
2,456 2,578
Unamortized Discount $30,888 28,432 25,854
January 1, 2012 Cash............................................................................................ Discount on Bonds Payable ........................................................ Bonds Payable ................................................................... (To record issuance of bonds at a discount)
FOR INSTRUCTOR USE ONLY
Carrying Value of Bonds $769,112 771,568 774,146
769,112 30,888 800,000
15 - 50 Test Bank for Accounting Principles, Tenth Edition a
Solution 200
(Cont.)
June 30, 2012 Bond Interest Expense ................................................................ Discount on Bonds Payable ................................................ Cash ................................................................................... (To record payment of interest and amortization of discount) December 31, 2012 Bond Interest Expense ................................................................ Discount on Bonds Payable ................................................ Cash ................................................................................... (To record payment of interest and amortization of discount) a
38,456 2,456 36,000
38,578 2,578 36,000
Ex. 201
On June 30, 2012, Upton, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated June 30, 2012, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2015. The following schedule was prepared by the accountant for 2012. Semi-Annual Interest Period
Interest to be Paid
Interest Expense
Amortization
1
$120,000
$131,625
$11,625
Unamortized Amount $75,000 63,375
Bond Carrying Value $2,925,000 1,936,625
Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) 1. What is the stated interest rate for this bond issue? 2. What is the market interest rate for this bond issue? 3. What was the selling price of the bonds as a percentage of the face value? 4. Prepare the journal entry to record the sale of the bond issue on June 30, 2012. 5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2012. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 201
(12–17 min.)
1. $120,000 ÷ $3,000,000 = .04 × 2 = 8% 2. $131,625 ÷ $2,925,000 = .045 × 2 = 9% 3. $2,925,000 ÷ $3,000,000 = .975 The bonds sold at 97.5. 4.
June 30, 2012 Cash ............................................................................................... 2,925,000 Discount on Bonds Payable ............................................................ 75,000 Bonds Payable....................................................................... FOR INSTRUCTOR USE ONLY
3,000,000
Long-Term Liabilities a
Solution 201
5.
a
15 - 51
(Cont.)
December 31, 2012 Interest Expense ............................................................................ Discount on Bonds Payable ................................................... Cash ......................................................................................
131,625 11,625 120,000
Ex. 202
On January 1, 2012, Sunrise Corporation issued $4,000,000, 9%, 5-year bonds dated January 1, 2012, at 94. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Sunrise Corporation would make related to this bond issue through January 1, 2013. Be sure to indicate the date on which the entries would be made. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 202
(8–12 min.)
January 1, 2012 Cash............................................................................................ 3,760,000 Discount on Bonds Payable ........................................................ 240,000 Bonds Payable ................................................................... (To record sale of bonds at a discount) July 1, 2012 Interest Expense ......................................................................... Discount on Bonds Payable ................................................ Cash ................................................................................... (To record semiannual payment of interest and amortization of discount) December 31, 2012 Interest Expense ......................................................................... Discount on Bonds Payable ................................................ Interest Payable .................................................................. (To record accrued bond interest and amortization of bond discount) January 1, 2013 Interest Payable .......................................................................... Cash ................................................................................... (To record payment of bond interest liability)
FOR INSTRUCTOR USE ONLY
4,000,000
204,000 24,000 180,000
204,000 24,000 180,000
180,000 180,000
15 - 52 Test Bank for Accounting Principles, Tenth Edition a
Ex. 203
Venture Company issued $600,000, 10%, 20-year bonds on January 1, 2012, at 103. Interest is payable semiannually on July 1 and January 1. Venture uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2012 related to the bond issue. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 203
Jan.
July
1
1
Dec. 31
a
(8–12 min.)
Cash ................................................................................... Bonds Payable ........................................................... Premium on Bonds Payable .......................................
618,000
Interest Expense ................................................................. Premium on Bonds Payable ................................................ Cash........................................................................... ($600,000 × 10% × 1/2 = $30,000) ($18,000 × 1/40 = $450)
29,550 450
Interest Expense ................................................................. Premium on Bonds Payable ................................................ Interest Payable ......................................................... ($600,000 × 10% × 1/2 = $30,000)
29,550 450
600,000 18,000
30,000
30,000
Ex. 204
Magic Company issued $500,000, 10%, 10-year bonds on December 31, 2012, for $460,000. Interest is payable semiannually on June 30 and December 31. Magic uses the straight-line method of amortization and has a calendar year end. Instructions Prepare the appropriate journal entries on (a) December 31, 2012. (b) June 30, 2013. Ans: N/A, SO: 9, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 204
(8–12 min.)
(a)
2012 Cash........................................................................... Discount on Bonds Payable ....................................... Bonds Payable ..................................................
Dec. 31
(b) June 30
2013 Interest Expense ........................................................ Discount on Bonds Payable ............................... Cash .................................................................. ($500,000 × 10% × 1/2 = $25,000; $40,000 × 1/20 = $2,000)
FOR INSTRUCTOR USE ONLY
460,000 40,000 500,000
27,000 2,000 25,000
Long-Term Liabilities
15 - 53
COMPLETION STATEMENTS 205. Bonds that mature at a single specified future date are called _______________ bonds, whereas bonds that mature in installments are called ________________ bonds. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
206. The terms of a bond issue are set forth in a formal legal document called a bond ________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
207. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
208. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
209. Discount on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
211. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
212. When bonds are converted into common stock and the conversion is recorded, the ________________ of the bonds is transferred to paid-in capital accounts. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
213. A lease may be classified as an _______________ lease or as a ________________ lease. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
214. The market price of a bond is obtained by discounting to its present value the _______________ paid at maturity, and all _____________ payments to be made over the term of the bond.
Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
15 - 54 Test Bank for Accounting Principles, Tenth Edition a
215. When there is a ________________ difference between the straight-line and effectiveinterest methods of amortization, the ________________ method is required under GAAP.
Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
216. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method.
Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
217. The straight-line method of amortization allocates the same amount to _______________ in each interest period.
Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 205. 206. 207. 208. 209. 210. 211.
term, serial indenture debenture greater deducted, added stated (contractual), market (effective) 970,000
212. 213. a 214. a 215. a 216. a 217.
carrying value operating, capital principal, interest material, effective-interest straight-line interest expense
MATCHING 218. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Serial bonds Debenture bonds Bond indenture Premium on bonds payable Discount on bonds payable Effective-interest method of amortization
G. H. I. J. K. L.
Straight-line method of amortization Bonds Debt to total assets ratio Capital lease Operating lease Registered bonds
_____ 1. A contractual arrangement which is in effect a purchase of property. _____ 2. A legal document that sets forth the terms of a bond issue. _____ 3. Bonds that mature in installments. _____ a4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. _____ 5. Bonds issued in the name of the owner. _____ 6. A form of interest-bearing notes payable used by corporations. _____ 7. Occurs when the contractual interest rate is greater than the market interest rate. _____ 8. Unsecured bonds issued against the general credit of the borrower. FOR INSTRUCTOR USE ONLY
Long-Term Liabilities
15 - 55
_____ 9. A contractual arrangement that gives the lessee temporary use of property. _____ 10. A solvency measure that indicates the percentage of assets provided by creditors. _____ 11. Occurs when the contractual interest rate is less than the market interest rate. _____a12. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A, SO: 1, 2, 5, Bloom: , Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. a 4. 5. 6.
J C A F L H
7. 8. 9. 10. 11. a 12.
D B K I E G
SHORT-ANSWER ESSAY QUESTIONS S-A E 219 Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates. Ans: N/A, SO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 219 The market interest rate often is different from the contractual interest rate and therefore bonds are frequently issued at amounts greater or less than face value. When the market interest rate is higher than the contractual rate, investors can find better investments elsewhere and consequently there is less demand for the bonds. So to make the bonds more attractive the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market interest rate is less than the contractual rate there will be greater demand for the bonds because of the higher interest rate. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. The investor is required to pay accrued interest because it allows the bond issuer to make the same interest payment to all bondholders on the same interest payment date. Otherwise the bond issuer would have to determine the interest payment for each bondholder based on how long that particular bond had been outstanding. Thus, the bond issuer does not have to maintain detailed records and saves bookkeeping costs.
FOR INSTRUCTOR USE ONLY
15 - 56 Test Bank for Accounting Principles, Tenth Edition S-A E 220 A company desires to replace its current plant equipment with new equipment that costs $10,000,000. One possibility would be for the company to issue $10,000,000 of bonds and use the proceeds to purchase the equipment. Another possibility is to acquire the use of the equipment by signing a long-term capital lease with a leasing company. Describe and compare the financial statement effects of these two alternatives. Ans: N/A, SO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 220 The bond alternative will result in the balance sheet presentation of an asset (Equipment) and a long-term liability (Bonds Payable), which probably will have a corresponding liability valuation account (Premium or Discount on Bonds Payable). The income statement will show the interest expense from the payment of interest to the bondholder and the depreciation expense for the equipment. The leasing alternative will result in the balance sheet presentation of a Leased Asset, recorded at the present value of the cash payments for the lease. The portion of the Lease Liability expected to be paid in the next year is reported as a current liability while the remainder is classified as a long-term liability. The income statement will show the interest expense, which is the financing cost, and since the lessee has essentially purchased the asset, the income statement will also show the depreciation expense. S-A E 221 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. Ans: N/A, SO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 221 For someone to purchase a bond at a discount, the stated interest rate normally must be below the market interest rate for similar bonds. Investors will need to make up the difference by paying less than the face value for the bonds. S-A E 222 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. Ans: N/A, SO: 3, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 222 A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources. When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds.
FOR INSTRUCTOR USE ONLY
Long-Term Liabilities
15 - 57
S-A E 223 Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss. Ans: N/A, SO: 7, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Research, AICPA PC: Communications, IMA: Business Economics
Solution 223 No, Kim is not right. The market price of any bond is a function of three factors: (1) The dollar amounts to be received by the investor (interest and principal), (2) The length of time until the amounts are received (interest payment dates and maturity date), and (3) The market interest rate. S-A E 224 Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying? Ans: N/A, SO: 8, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 224 Megan is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method. S-A E 225 (Ethics) Jeff Tanner, a 26-year-old entrepreneur, started Bells & Whistles (B&W), Inc., a firm that specializes in top-of-the-line add-ons for computer systems. The firm has a capital structure of approximately 60% debt. This was necessitated by the rapid growth of B&W, and Mr. Tanner's lack of personal funds to sustain the growth. The 60% debt amount is quite high for firms in this field, and in fact slightly exceeds the debt covenants negotiated with the bank. B&W recently received notice that the bank considers the company's debt to be excessive, and that some accelerated repayment schedule will be adopted. The notice came at a particularly bad time. B&W is in the midst of a major upgrade of its own computer system. The hardware was to have been purchased outright, financed by the seller, Mike Kerr, longtime friend of Mr. Tanner. Mr. Kerr really needs Mr. Tanner’s business. Both believe in the long-term strength of B&W. He therefore suggests to Mr. Tanner that the equipment be purchased by means of a short-term lease. Mr. Tanner could renew the lease annually. Required: 1. Is Mr. Kerr’s suggestion ethical? Explain. 2. If Mr. Tanner accepts the suggestion, is he behaving ethically? Explain. Ans: N/A, SO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
15 - 58 Test Bank for Accounting Principles, Tenth Edition Solution 225 1. Mr. Kerr's suggestion is ethical, at least on its face. Since a long-term lease is not possible, a short-term lease is a possibility. However, if there is some kind of agreement between the parties that essentially makes the lease a long-term one, it would not be ethical to treat it as a short-term lease for accounting purposes. 2. Since Mr. Kerr's suggestion is ethical, Mr. Tanner's acceptance of the suggestion is also ethical, with the same provisions. However, he should not accept the suggestion if his ability to pay Mr. Kerr will be compromised by the accelerated repayment required by the bank. S-A E 226 (Communication) Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Silver's were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was— the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books. Required: Draft a short note for Susan to send to Lisa. Explain how such a result could occur. Ans: N/A, SO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 226 Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:
Lisa— I can't believe that Silver can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Trend is a bad company just by the bond price. Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Silver got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't). Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 16 INVESTMENTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 6 6 6 1 2 3
C K K C K K K
sg sg
29. 30. sg 31.
4 5 6
C K C
98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119.
4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
K K K K K C K K K AP AP C K C C K AP K AP AP AP AP
120. 121. 122. 123. 124. sg 125. st 126. st 127. st 128. sg 129. sg 130. sg 131. st 132. sg 133. sg 134. st 135. 136. 137. 138. 139. 140.
6 6 6 6 6 1 2 2 3 3 3 3 5 5 6 6 6 6 6 6 6
C K C K C C K K K K K AP K K K K K K K K K
147. 148.
5 5
AP AP
149. 150.
5 5
AP AP
163. 164. 165. 166.
3 3 5,6 5
AP AP AN AP
167. 168. 169. 170.
5 5 5 5,6
AN AP AN AP
True-False Statements 1. 2. 3. 4. 5. 6. 7.
1 1 2 2 2 2 2
K C K C C C K
8. 9. 10. 11. 12. 13. 14.
3 3 3 3 3 3 4
C C K C K K K
15. 16. 17. 18. 19. 20. 21.
4 4 5 5 5 5 5
C K C K K C K
22. 23. 24. 25. sg 26. sg 27. sg 28.
Multiple Choice Questions 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.
1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K K K K K C AP AN AP AP AN K C K AP AP AP K K AP AP
54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
AP AP AP K AP AP AP AP AP K K AP AP K K C C K K K AP K
76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4
C C K K K K K K C C C AP AP AN AN AN AN K C K K K
Brief Exercises 141. 142.
2 2
AP AP
143. 144.
3 3
AP AP
145. 146.
151. 152. 153. 154.
2 2 2 2,3
AP AN AP AP
155. 156. 157. 158.
3 3 3,5 3,5
AP AP AN AN
159. 160. 161. 162.
3 3
AP AP
Exercises
sg st
3 3 3 3
AP AP AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. FOR INSTRUCTOR USE ONLY
16 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Completion Statements 171. 172. 173.
2 2 3
K K K
174. 175. 176.
3 3 4
K AP K
177. 178. 179.
5 5 5
K K K
180. 181. 182.
5 5 6
K K K
3
K
Matching Statements 183.
2
K
Short-Answer Essay 184. 185.
2 4
K K
186. 187.
5 5
K K
188. 189.
4 5
K K
190.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2.
TF TF
26. 32.
TF MC
33. 34.
3. 4. 5. 6. 7.
TF TF TF TF TF
27. 37. 38. 39. 40.
TF MC MC MC MC
41. 42. 43. 44. 45.
8. 9. 10. 11. 12. 13. 28. 54. 55. 56. 57.
TF TF TF TF TF TF TF MC MC MC MC
58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.
MC MC MC MC MC MC MC MC MC MC MC
69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.
14. 15.
TF TF
16. 29.
TF TF
93. 94.
17. 18. 19. 20. 21. 22. 30.
TF TF TF TF TF TF TF
100. 101. 102. 103. 104. 105. 106.
MC MC MC MC MC MC MC
107. 108. 109. 110. 111. 112. 113.
Note: TF = True-False MC = Multiple Choice
Type Item Type Item Type Study Objective 1 MC 35. MC 125. MC MC 36. MC Study Objective 2 MC 46. MC 51. MC MC 47. MC 52. MC MC 48. MC 53. MC MC 49. MC 126. MC MC 50. MC 127. MC Study Objective 3 MC 80. MC 91. MC MC 81. MC 92. MC MC 82. MC 128. MC MC 83. MC 129. MC MC 84. MC 130. MC MC 85. MC 131. MC MC 86. MC 143. BE MC 87. MC 144. BE MC 88. MC 145. BE MC 89. MC 146. BE MC 90. MC 154. Ex Study Objective 4 MC 95. MC 97. MC MC 96. MC 98. MC Study Objective 5 MC 114. MC 133. MC MC 115. MC 147. BE MC 116. MC 148. BE MC 117. MC 149. BE MC 118. MC 150. BE MC 119. MC 157. Ex MC 132. MC 158. Ex
BE = Brief Exercise Ex = Exercise FOR INSTRUCTOR USE ONLY
Item
Type
Item
Type
141. 142. 151. 152. 153.
BE BE Ex Ex Ex
154. 171. 172. 183. 184.
Ex C C Ma SA
155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 173.
Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex C
174. 175. 190.
C C SA
99. 176.
MC C
185. 188.
SA SA
165. 166. 167. 168. 169. 170. 177.
Ex Ex Ex Ex Ex Ex C
178. 179. 180. 181. 186. 187. 189.
C C C C SA SA SA
C = Completion
Investments
16 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 23. 24. 25.
TF TF TF
31. 120. 121.
TF MC MC
122. 123. 124.
Note: TF = True-False MC = Multiple Choice
Study Objective 6 MC 134. MC 137. MC 135. MC 138. MC 136. MC 139.
MC MC MC
BE = Brief Exercise Ex = Exercise
140. 165. 170.
MC Ex Ex
182.
C
C = Completion
The chapter also contains one set of ten Matching questions and Seven Short-Answer Essay questions.
CHAPTER STUDY OBJECTIVES 1. Discuss why corporations invest in debt and stock securities. Corporations invest for three primary reasons: (a) they have excess cash; (b) they view investments as a significant revenue source; or (c) they have strategic goals such as gaining control of a competitor or moving into a new line of business. 2. Explain the accounting for debt investments. Companies record investments in debt securities when they purchase bonds, receive or accrue interest, and sell the bonds. They report gains or losses on the sale of bonds in the “other revenues and gains” or “other expenses and losses” sections of the income statement. 3. Explain the accounting for stock investments. Companies record investments in common stock when they purchase the stock, receive dividends, and sell the stock. When ownership is less than 20%, the cost method is used. When ownership is between 20% and 50%, the equity method should be used. When ownership is more than 50%, companies prepare consolidated financial statements. 4. Describe the use of consolidated financial statements. When a company owns more than 50% of the common stock of another company, it usually prepares consolidated financial statements. These statements indicate the magnitude and scope of operations of the companies under common control. 5. Indicate how debt and stock investments are reported in financial statements. Investments in debt and stock securities are classified as trading, available-for-sale, or heldto-maturity securities for valuation and reporting purposes. Trading securities are reported in current assets at fair value, with changes from cost reported in net income. Available-forsale securities are also reported at fair value, with the changes from cost reported in stockholders' equity. Available-for-sale securities are classified as short-term or long-term depending on their expected realization. 6. Distinguish between short-term and long-term investments. Short-term investments are securities that are (a) readily marketable and (b) intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.
FOR INSTRUCTOR USE ONLY
16 - 4
Test Bank for Accounting Principles, Tenth Edition
TRUE-FALSE STATEMENTS 1.
Corporations purchase investments in debt or stock securities generally for one of two reasons.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
2.
A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
3.
The accounting for short-term debt investments and for long-term debt investments is similar.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
4.
When debt investments, are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
5.
Debt investments are investments in government and corporation bonds.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
6.
In accordance with the cost principle, brokerage fees should be added to the cost of an investment.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
7.
In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
8.
In accounting for stock investments of less than 20%, the equity method is used.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
9.
Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
10.
If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
11.
The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Investments 12.
16 - 5
Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
13.
Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
14.
Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
15.
Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
16.
Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
17.
The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
18.
An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
19.
For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
20.
A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Market Adjustment account.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
21.
If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
22.
The Market Adjustment account can only have a credit balance or a zero balance.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
16 - 6 23.
Test Bank for Accounting Principles, Tenth Edition To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
24.
An investment is readily marketable if it is management's intent to sell the investment.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
25.
Stocks traded on the New York Stock Exchange are considered readily marketable.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Pr oblem Solving, IMA: Reporting
26.
One of the reasons a corporation may purchase investments is that it has excess cash.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
27.
When recording bond interest, Interest Receivable is reported as a fixed asset in the balance sheet.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
28.
Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
29.
Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
30.
Available-for-sale securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
31.
"Intent to convert" does not include an investment used as a resource that will be used whenever the need for cash arises.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to True-False Statements Item
1. 2. 3. 4. 5.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F T T F T
6. 7. 8. 9. 10.
T F F F T
11. 12. 13. 14. 15.
T T F T F
16. 17. 18. 19. 20.
F T F T T
21. 22. 23. 24. 25.
F F T F T
26. 27. 28. 29. 30.
T F T F F
31.
F
FOR INSTRUCTOR USE ONLY
Investments
16 - 7
MULTIPLE CHOICE QUESTIONS 32.
Corporations invest excess cash for short periods of time in each of the following except a. equity securities. b. highly liquid securities. c. low-risk securities. d. government securities.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
33.
Corporations invest in other companies for all of the following reasons except to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. increase trading of the other companies’ stock.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
34.
A typical investment to house excess cash until needed is a. stocks of companies in a related industry. b. debt securities. c. low-risk, highly liquid securities. d. stock securities.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
35.
A company may purchase a noncontrolling interest in another firm in a related industry a. to house excess cash until needed. b. to generate earnings. c. for strategic reasons. d. for speculative reasons.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
36.
Pension funds and mutual funds regularly invest in debt and stock securities to a. generate earnings. b. house excess cash until needed. c. meet strategic goals. d. control the company in which they invest.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
37.
At the time of acquisition of a debt investment, a. no journal entry is required. b. the cost principle applies. c. the Stock Investments account is debited when bonds are purchased. d. the Investment account is credited for its cost plus brokerage fees.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
16 - 8 38.
Test Bank for Accounting Principles, Tenth Edition Which of the following is not a true statement regarding short-term debt investments? a. The securities usually pay interest. b. Investments are frequently government or corporate bonds. c. This type of investment must be currently traded in the securities market. d. Debt investments are recorded at the price paid less brokerage fees.
Ans: d, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
39.
On January 1, 2012, Danner Company purchased at face value, a $1,000, 8% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end. The entry for the receipt of interest on July 1, 2012, is a. Cash ................................................................................... Interest Revenue ........................................................ b. Cash ................................................................................... Interest Revenue ........................................................ c. Interest Receivable ............................................................. Interest Revenue ........................................................ d. Interest Receivable ............................................................. Interest Revenue ........................................................
40 40 80 80 40 40 80 80
Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
40.
On January 1, 2012, Danner Company purchased at face value, a $1,000, 10% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end. The adjusting entry on December 31, 2012, is a. not required. b. Cash ................................................................................... 50 Interest Revenue ........................................................ 50 c. Interest Receivable ............................................................. 50 Interest Revenue ........................................................ 50 d. Interest Receivable ............................................................. 50 Debt Investments ....................................................... 50
Ans: c, SO: 2, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
41.
On January 1, 2012, Danner Company purchased at face value, a $1,000, 4% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end. The entry for the receipt of interest on January 1, 2013 is a. Cash ................................................................................... 40 Interest Revenue ........................................................ 40 b. Cash ................................................................................... 40 Interest Receivable..................................................... 40 c. Cash ................................................................................... 20 Interest Revenue ........................................................ 20 d. Cash ................................................................................... 20 Interest Receivable..................................................... 20
Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Investments 42.
16 - 9
On January 1, Talent Company purchased as a short-term investment a $1,000, 8% bond for $1,050. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,200 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash ................................................................................... 1,200 Debt Investments ...................................................... 1,200 b. Cash ................................................................................... 1,220 Debt Investments ....................................................... 1,050 Gain on Sale of Debt Investments .............................. 150 Interest Revenue........................................................ 20 c. Cash ................................................................................... 1,220 Debt Investments ....................................................... 1,200 Interest Revenue........................................................ 20 d. Cash ................................................................................... 1,200 Debt Investments ....................................................... 1,050 Gain on Sale of Debt Investments .............................. 150
Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
43.
Which of the following is not a true statement about the accounting for debt investments? a. At acquisition, the cost principle applies. b. The cost includes any brokerage fees. c. Debt investments include investments in government and corporation bonds. d. The cost includes any accrued interest.
Ans: d, SO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
44.
The cost of debt investments includes each of the following except a. brokerage fees. b. commissions. c. accrued interest. d. the price paid.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
45.
If a short-term debt investment is sold, the Investment account is a. credited for the book value of the bonds at the sale date. b. credited for the cost of the bonds at the sale date. c. credited for the fair value of the bonds at the sale date. d. debited for the cost of the bonds at the sale date.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
46.
In accounting for debt investments, entries are made for each of the following except the a. acquisition. b. interest revenue. c. amortization of any discount or premium. d. sale.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 10 Test Bank for Accounting Principles, Tenth Edition 47.
Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2012 for $61,250. This includes a brokerage commission of $1,250. The journal entry to record this investment includes a debit to a. Debt Investments for $60,000. b. Debt Investments for $61,250. c. Cash for $61,250. d. Stock Investments for $60,000.
Ans: b, SO: 2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
48.
Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2012 for $61,250. This includes a brokerage commission of $1,250. Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at December 31, 2012 would include a credit to a. Interest Receivable for $3,000. b. Interest Revenue for $6,000. c. Accrued Expense for $6,000. d. Interest Revenue for $3,000.
Ans: d, SO: 2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
49.
Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2012 for $61,250. This includes a brokerage commission of $1,250. If Key sells all of its Community bonds for $62,500 and pays $1,500 in brokerage commissions, what gain or loss is recognized? a. Gain of $2,500 b. Loss of $250 c. Gain of $250 d. Gain of $1,250
Ans: b, SO: 2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
50.
Locke Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a a. debit to Interest Receivable for $1,500. b. credit to Interest Revenue for $1,500. c. credit to Interest Revenue for $1,515. d. credit to Debt Investments for $1,515.
Ans: b, SO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
51.
Locke Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a a. debit to Interest Receivable for $1,500. b. debit to Interest Revenue for $1,500. c. credit to Interest Revenue for $1,515. d. debit to Debt Investments for $1,500.
Ans: a, SO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Investments 52.
16 - 11
Temper Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale of Debt Investments for a. $2,000. b. $1,700. c. $2,300. d. $1,400.
Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
53.
On January 1, Bacon Company purchased as an investment a $1,000, 7% bond for $1,020. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable ............................................................. 35 Interest Revenue ....................................................... 35 b. Debt Investments ............................................................... 35 Interest Revenue ....................................................... 35 c. Interest Receivable ............................................................. 70 Interest Revenue ....................................................... 70 d. Debt Investments ............................................................... 70 Interest Revenue ....................................................... 70
Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
54.
Eck Corporation sells 250 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $25 a share. Eck sold the shares for $40 a share. The entry to record the sale is a. Cash ................................................................................... 6,250 Loss on Sale of Stock Investments .................................... 3,750 Stock Investments ..................................................... 10,000 b. Stock Investments ............................................................. 10,000 Cash ......................................................................... 10,000 c. Cash ................................................................................... 10,000 Gain on Sale of Stock Investments ........................... 3,750 Stock Investments ..................................................... 6,250 d. Cash ................................................................................... 10,000 Stock Investments ..................................................... 10,000
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
55.
White Corporation sells 300 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $60 a share. White sold the shares for $40 a share. The entry to record the sale is a. Cash ................................................................................... 12,000 Loss on Sale of Stock Investments .................................... 6,000 Stock Investments ..................................................... 18,000 b. Cash ................................................................................... 18,000 Gain on Sale of Stock Investments ........................... 6,000 Stock Investments ..................................................... 12,000
FOR INSTRUCTOR USE ONLY
16 - 12 Test Bank for Accounting Principles, Tenth Edition MC 55.
(cont.) c. Cash ................................................................................... Stock Investments ..................................................... d. Stock Investments .............................................................. Loss on Sale of Stock Investments .................................... Cash...........................................................................
12,000 12,000 12,000 6,000 18,000
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
56.
Tan Company had these transactions pertaining to stock investments: Feb. 1 Purchased 3,000 shares of Norton Company (10%) for $48,800 cash plus brokerage fees of $1,400. June 1 Received cash dividends of $2 per share on Norton stock. Oct. 1 Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600. The entry to record the purchase of the Norton stock would include a a. debit to Stock Investments for $48,800. b. credit to Cash for $48,800. c. debit to Stock Investments for $50,200. d. debit to Investment Expense for $1,400.
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Tan Company had these transactions pertaining to stock investments: Feb. 1 Purchased 3,000 shares of Norton Company (10%) for $49,800 cash plus brokerage fees of $1,200. June 1 Received cash dividends of $3 per share on Norton stock. Oct. 1 Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600. The entry to record the receipt of the dividends on June 1 would include a a. debit to Stock Investments for $9,000. b. credit to Dividend Revenue for $9,000. c. debit to Dividend Revenue for $9,000. d. credit to Stock Investments for $9,000.
Ans: b, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
58.
Tan Company had these transactions pertaining to stock investments: Feb. 1 Purchased 3,000 shares of Norton Company (10%) for $49,800 cash plus brokerage fees of $1,200. June 1 Received cash dividends of $2 per share on Norton stock. Oct. 1 Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600. The entry to record the sale of the stock would include a a. debit to Cash for $24,000. b. credit to Gain on Sale of Stock Investments for $1,200. c. debit to Stock Investments for $20,400. d. credit to Gain on Sale of Stock Investments for $3,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Investments 59.
16 - 13
Wise Company owns 30% interest in the stock of Dark Corporation. During the year, Dark pays $20,000 in dividends to Wise, and reports $200,000 in net income. Wise Company’s investment in Dark will increase Wise’s net income by a. $6,000. b. $60,000. c. $66,000. d. $80,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
60.
Nickel Company owns 30% interest in the stock of Finn Corporation. During the year, Finn pays $25,000 in dividends, and reports $200,000 in net income. Nickel Company’s investment in Finn will increase by a. $25,000. b. $60,000. c. $67,500. d. $52,500.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
On January 1, 2012, Great Corporation purchased 25% of the common stock outstanding of Long Corporation for $250,000. During 2012, Long Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments— Long account on the books of Great Corporation at December 31, 2010 is a. $250,000. b. $290,000. c. $330,000. d. $260,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62.
Dayton Corporation purchased 1,000 shares of Kart common stock at $77 per share plus $2,000 brokerage fees as a short-term investment. The shares were subsequently sold at $80 per share less $3,400 brokerage fees. The cost of the securities purchased and gain or loss on the sale were Cost Gain or Loss a. $77,000 $3,000 gain b. $77,000 $1,400 loss c. $79,000 $2,000 gain d. $79,000 $2,400 loss
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
63.
In accounting for stock investments between 20% and 50%, the _______ method is used. a. consolidated statements b. controlling interest c. cost d. equity
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 14 Test Bank for Accounting Principles, Tenth Edition 64.
When a company holds stock of several different corporations, the group of securities is identified as a(n) a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
65.
Jerome Corporation makes a short-term investment in 160 shares of Singer Company's common stock. The stock is purchased for $50 a share plus brokerage fees of $550. The entry for the purchase is a. Debt Investments ................................................................ 8,000 Cash........................................................................... 8,000 b. Stock Investments............................................................... 8,550 Cash........................................................................... 8,550 c. Stock Investments............................................................... 8,000 Brokerage Fee Expense. .................................................... 550 Cash........................................................................... 8,550 d. Stock Investments............................................................... 8,000 Cash........................................................................... 8,000
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66.
Cooke Corporation sells 400 shares of common stock being held as a short-term investment. The shares were acquired six months ago at a cost of $55 a share. Cooke sold the shares for $40 a share. The entry to record the sale is a. Cash ................................................................................... Loss on Sale of Stock Investments ..................................... Stock Investments ...................................................... b. Cash ................................................................................... Gain on Sale of Stock Investments ............................. Stock Investments ...................................................... c. Cash ................................................................................... Stock Investments ...................................................... d. Stock Investments............................................................... Loss on Sale of Stock Investments ..................................... Cash...........................................................................
16,000 6,000 22,000 22,000 6,000 16,000 16,000 16,000 16,000 6,000 22,000
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
For accounting purposes, the method used to account for long-term investments in common stock is determined by a. the amount paid for the stock by the investor. b. the extent of an investor's influence on the operating and financial affairs of the investee. c. whether the stock has paid dividends in past years. d. whether the acquisition of the stock by the investor was "friendly" or "hostile."
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Investments 68.
16 - 15
If an investor owns less than 20% of the common stock of another corporation as a longterm investment, a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
If the cost method is used to account for a long-term investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
70.
If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. c. the preparation of consolidated financial statements. d. determined by agreement with whomever owns the remaining 90% of the stock.
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
71.
The cost method of accounting for long-term investments in stock should be employed when the a. investor owns more than 50% of the investee's stock. b. investor has significant influence on the investee and the stock held by the investor are marketable equity securities. c. market value of the shares held is greater than their historical cost. d. investor's influence on the investee is insignificant.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
72.
When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor a. has insignificant influence on the investee and that the cost method should be used to account for the investment. b. should apply the cost method in accounting for the investment. c. will prepare consolidated financial statements. d. has significant influence on the investee and that the equity method should be used to account for the investment.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company, a. the Dividend Revenue account is credited. b. the Stock Investments account is increased. c. the Stock Investments account is decreased. d. no entry is necessary.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 16 Test Bank for Accounting Principles, Tenth Edition 74.
On January 1, 2012, Dart Corporation purchased 30% of the common stock outstanding of Run Corporation for $700,000. During 2012, Run Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Stock Investments— Run account on the books of Dart Corporation at December 31, 2012 is a. $700,000. b. $730,000. c. $760,000. d. $670,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
75.
Under the equity method, the Stock Investments account is increased when the a. investee company reports net income. b. investee company pays a dividend. c. investee company reports a loss. d. stock investment is sold at a gain.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
The account, Stock Investments, is a. a subsidiary ledger account. b. a long-term liability account. c. a general ledger control account. d. another name for Debt Investments.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
77.
Which of the following would not be considered a motive for making a stock investment in another corporation? a. Appreciation in the market value of the stock investment b. Use of the investment for expanding its own operations c. Use of the investment to diversify its own operations d. An increase in the amount of interest revenue from the stock investment
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
78.
Revenue is recognized when cash dividends are received under a. the controlling interest method. b. the cost method. c. the equity method. d. both the cost and equity methods.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? a. b. c. d.
% of Investor Ownership Less than 20% Between 20%-50% More than 50% Between 20%-50%
Presumed Influence Short-term Significant Long-term Controlling
Ans: b, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Investments 80.
16 - 17
Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments? a. b. c. d.
% of Investor Ownership Less than 20% Between 20%–50% More than 50% Between 20%–50%
Accounting Guidelines Cost method Cost method Cost or equity method Consolidated financial statements
Ans: a, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
81.
If the cost method is used to account for a long-term investment in common stock, a. it is presumed that the investor has significant influence on the investee. b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor. c. net income of the investee is not considered earned by the investor until dividends are declared by the investee. d. the Investment account may be, at times, greater than the acquisition cost.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
82.
If a company acquires a 40% common stock interest in another company, a. the equity method is usually applicable. b. all influence is classified as controlling. c. the cost method is usually applicable. d. the ability to exert significant influence over the activities of the investee does not exist.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
83.
If a common stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other revenues and gains section of the income statement. d. contributes to gross profit on the income statement.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
If the equity method is being used, cash dividends received a. are credited to Dividend Revenue. b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books. c. are credited to the Stock Investments account. d. are credited to the Revenue from Stock Investments account.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
85.
If the equity method is being used, the Revenue from Stock Investments account is a. just another name for a Dividend Revenue account. b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 18 Test Bank for Accounting Principles, Tenth Edition 86.
Under the equity method, the Stock Investments account is credited when the a. investee reports net income. b. investee reports a net loss. c. investment is originally acquired. d. investee reports net income and when the investment is originally acquired.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
87.
On August 1, Mistery Company buys 2,000 shares of ABC common stock for $70,000 cash plus brokerage fees of $2,200. On December 1, the stock investments are sold for $76,000 in cash. Which of the following are the correct journal entries to record for the purchase and sale of the common stock? a. Aug. 1 Cash ..................................................... 72,200 Stock Investments........................... 72,200 Dec. 1 Cash ..................................................... 76,000 Stock Investments........................... 72,200 Gain on Sale of Stock Investments 3,800 b.
Aug. 1 Dec. 1
c.
Aug. 1 Dec. 1
d.
Aug. 1 Dec. 1
Stock Investments ................................ Cash ............................................... Cash ..................................................... Stock Investments........................... Gain on Sale of Stock Investments
72,200
Stock Investments ................................ Cash ............................................... Stock Investments ................................ Cash ............................................... Gain on Sale of Stock Investments
72,200
Cash ..................................................... Stock Investments........................... Stock Investments ................................ Cash ............................................... Gain on Sale of Stock Investments
72,200
72,200 76,000 72,200 3,800
72,200 76,000 72,200 3,800
72,200 76,000 72,200 3,800
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
Laramie industries owns 45% of McCook Company. For the current year, McCook reports net income of $250,000 and declares and pays a $60,000 cash dividend. Which of the following correctly presents the journal entries to record Laramie's equity in McCook's net income and the receipt of dividends from McCook? a. Dec. 31 Stock Investments ................................ 112,500 Revenue from Stock Investments …. 112,500 Dec. 31 Cash ...................................................... 27,000 Stock Investments............................. 27,000 b.
Dec. 31 Stock Investments ................................. 112,500 Revenue from Stock Investments …. Dec. 31 Cash ....................................................... 60,000 Stock Investments..............................
FOR INSTRUCTOR USE ONLY
112,500 60,000
Investments MC 88.
16 - 19
(cont.) c. d.
Dec. 31 Stock Investments ................................ Revenue from Stock Investments … Dec. 31 Revenue from Stock Investments ………. Stock Investments ........................ Dec. 31 Stock Investments ................................. Cash ...............................................
85,500 85,500 112,500 112,500 27,000 27,000
Ans: a, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
89.
On January 1, 2012, Audrey Corp. paid $800,000 for 100,000 shares of Off Company's common stock, which represents 40% of Off's outstanding common stock. Off reported net income of $200,000 and paid cash dividends of $60,000 during 2012. Audrey should report the investment in Off Company on its December 31, 2012, balance sheet at: a. $800,000 b. $744,000 c. $824,000 d. $856,000
Ans: d, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
90.
Mission Inc. earns $600,000 and pays cash dividends of $150,000 during 2012. Cox Corporation owns 70,000 of the 210,000 outstanding shares of Mission. What amount should Cox show in the investment account at December 31, 2012 if the beginning of the year balance in the account was $40,000? a. $190,000 b. $200,000 c. $175,000 d. $180,000
Ans: a, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
91.
Mission Inc. earns $450,000 and pays cash dividends of $150,000 during 2012. Cox Corporation owns 70,000 of the 210,000 outstanding shares of Mission. How much revenue from investment should Cornwell report in 2012? a. $50,000 b. $100,000 c. $150,000 d. $200,000
Ans: c, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
92.
On January 1, 2012, Dumar Industries acquired a 15% interest in Virginia Corporation through the purchase of 12,000 shares of Virginia Corporation common stock for $240,000. During 2012, Virginia Corp. paid $60,000 in dividends and reported a net loss of $90,000. Dumar is able to exert significant influence on Virginia. However, Dumar mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Dumar's investment using the equity method?
FOR INSTRUCTOR USE ONLY
16 - 20 Test Bank for Accounting Principles, Tenth Edition MC 92.
(cont.)
a. b. c. d.
Investment Account $90,000 $217,500 $226,500 $226,500
Net Earnings (loss) ($30,000) ($13,500) ($13,500) ($4,500)
Ans: b, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
93.
Consolidated financial statements are prepared when a company owns _________ of the common stock of another company. a. less than 20% b. between 20% and 50% c. less than 50% d. more than 50%
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
94.
Consolidated financial statements present all of the following except the a. individual assets and liabilities of the parent company b. individual assets and liabilities of the subsidiary. c. total revenues and expenses of the subsidiary. d. All of these are presented in consolidated financial statements.
Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
95.
The company whose stock is owned by the parent company is called the a. controlled company. b. subsidiary company. c. investee company. d. sibling company.
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
96.
A company that owns more than 50% of the common stock of another company is known as the a. charge company. b. subsidiary company. c. parent company. d. management company.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
If one company owns more than 50% of the common stock of another company, a. the cost method should be used to account for the investment. b. a partnership exists. c. a parent-subsidiary relationship exists. d. the company whose stock is owned must be liquidated.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Investments 98.
16 - 21
If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? a. b. c. d.
Legal 3 1 3 2
Economic 3 2 1 1
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
When a company owns more than 50% of the common stock of another company, a. affiliated financial statements are prepared. b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
Changes from cost are reported as part of net income for a. available-for-sale securities. b. held-to-maturity securities. c. debt securities. d. trading securities.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
101.
Short-term investments are listed on the balance sheet immediately below a. cash. b. inventory. c. accounts receivable. d. prepaid expenses.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
102.
Short-term stock investments should be valued on the balance sheet at a. the lower of cost or fair value. b. the higher of cost or fair value. c. cost. d. fair value.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
In recognizing a decline in the fair value of short-term stock investments, an unrealized loss account is debited because a. management intends to realize this loss in the near future. b. the securities have not been sold. c. the stock market is volatile. d. management cannot determine the exact amount of the loss in value.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
The Market Adjustment account a. is set up for each security in the company's portfolio. b. relates to the entire portfolio of securities held by the company. c. is closed at the end of each accounting period. d. appears on the income statement as Other Expenses and Losses.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
16 - 22 Test Bank for Accounting Principles, Tenth Edition 105.
The contra-account, Market Adjustment, is also called a(n) a. offset account. b. adjustment account. c. valuation account. d. opposite account.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
106.
Reporting investments at fair value is a. applicable to stock securities only. b. applicable to debt securities only. c. applicable to both debt and stock securities. d. a conservative approach because only losses are recognized.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
107.
Randy Corporation's trading portfolio at the end of the year is as follows: Security Common Stock A Common Stock B
Cost $10,000 8,000 $18,000
Fair Value $12,000 5,000 $17,000
At the end of the year, Randy Corporation should a. set up a Market Adjustment account for Stock B. b. set up a Market Adjustment account for the portfolio. c. recognize an Unrealized Gain or Loss—Income for $3,000. d. report a loss on the income statement for $3,000 under "Other expenses and losses." Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
Randy Corporation's trading portfolio at the end of the year is as follows: Security Common Stock A Common Stock B
Cost $10,000 9,000 $19,000
Fair Value $12,000 5,000 $17,000
Randy subsequently sells Stock B for $10,000. What entry is made to record the sale? a. Cash ................................................................................... 10,000 Stock Investments ...................................................... 10,000 b. Cash ................................................................................... 10,000 Market Adjustment ..................................................... 1,000 Stock Investments ...................................................... 9,000 c. Cash ................................................................................... 10,000 Stock Investments ...................................................... 9,000 Gain on Sale of Stock Investments ............................. 1,000 d. Cash ................................................................................... 10,000 Stock Investments ...................................................... 5,000 Gain on Sale of Stock Investments ............................. 5,000 Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Investments 109.
16 - 23
Which of the following would not be reported under "Other Revenues and Gains" on the income statement? a. Unrealized gain on available-for-sale securities b. Dividend revenue c. Interest revenue d. Gain on sale of short-term debt investments
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
110.
The balance in the Unrealized Loss—Equity account will a. appear on the balance sheet as a contra asset. b. appear on the income statement under Other Expenses and Losses. c. appear as a deduction in the stockholders' equity section. d. not be shown on the financial statements until the securities are sold.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
111.
If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account. c. will show a credit to a contra-asset account that appears in the stockholders' equity section of the balance sheet. d. will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.
Ans: d, SO: 5, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
The balance sheet presentation of an unrealized loss on an available-for-sale security is similar to the statement presentation of a. treasury stock. b. discount on bonds payable. c. allowance for doubtful accounts. d. prepaid expenses.
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Fair Value Atrium Corporation $ 46,400 $ 50,000 Barnes Inc. 60,000 57,000 Cantor Corporation 80,000 76,000 $186,400 $183,000 The unrealized loss to be recognized under the fair value method is a. $3,000. b. $6,000. c. $3,400. d. $4,000.
Ans: c, SO: 5, Bloom: K, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 24 Test Bank for Accounting Principles, Tenth Edition 114.
At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Fair Value Atrium Corporation $ 46,400 $ 50,000 Barnes Inc. 60,000 55,800 Cantor Corporation 80,000 76,000 $186,400 $181,800 In the following year, the Barnes common stock is sold for cash proceeds of $56,000. The gain or loss to be recognized on the sale is a a. gain of $1,200. b. loss of $4,000. c. gain of $200. d. loss of $4,200.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
115.
At the end of the first year of operations, the total cost of the trading securities portfolio is $244,000. Total fair value is $250,000. The financial statements should show a. an addition to an asset of $6,000 and a realized gain of $6,000. b. an addition to an asset of $6,000 and an unrealized gain of $6,000 in the stockholders’ equity section. c. an addition to an asset of $6,000 in the current assets section and an unrealized gain of $6,000 in “Other revenues and gains.” d. an addition to an asset of $6,000 in the current assets section and a realized gain of $6,000 in “Other revenues and gains.”
Ans: c, SO: 5, Bloom: K, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
Nadia Corp. has common stock of $5,500,000, retained earnings of $3,000,000, unrealized gains on trading securities of $100,000 and unrealized losses on available-forsale securities of $200,000. What is the total amount of its stockholders’ equity? a. $8,300,000 b. $8,500,000 c. $8,400,000 d. $8,600,000
Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
117.
Cost and fair value data for the trading securities of Carson Company at December 31, 2012, are $115,000 and $85,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a. Dec. 31 b. Dec. 31 c. Dec. 31 d. Dec. 31
Unrealized Loss⎯Income ................... Trading Securities .........................
30,000
Unrealized Gain⎯Income .................... Trading Securities ..........................
30,000
Unrealized Loss⎯Income .................... Market Adjustment⎯Trading..........
30,000
Market Adjustment -Trading ................. Unrealized Gain-Income ................
30,000
FOR INSTRUCTOR USE ONLY
30,000 30,000 30,000 30,000
Investments MC 117.
16 - 25
(cont.)
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
118.
At December 31, 2012, the trading securities for Settle, Inc. are as follows: Security X Y Z
Cost $90,000 150,000 32,000
Fair Value 12/31/12 $93,000 141,000 29,000
Settle should report the following amount related to the securities in its 2012 income statement: a. $3,000 gain b. $9,000 realized loss. c. $9,000 unrealized loss. d. $12,000 unrealized loss. Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
At December 31, 2012, Gammon Inc. has these data on its security investments: Security Trading Available-for-sale
Cost $ 140,000 137,000
Fair Value 12/31/12 $192,000 125,000
If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value? a.
b.
c.
d.
Securities ....................................................... Unrealized Gain⎯Income .......................
40,000
Unrealized Loss⎯Income ............................... Securities ........................................................ Unrealized Gain⎯Income .......................
12,000 40,000
Market Adjustment⎯Trading........................... Unrealized Gain⎯Income ....................... Unrealized Gain or Loss⎯Equity .................... Market Adjustment⎯Available-for-Sale ...
52,000
Unrealized Gain⎯Income ............................... Market Adjustment⎯Trading ................... Market Adjustment⎯Available-for-Sale............ Unrealized Gain or Loss⎯Equity..............
52,000
40,000
52,000
52,000 12,000 12,000
52,000 12,000 12,000
Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 26 Test Bank for Accounting Principles, Tenth Edition 120.
All of the following statements about short-term investments are true except: a. Short-term investments are also called marketable securities b. Trading securities are always classified as short-term investments. c. Short-term investments are listed below accounts receivable in the current asset section of the balance sheet. d. Short-term assets must be readily marketable.
Ans: c, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
Available-for-sale securities are classified as a. short-term investments only. b. long-term investments only. c. either short-term or long-term investments. d. current assets only.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
Which one of the following would not be classified as a short-term investment? a. Marketable stock securities b. Equity method investments c. Marketable debt securities d. Short-term paper
Ans: b, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
123.
Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
124.
Which of the following would not be classified as a short-term investment? a. Short-term commercial paper b. Idle cash in a bank checking account c. Marketable stock securities d. Marketable debt securities
Ans: b, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or stock securities? a. The company may have excess cash. b. The company may generate a significant portion of its earnings from investment income. c. The company may invest for the strategic reason of establishing a presence in a related industry. d. The company may invest for speculative reasons to increase the value in pension funds.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Investments 126.
16 - 27
When bonds are sold, the gain or loss on sale is the difference between the a. sales price and the cost of the bonds. b. net proceeds and the cost of the bonds. c. sales price and the market value of the bonds. d. net proceeds and the market value of the bonds.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
127.
Debt investments are recorded at the a. face value of the bonds purchased. b. face value of the bonds purchased plus interest. c. price paid for the bonds plus interest. d. price paid for the bonds plus brokerage fees.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
128.
Under the equity method, the investor records dividends received by crediting a. Dividend Revenue. b. Investment Income. c. Revenue from Investment. d. Stock Investments.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
129.
A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using a. the cost method. b. the equity method. c. the significant method. d. consolidated financial statements.
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130.
The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment a. is composed of common stock and it is the investor's intent to vote the common stock. b. ensures a source of supply of raw materials for the investor. c. enables the investor to exercise significant influence over the investee. d. is obtained by an exchange of stock for stock.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
131.
On January 2, Dickson Corporation acquired 30% of the outstanding common stock of Crane Company for $550,000. For the year ended December 31, Crane reported net income of $90,000 and paid cash dividends of $30,000 on its common stock. At December 31, the carrying value of Dickson's investment in Crane under the equity method is a. $541,000. b. $550,000. c. $577,000. d. $568,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
16 - 28 Test Bank for Accounting Principles, Tenth Edition 132.
An unrealized loss on available-for-sale securities is a. reported under Other Expenses and Losses in the income statement. b. closed-out at the end of the accounting period. c. reported as a separate component of stockholders' equity. d. deducted from the cost of the investment.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
133.
Securities bought and held primarily for sale in the near term to generate income on shortterm price differences are a. trading securities. b. available-for-sale securities. c. never-sell securities. d. held-to-maturity securities.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
134.
Short-term investments are a. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is shorter. b. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is longer. c. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is longer. d. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is shorter.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
135.
Short-term investments are securities held by a company that are a. readily marketable. b. intended to be converted into cash within the next year. c. readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer. d. readily marketable and intended to be held until maturity.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
136.
Debt investments that are held to maturity are recorded at a. amortized cost. b. fair value. c. original cost. d. maturity value.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
137.
Equity investments are generally recorded and reported at a. amortized cost. b. fair value. c. original cost. d. maturity value.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Investments 138.
16 - 29
Which of the following investment classifications are the same for GAAP and IFRS? a. Available-for-sale b. Held-to-maturity c. Non-trading d. Trading.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
139.
Which of the following are accounted for at amortized cost? a. Held-for-collection investments b. Held-to-maturity investments c. Non-trading equity investments d. Both Held-for-collection and Held-to-maturity investments
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
140.
Unrealized gains and losses related to available-for-sale/non-trading equity investments are reported in other comprehensive income under a. GAAP only. b. IFRS only. c. Both GAAP and IFRS. d. Neither GAAP or IFRS.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48.
a d c c a b d a c d b d c b c b d
49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65.
b b a d a c a c b d b d d d d c b
66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.
a b c b a d d c b a c d b b a c a
83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.
c c c b b a d a c b d d b c c c b
100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.
d a d b b c c b c a c d a c b c a
117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133.
c c c c c b d b a b d d a c d c a
134. 135. 136. 137. 138. 139. 140.
b c a b d d c
FOR INSTRUCTOR USE ONLY
16 - 30 Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 141 On January 14, Balcom Corporation purchased 20, 11%, $1,000 Eiger Company bonds for $22,000, plus brokerage fees of $400. On November 30, the company sold 10 of the Eiger Company bonds for $11,900, less $300 brokerage fees. Prepare journal entries for the purchase and sale of the Eiger Company bonds. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 141
(5 min.)
Jan. 14 Debt Investments ................................................................... Cash .............................................................................
22,400
Nov. 30 Cash ($11,900 – $300) .......................................................... Debt Investments ($22,400 × 1/2) ................................. Gain on Sale of Debt Investments .................................
11,600
22,400 11,200 400
BE 142 On January 2, Worth Company purchased 40, 10%, $1,000 Bolton Company bonds for $41,000 cash, plus brokerage fees of $1,000. Interest is payable semiannually on July 1 and January 1. On July 1, the company received a semiannual interest payment on the Bolton Company bonds. Journalize the entries to record the purchase of the bonds and the receipt of the interest payment. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 142 Jan. 2 July 1
(4 min.)
Debt Investments ................................................................ Cash .............................................................................
42,000
Cash ($40,000 × 10% × 1/2) ............................................... Interest Revenue ...........................................................
2,000
42,000 2,000
BE 143 On April 25, Davis Company buys 4,200 shares of Carter common stock for $91,500, plus brokerage fees of $3,000. On October 31, Davis sells 600 shares of Carter stock for $17,000, less brokerage fees of $500. Prepare journal entries for the purchase and sale of the Carter common stock. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 143
(5 min.)
April 25 Stock Investments.................................................................. Cash .............................................................................
94,500
Oct. 31 Cash ($17,000 – $500) .......................................................... Stock Investments ($94,500 × 600/4,200) ..................... Gain on Sale of Stock Investments................................
16,500
FOR INSTRUCTOR USE ONLY
94,500 13,500 3,000
Investments
16 - 31
BE 144 On January 1, Klaus Corporation purchased a 30% equity in Layton Company for $390,000. At December 31, Layton declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Klaus Corporation. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 144
(5 min.)
Jan. 1 Stock Investments ................................................................. Cash .............................................................................
390,000
Dec. 31 Cash ($40,000 × .30) ............................................................. Stock Investments.........................................................
12,000
Stock Investments ($98,000 × .30) ........................................ Revenue from Stock Investments .................................
29,400
390,000
12,000 29,400
BE 145 Jenner Company had the following transactions pertaining to its short-term stock investments. Jan.
1
Purchased 600 shares of Pork Company stock for $8,000 cash plus brokerage fees of $420.
June
1
Received cash dividends of $0.60 per share on the Pork Company stock.
Sept. 15
Sold 300 shares of the Pork Company stock for $3,600 less brokerage fees of $200.
Instructions Journalize the transactions. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 145 Jan.
1
June 1
Sept. 15
(5 min.)
Stock Investments ............................................................. Cash .......................................................................
8,420
Cash (600 × $0.60) ........................................................... Dividend Revenue ...................................................
360
Cash ($3,600 – $200)........................................................ Loss on Sale of Stock Investments.................................... Stock Investments ................................................... [300 × ($7,350 ÷ 600)]
3,400 810
FOR INSTRUCTOR USE ONLY
8,420
360
4,210
16 - 32 Test Bank for Accounting Principles, Tenth Edition BE 146 On January 1, 2012, Otter Company purchased 5,000 shares of Ashton Company stock for $350,000. Otter’s investment represents 40 percent of the total outstanding shares of Ashton. During 2012, Ashton paid total dividends of $100,000 and reported net income of $300,000. What revenue does Otter report related to this investment and what is the amount to be reported as an investment in Ashton stock at December 31? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 146
(5 min.)
Revenue for 2012 ($300,000 x .40)
$120,000
Balance in Investment account Purchase price Less dividend receipt ($100,000 × .40) Plus investment revenue ($300,000 × .40) Ending balance Investment in Ashton
$350,000 – 40,000 +120,000 $430,000
BE 147 At January 1, 2012, the trading securities portfolio held by the Darren Corporation consisted of the following investments: 1. 2,000 shares of Temper common stock purchased for $42 per share. 2. 1,500 shares of Logan common stock purchased for $50 per share. At December 31, 2012, the fair values per share were Temper $38 and Logan $54. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2012. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 147 (a)
(b)
Security Temper Logan Totals Dec. 31
(6 min.) Cost $ 84,000 75,000 $159,000
Fair Value $ 76,000 81,000 $157,000
(2,000 × $38) (1,500 × $54)
Unrealized Loss—Income .......................................... Market Adjustment—Trading ............................
FOR INSTRUCTOR USE ONLY
2,000 2,000
Investments
16 - 33
BE 148 At December 31, 2012, the trading securities for Cantor Company are as follows: Security A B
Cost $15,000 34,000 $49,000
Fair Value $20,000 33,000 $53,000
Prepare the adjusting entry at December 31, 2012, to report the securities at fair value. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 148
(3 min.)
Market Adjustment—Trading ($53,000 – $49,000) ............................... Unrealized Gain—Income ...........................................................
4,000 4,000
BE 149 At January 1, 2012, Grand Corporation held one available-for-sale security: 1,500 shares of Nettle common stock purchased for $40 per share. At December 31, 2012, the fair value per share for Nettle was $42. Prepare the adjusting entry to report the portfolio at fair value at December 31, 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 149 Dec. 31
(3 min.)
Fair Adjustment—Available-for-Sale ................................ [1,500 × ($42 – $40)] = $6,000 Unrealized Gain or Loss—Equity ...............................
6,000 6,000
BE 150 Terra Foster Company has the following data at December 31, 2012 for its securities: Securities Available-for-sale Trading
Cost $35,000 46,000
Fair Value $39,000 41,000
Instructions Journalize the December 31 adjusting entries. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 150 Dec. 31
(5 min.)
Market Adjustment—Available-for-Sale ........................... Unrealized Gain or Loss—Equity ............................
4,000
Unrealized Loss—Income ................................................ Market Adjustment—Trading ...................................
5,000
FOR INSTRUCTOR USE ONLY
4,000
5,000
16 - 34 Test Bank for Accounting Principles, Tenth Edition
EXERCISES Ex. 151 Maxim Corporation had the following transactions pertaining to debt investments. Jan. 1
Purchased 80, 8%, $1,000 Woodrow Company bonds for $80,000, plus brokerage fees of $800.
July 1
Sold 20 Woodrow Company bonds for $22,000, less $300 brokerage fees.
Instructions Prepare journal entries for the purchase and sale of the Woodrow Company bonds. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 151 Jan. 1 July 1
(7 min.)
Debt Investments ................................................................... Cash .............................................................................
80,800
Cash ($22,000 – $300) .......................................................... Debt Investments ($80,800 × 1/4) ................................. Gain on Sale of Debt Investments .................................
21,700
80,800 20,200 1,500
Ex. 152 Grouse Company had the following transactions pertaining to debt securities held as a short-term investment. Jan. 1
Purchased 50, 8%, $1,000 Allen Company bonds for $50,000 cash plus brokerage fees of $800. Interest is payable semiannually on July 1 and January 1.
July 1
Received semiannual interest on Allen Company bonds.
Oct. 1
Sold 30 Allen Company bonds for $32,000 plus accrued interest less $500 brokerage fees.
Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31. Ans: N/A, SO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 152 (a) Jan. 1
(10–15 min.) Debt Investments .......................................................... Cash .....................................................................
50,800
Cash ($50,000 × 8% × 1/2) ........................................... Interest Revenue ..................................................
2,000
Cash ($32,000 + $600 – $500) ...................................... Debt Investments.................................................. Interest Revenue ($30,000 × 8% × 3/12) .............. Gain on Sale of Debt Investments ....................... ($31,500 – $30,480 = $1,020)
32,100
(b) Interest Receivable ...................................................................... Interest Revenue ($20,000 × 8% × ½) ...................................
800
July Oct.
1 1
FOR INSTRUCTOR USE ONLY
50,800 2,000 30,480 600 1,020
800
Investments
16 - 35
Ex. 153 Pincher Company purchased 50 Issac Company 12%, 10-year, $1,000 bonds on January 1, 2012, for $54,000. Pincher Company also had to pay $500 of broker's fees. The bonds pay interest semiannually. On January 1, 2013, after receipt of interest, Pincher Company sold 30 of the bonds for $31,000. Instructions Prepare the journal entries to record the transactions described above. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 153 Jan. 1, 2012
(10-14 min.) Debt Investments .......................................................... Cash ....................................................................
54,500
Cash ($50,000 12% 6/12) ....................................... Interest Revenue ..................................................
3,000
Dec. 31, 2012 Interest Receivable ....................................................... Interest Revenue ..................................................
3,000
Jan. 1, 2013
Cash ............................................................................. Interest Receivable...............................................
3,000
Cash ............................................................................. Loss On Sale of Debt Investments ................................ Debt Investments (30/50 54,500) ......................
31,000 1,700
July 1, 2012
Jan. 1, 2013
54,500
3,000
3,000
3,000
32,700
Ex. 154 The following transactions were made by Wilson Company. Assume all investments are shortterm and are readily marketable. June
2
Purchased 400 shares of Dogg Corporation common stock for $46 per share.
July
1
Purchased 200 Open Corporation bonds for $225,000.
30
Received a cash dividend of $2 per share from Dogg Corporation.
Sept. 15
Sold 120 shares of Dogg Corporation stock for $50 per share.
Dec. 31
Received semiannual interest check for $13,000 from Open Corporation.
31
Received a cash dividend of $3 per share from Dogg Corporation.
Instructions Journalize the transactions. Ans: N/A, SO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 36 Test Bank for Accounting Principles, Tenth Edition Solution 154 June
2
July
1
30
Sept. 15
Dec. 31
31
(12–17 min.)
Stock Investments ............................................................. Cash ........................................................................ (To record purchase of 400 shares of Dogg Corporation common stock)
18,400
Debt Investments............................................................... Cash ........................................................................ (To record purchase of 200 Open Corporation bonds)
225,000
Cash .................................................................................. Dividend Revenue ................................................... (To record receipt of cash dividend)
800
Cash .................................................................................. Stock Investments ................................................... Gain on Sale of Stock Investments .......................... (To record sale of Dogg Corporation stock)
6,000
Cash .................................................................................. Interest Revenue ..................................................... (To record receipt of interest on Open Corporation bonds)
13,000
Cash .................................................................................. Dividend Revenue ................................................... (To record receipt of cash dividend)
840
18,400
225,000
800
5,520 480
13,000
840
Ex. 155 On April 1, Sign Company buys 4,000 shares of Polk common stock for $60,000, plus brokerage fees of $1,500. On October 1, Sign sells 1,000 shares of Polk stock for $21,000, less brokerage fees of $500. Instructions Prepare journal entries for the purchase and sale of the Polk common stock. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 155 Apr. 1 Oct. 1
(7 min.)
Stock Investments.................................................................. Cash .............................................................................
61,500
Cash ($21,000 – $500) .......................................................... Stock Investments ($61,500 × 1/4) ................................ Gain on Sale of Stock Investments................................
20,500
FOR INSTRUCTOR USE ONLY
61,500 15,375 5,125
Investments
16 - 37
Ex. 156 Santos Company had the following transactions pertaining to short-term investments in equity securities. Jan.
1
Purchased 1,500 shares of Quinn Company stock for $9,250 cash plus brokerage fees of $300.
June
1
Received cash dividends of $.30 per share on Quinn Company stock.
Sept. 15
Sold 400 shares of Quinn Company stock for $2,500 less brokerage fees of $100.
Dec.
Received cash dividends of $.75 per share on Quinn Company stock.
1
Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 156
(10–15 min.)
(a) Jan.
Stock Investments ....................................................... Cash ...................................................................
9,550
Cash (1,500 × $.30)..................................................... Dividend Revenue ..............................................
450
Cash ($2,500 – $100) .................................................. Loss on Sale of Stock Investments .............................. Stock Investments .............................................. [400 × ($9,450 ÷ 1,500)]
2,400 147
Cash (1,100 × $.75)..................................................... Dividend Revenue ..............................................
825
1
June 1 Sept. 15
Dec.
1
9,550 450
2,547
825
(b) Dividend Revenue is reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement. Ex. 157 Stewart Corporation's balance sheet at December 31, 2011, showed the following: Short-term investments, at fair value
$46,500
Stewart Corporation's trading portfolio of stock investments consisted of the following at December 31, 2011: Stock Conn Common Stock Ares Preferred Stock Hall Common Stock
Number of Shares 200 400 300
Cost $28,000 6,000 9,000 $43,000
During 2012, the following transactions took place: Feb. 5 Mar. 30 Sept. 9
Sold 100 shares of Conn common stock for $18,000. Purchased 25 shares of Hall common stock for $1,000. Purchased 50 shares of Hall common stock for $3,000. FOR INSTRUCTOR USE ONLY
16 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 157
(Cont.)
At year end on December 31, 2012, the fair values per share were: Fair Value Per Share $158.00 $14.00 $24.00
Conn Common Stock Ares Preferred Stock Hall Common Stock
Instructions (a) Prepare the journal entries to record the 2012 stock transactions. (b) On December 31, 2012, prepare any adjusting entry that might be necessary relative to the trading portfolio. (c) Show how the stock investments will appear on Stewart Corporation's balance sheet at December 31, 2012. Ans: N/A, SO: 3, 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 157
(15–20 min.)
(a)
Cash........................................................................... Stock Investments (100 ÷ 200 × $28,000) .......... Gain on Sale of Stock Investments .................... (To record sale of 100 shares of Conn common stock)
18,000
Stock Investments ...................................................... Cash .................................................................. (To record purchase of 25 shares of Hall common stock)
1,000
Stock Investments ...................................................... Cash .................................................................. (To record purchase of 50 shares of Hall common stock)
3,000
Feb.
5
Mar. 30
Sept. 9
(b)
Stock Conn Common Stock Ares Preferred Stock Hall Common Stock
Number of Shares 100 400 375
Cost $14,000 6,000 11,950 $31,950
Unrealized Loss—Income [($31,950 – $26,600) + $3,500*] ......... Market Adjustment—Trading...............................................
14,000 4,000
1,000
3,000
Fair Value $12,000 5,600 9,000 $26,600 8,850 8,850
*($46,500 fair value – $43,000 cost) (c)
Short-term investments, at fair value
FOR INSTRUCTOR USE ONLY
$26,600
Investments
16 - 39
Ex. 158 On January 5, 2012, Rouse Company purchased the following stock securities as a long-term investment: 300 shares Haggle Corporation common stock for $4,200. 500 shares Wax Corporation common stock for $10,000. 800 shares Karl Corporation common stock for $22,800. Assume that Rouse Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2012, Rouse Company received the following cash dividends: Haggle Corporation ..................................... Wax Corporation ......................................... Karl Corporation ..........................................
$2.00 per share $1.00 per share $1.50 per share
On November 15, 2012, Rouse Company sold 200 shares of Karl Corporation common stock for $7,500. On December 31, 2012, the fair value of the securities held by Rouse Company is as follows:
Haggle Corporation common stock Wax Corporation common stock Karl Corporation common stock
Per Share $10 16 28
Instructions Prepare the appropriate journal entries that Rouse Company should make on the following dates: January 5, 2012 June 30, 2012 November 15, 2012 December 31, 2012 Ans: N/A, SO: 3, 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 158
(20–25 min.)
January 5, 2012 Stock Investments ....................................................................... 37,000 Cash ................................................................................... (To record purchase of stock securities as a long-term investment) June 30, 2012 Cash............................................................................................ Dividend Revenue .............................................................. (To record cash dividends received) *300 × $2 = $600; 500 × $1 = $500; and 800 × $1.50 = $1,200.
FOR INSTRUCTOR USE ONLY
37,000
2,300* 2,300
16 - 40 Test Bank for Accounting Principles, Tenth Edition Solution 158
(Cont.)
November 15, 2012 Cash ............................................................................................ Stock Investments............................................................... Gain on Sale of Stock Investments ..................................... (To record sale of 200 shares of Karl Corporation common stock) December 31, 2012 Unrealized Loss—Equity ............................................................. Market Adjustment—Available-for-Sale ............................... (To value long-term investments at fair value)
7,500 5,700 1,800
3,500 3,500
Investment Portfolio Security Haggle Corporation Wax Corporation Karl Corporation Total
Shares 300 500 600
Cost $ 4,200 10,000 17,100 $31,300
Fair Value $ 3,000 8,000 16,800 $27,800
Ex. 159 Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a longterm investment for $900,000. During the year, Paxton Corporation reported net income of $300,000 and paid dividends of $100,000. Instructions (a) Assuming that the 35,000 shares represent a 10% interest in Paxton Corporation: 1. Prepare the journal entry to record the investment in Paxton stock. 2. Prepare any entries that Rosco Company should make in accounting for its investment in Paxton stock during the year. 3. What is the balance of the Stock Investments account on Rosco Company's books at the end of the year? (b)
Repeat requirement (a) above except assume that the 35,000 shares represent a 20% interest in Paxton Corporation.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 159 (a)
(16–21 min.)
Cost Method 1. Stock Investments.................................................................. Cash ............................................................................. (To record purchase of 35,000 shares of Paxton Corporation stock) 2. Cash ...................................................................................... Dividend Revenue ......................................................... [(To record dividends received); $100,000 × 10% = $10,000]
900,000 900,000
10,000
3. The Stock Investments account balance at the end of the year is $900,000. FOR INSTRUCTOR USE ONLY
10,000
Investments Solution 159 (b)
16 - 41
(Cont.)
Equity Method 1. Stock Investments ................................................................. Cash ............................................................................. (To record purchase of 35,000 shares of Paxton’s Corporation stock)
900,000 900,000
2. Stock Investments ................................................................. Revenue from Stock Investments ................................. (To record 20% equity in Paxton's net income) $300,000 × 20% = $60,000
60,000
Cash ...................................................................................... Stock Investments......................................................... [(To record dividends received); $100,000 × 20% = $20,000]
20,000
60,000
20,000
3. The Stock Investments account balance at the end of the year is $940,000 ($900,000 + $60,000 – $20,000). Ex. 160 On January 1, Mclaren Corporation purchased a 40% equity in Sigman Company for $180,000. At December 31, Sigman declared and paid a $50,000 cash dividend and reported net income of $80,000. Instructions Prepare the necessary journal entries for Mclaren Corporation. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160 Jan. 1
(7–9 min.)
Stock Investments ................................................................. Cash .............................................................................
180,000
Dec. 31 Cash ($50,000 × .40) ............................................................. Stock Investments.........................................................
20,000
Stock Investments ($80,000 × .40) ........................................ Revenue from Stock Investments .................................
32,000
180,000
20,000 32,000
Ex. 161 Information pertaining to long-term stock investments in 2012 by Bell Corporation follows: Acquired 18% of the 250,000 shares of common stock of Kansas Company at a total cost of $8 per share on January 1, 2012. On July 1, Kansas Company declared and paid a cash dividend of $2 per share. On December 31, Kansas's reported net income was $654,000 for the year. Obtained significant influence over Toto Company by buying 30% of Toto's 100,000 outstanding shares of common stock at a total cost of $22 per share on January 1, 2012. On June 15, Toto Company declared and paid a cash dividend of $1.50 per share. On December 31, Toto's reported net income was $280,000. FOR INSTRUCTOR USE ONLY
16 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 161
(Cont.)
Instructions Prepare all necessary journal entries for 2012 for Bell Corporation. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 161 Jan.
Jan.
1
1
June 15
July
1
Dec. 31
(15–20 min.)
Stock Investments............................................................... Cash........................................................................... (250,000 × 18% × $8 = $360,000)
360,000
Stock Investments............................................................... Cash........................................................................... (30% × 100,000 × $22 = $660,000)
660,000
Cash (30,000 × $1.50) ........................................................ Stock Investments ......................................................
45,000
Cash (45,000 × $2) ............................................................. Dividend Revenue ......................................................
90,000
Stock Investments............................................................... Revenue from Stock Investments ............................... ($280,000 × 30% = $84,000)
84,000
360,000
660,000
45,000
90,000
84,000
Ex. 162 On February 1, Marcus Company purchased 1,000 shares (2% ownership) of Win Company common stock for $30 per share plus brokerage fees of $400. On March 20, Marcus Company sold 200 shares of Win stock for $5,800, less a $50 brokerage fee. Marcus received a dividend of $1.00 per share on April 25. On June 15, Marcus sold 300 shares of Win stock for $9,800 less a $100 brokerage fee. Instructions Prepare the journal entries to record the transactions described above. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 162 (10–13 min) February 1 Stock Investments ....................................................... Cash [(1,000 $30) + $400] ...................................
30,400
March 20 Cash ($5,800 – $50) ..................................................... Loss on Sale of Stock Investments ............................... Stock Investments ($30,400 200/1,000) ...............
5,750 330
April 25 Cash (800 $1.00) ....................................................... Dividend Revenue .................................................. FOR INSTRUCTOR USE ONLY
30,400
6,080 800 800
Investments Solution 162
16 - 43
(Cont.)
June 15 Cash ($9,800 – $100) ................................................... Stock Investments ($30,400 300/1,000) ............... Gain on Sale of Stock Investments .........................
9,700 9,120 580
Ex. 163 On January 1 Jarret Corporation purchased a 35% equity in Dorman Corporation for $220,000. At December 31 Dorman declared and paid a $60,000 cash dividend and reported net income of $200,000. Instructions (a) Journalize the transactions. (b) Determine the amount to be reported as an investment in Dorman stock at December 31. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 163 (8–10 min.) (a)
Jan.
1
Dec. 31 31
(b)
Stock Investments ............................... Cash ...............................................
220,000
Cash ($60,000 35%)......................... Stock Investments ..........................
21,000
Stock Investments ............................... Revenue from Stock Investments ($200,000 35%) ...........................
70,000
Investment in Dorman, January 1 Less: Dividend received Plus: Share of reported income Investment in Dorman, December 31
220,000 21,000
70,000 $220,000 (21,000) 70,000 $269,000
Ex. 164 Presented below are two independent situations. 1.
2.
Garrett Cosmetics acquired 10% of the 200,000 shares of common stock of Clyde Fashion at a total cost of $11 per share on March 18, 2012. On June 30, Clyde declared and paid a $60,000 dividend. On December 31, Clyde reported net income of $110,000 for the year. At December 31, the market price of Clyde Fashion was $15 per share. The stock is classified as available-for-sale. Upton, Inc., obtained significant influence over Focus Corporation by buying 25% of Focus 40,000 outstanding shares of common stock at a total cost of $7 per share on January 1, 2012. On June 15, Focus declared and paid a cash dividend of $30,000. On December 31, Focus reported a net income of $80,000 for the year.
Instructions Prepare all the necessary journal entries for 2012 for (a)Garrett Cosmetics and (b) Upton, Inc. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
16 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 164 (10–14 min.) (a)
2012 Mar. 18 June 30 Dec. 31
(b)
Jan. 1 June 15 Dec. 31
Stock Investments .................................. Cash (200,000 10% $11) ...........
220,000
Cash ........................................................ Dividend Revenue ($60,000 10%)..
6,000
Market Adjustment—Available-for-Sale .... Unrealized Gain—Equity. ($300,000 – $220,000) ........................
80,000
Stock Investments ................................... Cash (40,000 25% $7) .................
70,000
Cash ......................................................... Stock Investments ($30,000 25%)....
7,500
Stock Investments ..................................... Revenue from Stock Investments ($80,000 25%).............................
20,000
220,000 6,000
80,000
70,000 7,500
20,000
Ex. 165 At December 31, 2012, the available-for-sale securities for Allison, Inc. are as follows. Security X Y Z
Cost $27,500 12,500 23,000 $63,000
Fair Value $24,000 13,000 18,000 $55,000
Instructions (a) Prepare the adjusting entry at December 31, 2012, to report the securities at fair value. (b) Show the balance sheet and income statement presentation at December 31, 2012, after adjustment to fair value. The securities are considered to be a long-term investment. Ans: N/A, SO: 5, 6, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 165 (5-8 min) (a)
(b)
Dec. 31
Unrealized Gain or Loss—Equity ....................... Market Adjustment—Availablefor-Sale .............................................
8,000 8,000
Balance Sheet Investments Investments in stock of less than 20% owned companies, at fair value ....................................................
$55,000
Stockholders’ equity Less: Unrealized loss on available-for-sale securities...........................................................................
$ (8,000)
FOR INSTRUCTOR USE ONLY
Investments
16 - 45
Ex. 166 At December 31, 2012, the trading securities for Franken Company are as follows: Security X Y
Cost $25,000 46,000 $71,000
Fair Value $26,000 38,000 $64,000
Instructions Prepare the adjusting entry at December 31, 2012, to report the securities at fair value. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 166
(3 min.)
Unrealized Loss—Income .................................................................... Market Adjustment—Trading ($71,000 – $64,000) ......................
7,000 7,000
Ex. 167 Plotner Corporation has the following trading portfolio of stock investments as of December 31, 2012. Security A B C
Cost $19,000 22,000 34,000 $75,000
Fair Value $15,000 27,000 29,000 $71,000
On January 22, 2013, Plotner Corporation sold security C for $32,000. Instructions (a) Prepare the adjusting entry for Plotner Corporation on December 31, 2012, to report the portfolio at fair value. (b)
Indicate the balance sheet and income statement presentation of the fair value data for Plotner Corporation at December 31, 2012.
(c)
Prepare the journal entry for the 2013 sale.
Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 167
(12–17 min.)
(a)
2012 Unrealized Loss—Income............................................ Market Adjustment—Trading ..............................
Dec. 31
4,000 4,000
(b) On the balance sheet, the short-term investments are reported in the current assets section as follows: Current Assets Short-term Investments, at fair value $71,000 The unrealized loss account is reported under Other Expenses and Losses in the income statement. FOR INSTRUCTOR USE ONLY
16 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 167
(Cont.)
(c)
2013 Cash ............................................................................ Loss on Sale of Stock Investments .............................. Stock Investments ...............................................
Jan. 22
32,000 2,000 34,000
Ex. 168 The following information is available for Martin Corporation's available-for-sale securities at December 31, 2012. Security X Y
Cost $34,000 22,000 $56,000
Fair Value $31,000 32,000 $63,000
Instructions Prepare the adjusting entry to record the securities at fair value at December 31, 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 168
(3 min.)
Market Adjustment—Available-for-Sale ................................................ Unrealized Gain or Loss—Equity ..............................................
7,000 7,000
Ex. 169 At January 1, 2012, the available-for-sale securities portfolio held by Hyde Corporation consisted of the following investments: 1. 2,500 shares of Park common stock purchased for $42 per share. 2. 1,500 shares of Grace common stock purchased for $60 per share. At December 31, 2012, the market values per share were Park $36 and Grace $68. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2012. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2012. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 169 (a)
(b)
Security Park Grace Totals Dec. 31
(8–10 min.) Cost $105,000 90,000 $195,000
Fair Value $ 90,000 102,000 $192,000
(2,500 × $36) (1,500 × $68)
Unrealized Loss—Equity ............................................ Market Adjustment—Available-for-Sale ...........
FOR INSTRUCTOR USE ONLY
3,000 3,000
Investments
16 - 47
Ex. 170 Wyndom Company has the following data at December 31, 2012 for its securities. Securities Trading Available-for-sale
Cost $90,000 74,000
Fair Value $94,000 69,000
Instructions (a) Prepare the adjusting entries to report the securities at fair value. (b) Indicate the statement presentation of the related unrealized gain (loss) accounts for each class of securities. Ans: N/A, SO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 170 a)
(b)
(7–9 min.)
Market Adjustment—Trading ....................................................... Unrealized Gain—Income ...................................................
4,000
Unrealized Gain or Loss—Equity ................................................. Market Adjustment—Available-for-Sale ..............................
5,000
4,000 5,000
Unrealized Gain—Income: Income Statement under other revenues and gains Unrealized Gain or Loss—Equity: Balance Sheet as part of stockholders’ equity
COMPLETION STATEMENTS 171. Debt investments are investments in government and _____________ bonds. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
172. Cost of debt investments includes the price paid plus ______________ Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
173. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has _______________ influence over the investee and therefore, the appropriate method of accounting for this type of investment is the _______________ method. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
174. Under the cost method, dividends received from an investee company are credited to the _______________ account, whereas under the equity method, dividends received from an investee company are credited to the _______________ account. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
175. At the beginning of the year, Grant Corporation acquired 15% of Ernst Company common stock for $300,000. Ernst Company reported net income for the year of $75,000 and paid $25,000 cash dividends during the year. The balance of the Stock Investments account on the books of Grant Corporation at the end of the year should be $___________. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
16 - 48 Test Bank for Accounting Principles, Tenth Edition 176. A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
177. _______________ securities are bought and held primarily for sale in the near future. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178. Market Adjustment is a valuation _______________ account which is _______________ to (from) the cost of the investments. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an ______________ which is reported on the _________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
180. An unrealized loss on trading securities is reported under Other ____________________ on the income statement. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
181. An unrealized gain or loss on available-for-sale securities is reported as a separate component of _________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182. Short-term investments are securities that are _____________ and ______________ to be converted into cash within the next year. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 171. corporation 172. brokerage fees 173. significant, equity 174. Dividend Revenue, Stock Investments 175. 300,000 176. parent, consolidated
177. 178. 179. 180. 181. 182.
Trading allowance, added (subtracted) unrealized loss, income statement Expenses and Losses stockholders’ equity readily marketable, intended
FOR INSTRUCTOR USE ONLY
Investments
16 - 49
MATCHING 183.
Match the items below by entering the appropriate code letter in the space provided. A. Available-for-sale securities B. Subsidiary company C. Equity method D. Unrealized Gain or Loss—Equity E. Fair value
F. Consolidated financial statements G. Controlling interest H. Market Adjustment I. Parent company J. Long-term investments
____ 1. Valuation allowance account. ____ 2. Amount for which a security could be sold. ____ 3. Ownership of more than 50% of another company's common stock. ____ 4. Securities that may be sold in the future. ____ 5. Investments that are not readily marketable and not intended to be converted into cash within the next year. ____ 6. Financial statements that present the total assets and liabilities controlled by the parent and the total revenues and expenses of the subsidiary companies. ____ 7. The Stock Investments account is adjusted for net income and dividends received. ____ 8. A company that owns more than 50% of the common stock of another entity. ____ 9. Entity whose stock is owned by the parent company. ____ 10. An account that is reported in the stockholders' equity section. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
H E G A J
6. 7. 8. 9. 10.
F C I B D
FOR INSTRUCTOR USE ONLY
16 - 50 Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 184 Distinguish between the cost and equity methods of accounting for investments in stocks. Ans: N/A, SO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 184 Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as a separate component of stockholders’ equity (available-for-sale security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor's share of the earnings or losses of the investee. The investor's share of the investee's earnings is recognized in the earnings of the investor. Dividends received from the investee are reductions in the carrying amount of the investment. S-A E 185 A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why all the individual items appearing on the separate balance sheets of each of the affiliated companies cannot be added together to arrive at a consolidated total for each item. Ans: N/A, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 185 A consolidated balance sheet does not include transactions that occurred between the affiliated companies (intercompany transactions). The inclusion of intercompany transactions would cause the assets, liabilities, and stockholders' equity accounts to all be overstated in the consolidated balance sheet. Thus, the individual items appearing on the separate balance sheets cannot simply be added together. S-A E 186 What purposes are served by reporting Unrealized Gains (Losses)—Equity in the stockholders’ equity section? Ans: N/A, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 186 Reporting Unrealized Gains (Losses)—Equity in the stockholders’ equity section serves two important purposes: (1) it reduces the volatility of net income due to fluctuations in fair value, and (2) it still informs the financial statement user of the gain or loss that would occur if the securities were sold at fair value. S-A E 187 The Market Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of. Ans: N/A, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Investments
16 - 51
Solution 187 The Market Adjustment account is a valuation allowance account for short-term and long-term investments. The Market Adjustment account is increased when the difference between the investments’ fair value and cost increases. When specific securities are sold, the Market Adjustment account is ignored because the account relates to the entire portfolio and not the specific securities. S-A E 188 When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 188 The unrealized loss would be reported in the Other Expenses and Losses section of the Income Statement and the assets would be decreased by a credit balance in the Market Adjustment— Trading Valuation account. S-A E 189 (Ethics) Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Servitronics, a company specializing in automatic vending equipment. The company decided not to sell its Servitronics stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished, so that less attention will be directed to it. (Presently, Greyhound has no long-term investment in stock at all.) Required: 1. Is it ethical for Greyhound to attempt to take over another company? Explain. 2. Is it ethical for Greyhound to leave its investment in the short-term investment category? Explain. Ans: N/A, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 189 1. Yes, Greyhound may attempt to "take over" or purchase another company. The means that it uses to accomplish its goal must be ethical, and certainly building up a portfolio of the stock in question is ethical. Unethical takeovers are those in which a company is purchased for its assets and "harvested," leaving employees without jobs, and possibly irreparably damaging a community. 2. It is not ethical for the company to leave the stock in the short-term category if it no longer meets the criterion for a short-term investment. It would depend upon whether the company was serious in its intention to purchase a controlling interest in Servitronics. Since there is no evidence to the contrary, it appears that Greyhound's investment should be classified as longterm. FOR INSTRUCTOR USE ONLY
16 - 52 Test Bank for Accounting Principles, Tenth Edition S-A E 190 (Communication) Sue Garner is the daughter of Fred Garner, the founder and president of Big Sky Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the stock price of several of the firm's available-for-sale securities are up, and that her father said that the company had made over $10,000 because of this jump in stock prices. She asks to see how the increase is recorded. It is a very busy time in the accounting department, and so her question is deferred. Required: Prepare a brief note to answer Sue's question. Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 190 This communication can be informal, but it should contain the key elements of the answer.
Dear Sue, Yesterday, you asked to see how we recorded the $10,000 that the company had "earned" because of the jump in the price of some of the stock we hold. Since we were finishing month-end closing, we couldn't answer your question right away. The basic answer to your question is that we don't record those earnings. The change in stock price is kind of like having the value of your house or car change. You don't get any money unless you sell the house or the car. It's the same with those investments. We record changes in the value only when we sell the stock. We would record the difference between the amount we paid originally and the amount we received on the sale as a gain or a loss. Again, I'm sorry we couldn't ask you to stay yesterday. Stop by again sometime (any time except month end!) (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 17 STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 6 6 6 6 6 2 2
C C K C K K K K
sg
2 3 5 6
K C K K
112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. a 124. a 125. a 126. a 127. 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136.
3,6 3,6 3,6 3,6 3,6 3,6 3,6 4 4 4 4 4 5 5 5 5 6 6 6 6 6 6 6 6 6
C C C C C C C K C AP AN C C C C C AP C K AP AP AP AP AP AP
137. 6 138. 6 a 139. 6 a 140. 6 a 141. 6 a 142. 6 a 143. 6 a 144. 6 a 145. 6 sg 146. 2 sg 147. 2 st 148. 2 sg 149. 2 sg 150. 1 sg 151. 3 sg 152. 3,6 a,sg 153. 6 a,sg 154. 6 a.sg 155. 5 156. 5 157. 5 158. 5 159. 5 160. 5
AP C AP AP C AP AP AP AP K K K K C K AP AP AP K K K K K K
167. 168.
3 4
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 1 2
K K K K K C C K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 2 2
K K C C C C C C
17. 18. 19. 20. 21. 22. 23. 24.
2 3 3 3 3 3 4 4
C C C C C C K K
a
25. 26. a 27. a 28. a 29. a 30. sg 31. sg 32. a
33. 34. a,sg 35. a,sg 36. sg
Multiple Choice Questions 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61.
1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K C C C K K C K K K C K C C C C C K C K C C C K
62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K K K AP AP AP AP AP AP AP AP AP AP AP K K AP K C C C C C AP AP
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3,6 3,6
K C C K K C C C C C C C C AP C C K AP AP AP AP AP AP AP C
a a
Brief Exercises 161. 162. sg st a
2 3
C AP
163. 164.
3 3
AP AP
165. 166.
3 3
K K
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.
a
169. 170.
a
6 6
AP AP
17 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 171. 172. 173. 174. 175. 176.
2 2 2 2 3 3
C C C AP AP AP
177. 178. 179. 180. 181. 182.
3 3,4 3 3 3 3
C AP AP AP AP AP
183. 3 184. 3 185. 3,4 186. 3,4 187. 4 a 188. 5
AP AN AP AP AP AP
a
189. 190. a 191. a 192. a 193. a 194. a
6 6 6 6 6 6
AP AP AP AP AP AP
a a
195. 196.
6 6
AP AP
6 6 6
K AN K
a
209.
6
K
1
K
Item
Type
Completion Statements 197. 198. 199.
2 2 3
K K K
200. 201. 202.
3 3 3
K K K
203. 204. a 205.
3 4 6
K K K
a
206. 207. a 208. a
Matching Statements 210.
3
K
211.
6
K
Short-Answer Essay 212. 213. sg st a
2 1
K K
214. 215.
1 1
K K
216. 217.
1 1
K K
218.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
1. 2. 3. 4.
TF TF TF TF
5. 6. 7. 37.
TF TF TF MC
8. 9. 10. 11. 12. 13. 14. 15.
TF TF TF TF TF TF TF TF
16. 17. 31. 32. 33. 46. 47. 48.
TF TF TF TF TF MC MC MC
18. 19. 20. 21.
TF TF TF TF
22. 34. 70. 71.
TF TF MC MC
Item
Note: TF = True-False MC = Multiple Choice
Type
Item
Type
Item
Study Objective 1 38. MC 42. MC 46. 39. MC 43. MC 150. 40. MC 44. MC 213. 41. MC 45. MC 214. Study Objective 2 49. MC 57. MC 65. 50. MC 58. MC 66. 51. MC 59. MC 67. 52. MC 60. MC 68. 53. MC 61. MC 69. 54. MC 62. MC 146. 55. MC 63. MC 147. 56. MC 64. MC 148. Study Objective 3 72. MC 76. MC 80. 73. MC 77. MC 81. 74. MC 78. MC 82. 75. MC 79. MC 83. Continued on the next page.
Type
Item
Type
MC MC SA SA
215. 216. 217. 218.
SA SA SA SA
MC MC MC MC MC MC MC MC
149. 161. 171. 172. 173. 174. 197. 198.
MC BE Ex Ex Ex Ex C C
212.
SA
MC MC MC MC
84. 85. 86. 87.
MC MC MC MC
88. 89. 90. 91.
MC MC MC MC
BE = Brief Exercise Ex = Exercise FOR INSTRUCTOR USE ONLY
C = Completion
Statement of Cash Flows
17 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
92. 93. 94. 95. 96. 97. 98. 99.
MC MC MC MC MC MC MC MC
100. 101. 102. 103. 104. 105. 106. 107.
MC MC MC MC MC MC MC MC
23. 24.
TF TF
119. 120.
MC MC
25. 35.
TF TF
a
124. 125.
MC MC
a
26. TF 27. TF a 28. TF a 29. TF a 30. TF a 36. TF a 110. MC a 111. MC
a
a
a
MC MC MC MC MC MC MC MC
a a
a
112. 113. a 114. a 115. a 116. a 117. a 118. a 128.
Study Objective 3 (Cont.) MC 116. MC 165. BE MC 117. MC 166. BE MC 118. MC 167. BE MC 151. MC 175. Ex MC 152. MC 176. Ex MC 162. BE 177. Ex MC 163. BE 178. Ex MC 164. BE 179. Ex Study Objective 4 121. MC 123. MC 178. Ex 122. MC 168. BE 185. Ex Study Objective a5 a 126. MC a155. MC 157. MC a 127. MC 156. MC 158. MC a Study Objective 6 a 129. MC a137. MC a145. MC a 130. MC a138. MC a152. MC a 131. MC a139. MC a153. MC a 132. MC a140. MC a154. MC a 133. MC a141. MC a169. BE a 134. MC a142. MC a170. BE a 135. MC a143. MC a189. Ex a 136. MC a144. MC a190. Ex 108. 109. 110. 111. 112. 113. 114. 115.
Note: TF = True-False MC = Multiple Choice
BE = Brief Exercise Ex = Exercise
180. 181. 182. 183. 184. 185. 186. 199.
Ex Ex Ex Ex Ex Ex Ex C
200. 201. 202. 203. 210.
C C C C SA
186. 187.
Ex Ex
204.
C
159. 160.
MC MC
a
188.
Ex
191. 192. a 193. a 194. a 195. a 196. a 205. a 206.
Ex Ex Ex Ex Ex Ex C C
a
C C C C
a a
207. 208. a 209. a 211. a
C = Completion
CHAPTER STUDY OBJECTIVES 1. Indicate the usefulness of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period. 2. Distinguish among operating, investing, and financing activities. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items. 3. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. FOR INSTRUCTOR USE ONLY
17 - 4
Test Bank for Accounting Principles, Tenth Edition
4. Analyze the statement of cash flows. The statement of cash flows can be used for cashbased ratio analysis. Free cash flow provides information about a company’s cash-generating capabilities. It is calculated as cash from operations less capital expenditures and cash dividends. a
5. Explain how to use a worksheet to prepare the statement of cash flows using the indirect method. When there are numerous adjustments, a worksheet can be a helpful tool in preparing the statement of cash flows. Key guidelines for using a worksheet are (1) List accounts with debit balances separately from those with credit balances. (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits. (3) Do not enter reconciling items in any journal or account, but use them only to help prepare the statement of cash flows. The steps in preparing the worksheet are (1) Enter beginning and ending balances of balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the increase or decrease in cash in two places as a balancing amount.
a
6. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities.
TRUE-FALSE STATEMENTS 1.
The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
2.
For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
3.
A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
4.
A statement of cash flows indicates the sources and uses of cash during a period.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
5.
A statement of cash flows should help investors and creditors assess the entity’s ability to generate future income.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 6.
17 - 5
The information in a statement of cash flows helps investors and creditors assess the company’s ability to pay dividends and meet obligations.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
7.
Financial statement readers can determine future investing and financing transactions by examining a company’s statement of cash flows.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
8.
In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
9.
Noncash investing and financing activities must be reported in the body of a statement of cash flows.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
10.
The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
11.
The sale of land for cash would be classified as a cash inflow from an investing activity.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
12.
Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
13.
The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
14.
The payment of interest on bonds payable is classified as a cash outflow from operating activities.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
15.
Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
17.
All major financing and investing activities affect cash.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 6 18.
Test Bank for Accounting Principles, Tenth Edition Cash provided by operations is generally equal to operating income.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
19.
Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
20.
Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
21.
A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
22.
In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
23.
Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
24.
Free cash flow equals cash provided by operations less capital expenditures and cash dividends.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting a
25.
The use of a worksheet to prepare a statement of cash flows is optional.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
26.
During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $4,000; therefore, the cash paid for income taxes was $26,000.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
27.
In preparing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
28.
Using the direct method, major classes of investing and financing activities are listed in the operating activities section.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows a
30.
17 - 7
Operating expenses + an increase in prepaid expenses – a decrease in accrued expenses payable = cash payments for operating expenses.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
31.
The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
32.
Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
33.
The adjusted trial balance is the only item needed to prepare the Statement of Cash Flows.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
35.
The reconciling entry for depreciation expense in a worksheet is a credit to Accumulated Depreciation and a debit to Operating-Depreciation Expense.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
36.
Under the direct method, the formula for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T F F T F T
7. 8. 9. 10. 11. 12.
F T F F T F
13. 14. 15. 16. 17. 18.
F T F T F F
19. 20. 21. 22. 23. 24.
T F T F T T
Item a
25. a 26. a 27. a 28. a 29. a 30.
Ans.
Item
Ans.
T T T F F F
31. 32. 33. 34. a 35. a 36.
F T F F T F
FOR INSTRUCTOR USE ONLY
17 - 8
Test Bank for Accounting Principles, Tenth Edition
MULTIPLE CHOICE QUESTIONS 37.
The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The statement of cash flows a. must be prepared on a daily basis. b. summarizes the operating, financing, and investing activities of an entity. c. is another name for the income statement. d. is a special section of the income statement.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
Which one of the following items is not generally used in preparing a statement of cash flows? a. Adjusted trial balance b. Comparative balance sheets c. Current income statement d. Additional information
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
40.
The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships.
Ans: c, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
If a company reports a net loss, it a. may still have a net increase in cash. b. will not be able to pay cash dividends. c. will not be able to get a loan. d. will not be able to make capital expenditures.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
In addition to the three basic financial statements, which of the following is also a required financial statement? a. the "Cash Budget" b. the Statement of Cash Flows c. the Statement of Cash Inflows and Outflows d. the "Cash Reconciliation"
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 43.
17 - 9
The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
The statement of cash flows reports each of the following except a. cash receipts from operating activities. b. cash payments from investing activities. c. the net change in cash. d. cash sales.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
Each of the following are particularly interested in the statement of cash flows except a. creditors. b. employees. c. shareholders. d. government agencies.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
Lending money and collecting the loans are a. operating activities. b. investing activities. c. financing activities. d. Non-cash investing and financing activities.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
The cash effects of transactions that create revenues and expenses are a. financing activities. b. investing activities. c. operating activities. d. processing activities.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
48.
The acquisition of land by issuing common stock is a. a noncash transaction which is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a noncash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating.
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 10 Test Bank for Accounting Principles, Tenth Edition 50.
Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
Generally, the most important category on the statement of cash flows is cash flows from a. operating activities. b. investing activities. c. financing activities. d. significant noncash activities.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year.
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. operating activities. d. either financing or investing activities.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
Each of the following is an example of a significant noncash activity except a. conversion of bonds into common stock. b. exchanges of plant assets. c. issuance of debt to purchase assets. d. stock dividends.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 56.
17 - 11
If a company has both an inflow and outflow of cash related to property, plant, and equipment, the a. two cash effects can be netted and presented as one item in the investing activities section. b. cash inflow and cash outflow should be reported separately in the investing activities section. c. two cash effects can be netted and presented as one item in the financing activities section. d. cash inflow and cash outflow should be reported separately in the financing activities section.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Of the items below, the one that appears first on the statement of cash flows is a. noncash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of treasury stock d. Exercise of the call option on bonds payable
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
59.
Significant noncash transactions would not include a. conversion of bonds into common stock. b. asset acquisition through bond issuance. c. treasury stock acquisition. d. exchange of plant assets.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in a. the financing section. b. the "extraordinary" section. c. a separate schedule or note to the financial statements. d. the stockholders' equity section.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
61.
Indicate where the event paid income taxes would appear, if at all, on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 12 Test Bank for Accounting Principles, Tenth Edition 62.
Indicate where the event common stock issued for cash would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Indicate where the event purchased land for cash would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
Indicate where the event purchased land and a building with a mortgage would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
65.
Joan’s Vegetable Market had the following transactions during 2012: 1. Issued $60,000 of par value common stock for cash. 2. Repaid a 6 year note payable in the amount of $21,000. 3. Acquired land by issuing common stock of par value $50,000. 4. Declared and paid a cash dividend of $5,000. 5. Sold a long-term investment (cost $63,000) for cash of $6,000. 6. Acquired an investment in IBM stock for cash of $10,000. What is the net cash provided by financing activities? a. $34,000 b. $80,000 c. $39,000 d. $0
Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
66.
Joan’s Vegetable Market had the following transactions during 2012: 1. Issued $50,000 of par value common stock for cash. 2. Repaid a 6 year note payable in the amount of $22,000. 3. Acquired land by issuing common stock of par value $100,000. 4. Declared and paid a cash dividend of $2,000. 5. Sold a long-term investment (cost $63,000) for cash of $6,000. 6. Acquired an investment in IBM stock for cash of $12,000. What is the net cash provided by investing activities? a. $12,000 b. $32,000 c. ($6,000) d. $6,000
Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 67.
17 - 13
Miracle Company purchased treasury stock with a cost of $15,000 during 2012. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $866,000. Cash flows from financing activities for 2012 total a. $846,000 net cash inflow. b. $861,000 net cash inflow. c. $866,000 net cash outflow. d. $831,000 net cash inflow.
Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
Carrot Company issued common stock for proceeds of $381,000 during 2012. The company paid dividends of $90,000 and issued a long-term note payable for $95,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $18,000. The financing section of the statement of cash flows will report net cash inflows of a. $273,000. b. $489,000. c. $183,000. d. $363,000.
Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
In Garland Company, land decreased $140,000 because of a cash sale for $140,000, the equipment account increased $40,000 as a result of a cash purchase, and Bonds Payable increased $130,000 from issuance for cash at face value. The net cash provided by investing activities is a. $140,000. b. $230,000. c. $100,000. d. $110,000.
Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
Accounts receivable arising from sales to customers amounted to $85,000 and $75,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $285,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $285,000. b. $295,000. c. $445,000. d. $275,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
71.
Accounts receivable arising from sales to customers amounted to $45,000 and $50,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $160,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $160,000. b. $165,000. c. $205,000. d. $155,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 14 Test Bank for Accounting Principles, Tenth Edition 72.
Winston Company reported net income of $50,000 for the year. During the year, accounts receivable decreased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $40,000. b. $65,000. c. $49,000. d. $45,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
Blocker Company reported a net loss of $5,000 for the year ended December 31, 2012. During the year, accounts receivable increased $14,000, merchandise inventory decreased $10,000, accounts payable decreased by $20,000, and depreciation expense of $10,000 was recorded. During 2012, operating activities a. used net cash of $19,000. b. used net cash of $27,000. c. provided net cash of $27,000. d. provided net cash of $17,000.
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
The net income reported on the income statement for the current year was $225,000. Depreciation recorded on plant assets was $38,000. Accounts receivable and inventories increased by $2,000 and $8,000, respectively. Prepaid expenses and accounts payable decreased by $1,000 and $11,000 respectively. How much cash was provided by operating activities? a. $205,000 b. $243,000 c. $225,000 d. $259,000
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
75.
The net income reported on the income statement for the current year was $240,000. Depreciation was $50,000. Account receivable and inventories decreased by $10,000 and $30,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities? a. $301,000 b. $337,000 c. $321,000 d. $329,000
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
If a gain of $15,000 is incurred in selling (for cash) office equipment having a book value of $100,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $95,000. b. $115,000. c. $100,000. d. $15,000.
Ans: b, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 77.
17 - 15
If a loss of $20,000 is incurred in selling (for cash) office equipment having a book value of $80,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $60,000. b. $80,000. c. $100,000. d. $20,000.
Ans: a, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
Madison Company reported net income of $100,000 for the year ended December 31, 2012. During the year, inventories decreased by $12,000, accounts payable decreased by $18,000, depreciation expense was $20,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2012 using the indirect method was a. $154,000. b. $105,000. c. $112,000. d. $90,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
The third (final) step in preparing the statement of cash flows is to a. analyze changes in noncurrent asset and liability accounts. b. compare the net change in cash with the change in the cash account reported on the balance sheet. c. determine net cash provided by operating activities. d. list the noncash activities.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
Which one of the following items is not necessary in preparing a statement of cash flows? a. Determine the change in cash b. Determine the cash provided by operations c. Determine cash from financing and investing activities d. Determine the cash in all bank accounts
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
If accounts receivable have increased during the period, a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
82.
If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 16 Test Bank for Accounting Principles, Tenth Edition 83.
Which one of the following affects cash during a period? a. Recording depreciation expense b. Declaration of a cash dividend c. Write-off of an uncollectible account receivable d. Payment of an accounts payable
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
Dino Company reported net income of $72,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $67,000. b. $87,000. c. $71,000. d. $72,000.
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
Fare Company reported a net loss of $31,000 for the year ended December 31, 2012. During the year, accounts receivable decreased $15,000, merchandise inventory increased $24,000, accounts payable increased by $30,000, and depreciation expense of $15,000 was recorded. During 2012, operating activities a. used net cash of $5,000. b. used net cash of $23,000. c. provided net cash of $5,000. d. provided net cash of $23,000.
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
88.
In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses.
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 89.
17 - 17
Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
90.
In developing the cash flows from operating activities, most companies in the U. S. a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
Each of the following is added to net income in computing net cash provided by operating activities except a. amortization expense. b. an increase in accrued expenses payable. c. a gain on sale of equipment. d. a decrease in inventory.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
92.
Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
Which of the following would be added to net income using the indirect method? a. An increase in accounts receivable b. An increase in prepaid expenses c. Depreciation expense d. A decrease in accounts payable
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense b. An increase in Prepaid Insurance c. Amortization Expense d. An increase in Land
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
95.
In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 18 Test Bank for Accounting Principles, Tenth Edition 96.
Which of the following adjustments to convert net income to net cash provided by operating activities is correct? a. b. c. d.
Accounts Receivable Prepaid Expenses Inventory Taxes Payable
Add to Net Income increase increase decrease decrease
Deduct from Net Income decrease decrease increase increase
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? a. b. c. d.
Accounts Receivable Prepaid Expenses Inventory Accounts Payable
Add to Net Income decrease increase decrease increase
Deduct from Net Income increase decrease increase decrease
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Sale of Equipment b. Depreciation Expense c. Patent Amortization Expense d. Depletion Expense
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
99.
Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
A company had net income of $210,000. Depreciation expense is $26,000. During the year, Accounts Receivable and Inventory increased $15,000 and $40,000, respectively. Prepaid Expenses and Accounts Payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities? a. $176,000 b. $182,000 c. $256,000 d. $268,000
Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
101.
On the statement of cash flows using the indirect method, patent amortization expense will a. be added to net income in the operating section. b. be deducted from net income in the operating section. c. appear as an inflow of cash in the investing section. d. appear as an outflow of cash in the investing section.
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 102.
17 - 19
The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
Land acquired from the issuance of common stock is reported a. as a financing activity. b. as an investing activity. c. as an operating activity. d. in a separate schedule at the bottom of the statement.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
In Numar Company, Treasury Stock increased $25,000 from a cash purchase, and Retained Earnings increased $75,000 as a result of net income of $120,000 and cash dividends paid of $45,000. Net cash used by financing activities is: a. $25,000. b. $45,000. c. $120,000. d. $70,000.
Ans: d, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
105.
In Flagg Company, net income is $280,000. If accounts receivable increased $145,000 and accounts payable decreased $50,000, net cash provided by operating activities using the indirect method is: a. $85,000. b. $185,000. c. $375,000. d. $475,000.
Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
In Stretch Company, there was an increase in the land account during the year of $48,000. Analysis reveals that the change resulted form a cash sale of land at cost $110,000, and a cash purchase of land for $158,000. In the statement of cash flows, the change in the land account should be reported in the investment section: a. as a net purchase of land, $48,000. b. only as a purchase of land $158,000. c. as a purchase of land $158,000 and a sale of land $110,000. d. only as a sale of land $110,000.
Ans: c, SO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
The following data are available for Simpson Corporation. Net income $300,000 Depreciation expense 60,000 Dividends paid 90,000 Gain on sale of land 15,000 Decrease in accounts receivable 30,000 Decrease in accounts payable 45,000 FOR INSTRUCTOR USE ONLY
17 - 20 Test Bank for Accounting Principles, Tenth Edition MC. 107
(cont.)
Net cash provided by operating activities is: a. $240,000. b. $330,000. c. $360,000. d. $420,000. Ans: b, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
108.
The following data are available for Nemo Corporation. Sale of land $250,000 Sale of equipment $125,000 Issuance of common stock 140,000 Purchase of equipment 60,000 Payment of cash dividends 120,000 Net cash provided by investing activities is: a. $315,000. b. $260,000. c. $335,000. d. $455,000.
Ans: a, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
109.
The following data are available for Quarter Company. Increase in accounts payable $120,000 Increase in bonds payable 400,000 Sale of investments 150,000 Issuance of common stock 180,000 Payment of cash dividends 90,000 Net cash provided by financing activities is: a. $280,000. b. $490,000. c. $460,000. d. $520,000.
Ans: b, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
110.
If $250,000 of bonds are issued during the year but $100,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $150,000. b. net decrease in cash of $150,000. c. increase in cash of $250,000 and a decrease in cash of $100,000. d. net gain on retirement of bonds of $150,000.
Ans: c, SO: 3, 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 111.
17 - 21
Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? 1. Declaration and payment of a cash dividend during the period. 2. Net income for the period. a. 1 b. 2 c. Neither 1 nor 2. d. Both 1 and 2.
Ans: a, SO: 3, 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
The statement of cash flows a. is prepared instead of an income statement under generally accepted accounting principles. b. is used to assess an entity's ability to pay dividends and meet obligations. c. is prepared from comparative income statements. d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.
Ans: b, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of a. the adjusted trial balance. b. the current period's balance sheet. c. a comparative balance sheet. d. a comparative income statement.
Ans: c, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
114.
To determine the net cash provided (used) by operating activities, it is necessary to analyze a. the current year's income statement. b. a comparative balance sheet. c. additional information. d. all of these.
Ans: d, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115.
Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense b. Change in accounts receivable c. Payment of cash dividends d. Change in prepaid expenses
Ans: c, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section.
Ans: c, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 22 Test Bank for Accounting Principles, Tenth Edition 117.
The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. d. how the retirement of debt was accomplished.
Ans: c, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
118.
Which of the following transactions would not be classified as a financing activity? a. Purchase of treasury stock b. Payment of dividends c. Issuance of bonds at a discount d. Purchase of a long-term investment in bonds
Ans: d, SO: 3, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
119.
A measure that describes the cash remaining from operations after adjustment for capital expenditures and dividends is a. adjusted cash from operations. b. cash provided by operations. c. free cash flow. d. net cash provided by operating activities.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
Free cash flow equals cash provided by a. operations less capital expenditures and cash dividends. b. operations less cash dividends. c. investing activities less capital expenditures and cash dividends. d. operations less capital expenditures.
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
Collins Pest Control Products has the following information available: Net Income Cash Provided by Operations Cash Sales Capital Expenditures Dividends Paid
$25,000 31,000 65,000 11,000 3,000
What is Collins’ free cash flow? a. $28,000 b. $20,000 c. $17,000 d. $11,000 Ans: c, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows 122.
17 - 23
During 2012, Korman Industries reported cash provided by operations of $690,000, cash used in investing of $1,029,000, and cash used in financing of $135,000. In addition, cash spent for fixed assets during the period was $414,000. No dividends were paid. Based on this information, what was Korman's free cash flow? a. ($339,000) b. $1,440,000 c. $276,000 d. ($888,000)
Ans: c, SO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting
123.
All of the following statements about free cash flow are false except: a. Significant free cash flow indicates less potential to finance new investments. b. Free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends. c. Free cash flow is not reported on the statement of cash flows. d. Significant free cash flow indicates less potential to pay additional dividends.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
124. In the Gannett Company, the beginning and ending balances in Land were $198,000 and $240,000 respectively. During the year, land costing $50,000 was sold for $50,000 cash, and land costing $92,000 was purchased for cash. The entries in the reconciling columns of the worksheet will include a: a. credit to Land $50,000 and a debit to Sale of Land $50,000 under investing activities. b. debit to Land $92,000 and a credit to Purchase of Land $92,000 under financing activities. c. net debit to Land $42,000 and a credit to Purchase of Land $42,000 under investing activities. d. credit to Land $50,000 and a debit to Sale of Land $50,000 under financing activities.
Ans: a, SO: 5, Bloom: C, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
125. When listing accounts in the statement of cash flows worksheet, the accumulated depreciation account is shown a. with accounts that have credit balances. b. with accounts that have debit balances. c. as a credit under the reconciling items. d. as a debit under the reconciling items.
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
126. In the bottom portion of the statement of cash flows worksheet, a. inflows of cash are debits in the reconciling columns. b. outflows of cash are debits in the reconciling columns. c. information pertaining to investing and financing activities only is entered. d. only significant noncash transactions are entered.
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 24 Test Bank for Accounting Principles, Tenth Edition a
127. On the statement of cash flows worksheet, a. significant noncash investing and financing activities are not entered in the reconciling columns. b. a decrease in cash will be offset by a debit in the reconciling items columns at the bottom of the worksheet. c. an increase in cash will be offset by a debit in the reconciling items column at the bottom of the worksheet. d. income statement accounts are listed after balance sheet accounts in the top half of the worksheet under the indirect method.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
128.
In the Paper Corporation, cash receipts from customers were $138,000, cash payments for operating expenses were $102,000, and one-third of the company's $6,300 income taxes were paid during the year. Net cash provided by operating activities is: a. $36,000. b. $29,700. c. $33,900. d. $31,800.
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
129. Each of the following would be reported under operating activities except cash receipts a. from sales of goods. b. from sales of investments. c. of interest on loans. d. of dividends from investments.
Ans: b, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
130. Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
131. Crush Company reports the following: Inventory Accounts Payable
End of Year $27,000 32,000
Beginning of Year $42,000 12,000
If cost of goods sold for the year is $210,000, the amount of cash paid to suppliers is a. $215,000. b. $205,000. c. $175,000. d. $245,000. Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 25
a
132. During the year, Salaries Payable decreased by $6,000. If Salary Expense amounted to $170,000 for the year, the cash paid to employees (including deductions from gross pay) is a. $176,000. b. $170,000. c. $164,000. d. $182,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
133. Gore Company reports a $16,000 increase in inventory and a $6,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $160,000. The cash payments made to suppliers were a. $160,000. b. $170,000. c. $140,000. d. $155,000.
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
134. Ranger Company had credit sales of $550,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period? a. $650,000 b. $550,000 c. $450,000 d. $590,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
135. Hark Inc. had cash sales of $400,000 and credit sales of $1,100,000. The accounts receivable balance increased $25,000 during the year. How much cash did Hark receive from its customers during the year? a. $1,475,000 b. $1,075,000 c. $1,500,000 d. $725,000
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
136. Barry Company had a cost of purchases of $250,000. The comparative balance sheet analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Barry's cash payments to suppliers? a. $230,000 b. $220,000 c. $260,000 d. $280,000
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 26 Test Bank for Accounting Principles, Tenth Edition a
137. Thomas Company had an increase in inventory of $45,000. The cost of goods sold was $90,000. There was a $6,000 decrease in accounts payable from the prior period. What were Thomas’ cash payments to suppliers? a. $141,000 b. $51,000 c. $129,000 d. $96,000
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
138. Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers b. Cash collections from customers c. Depreciation Expense d. Cash from the sale of equipment
Ans: c, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
139. Lager Company has other operating expenses of $75,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were Lager's cash payments for operating expenses? a. $77,000 b. $73,000 c. $65,000 d. $75,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
140. Damien Corporation shows income tax expense of $80,000. There has been a $5,000 decrease in federal income taxes payable and a $8,000 increase in state income taxes payable during the year. What was Damien's cash payment for income taxes? a. $80,000 b. $77,000 c. $75,000 d. $93,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
141. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers b. Cash paid for income taxes c. Gain on sale of equipment d. Cash paid to employees
Ans: c, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 27
a
142. The cost of goods sold during the year was $185,000. Merchandise inventory decreased by $6,000 during the year and accounts payable decreased by $3,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $188,000. b. $182,000. c. $176,000. d. $194,000.
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
143. Bongo Company reports a $25,000 increase in inventory and a $10,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $180,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $180,000. b. $190,000. c. $215,000. d. $135,000.
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
144. During 2012, Uma Company had $160,000 in cash sales and $1,200,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2011 and 2012, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2012? a. $1,168,000 b. $1,392,000 c. $1,360,000 d. $1,328,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
145. Monitor Company has other operating expenses of $250,000. There has been an increase in prepaid expenses of $15,000 during the year, and accrued liabilities are $22,000 lower than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Monitor's cash payments for operating expenses? a. $243,000 b. $257,000 c. $213,000 d. $287,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
146.
Which of the following steps is not required in preparing the statement of cash flows? a. Determine the net change in cash. b. Determine the net cash provided by operating activities. c. Determine cash from investing and financing activities. d. Determine the change in current assets.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 28 Test Bank for Accounting Principles, Tenth Edition 147.
Financing activities involve a. lending money to other entities and collecting on those loans. b. cash receipts from sales of goods and services. c. acquiring and disposing of productive long-lived assets. d. long-term liability and owners' equity items.
Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
148.
The information to prepare the statement of cash flows usually comes from each of the following except a. the comparative balance sheet. b. the retained earnings statement. c. additional information. d. the current income statement.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
149.
The statement of cash flows is prepared from all of the following except a. the adjusted trial balance. b. comparative balance sheets. c. selected transaction data. d. the current income statement.
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
The information in a statement of cash flows will not help investors to assess the entity's ability to a. generate future cash flows. b. obtain favorable borrowing terms at a bank. c. pay dividends. d. pay its obligations when they become due.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
In converting net income to net cash provided by operating activities, under the indirect method: a. decreases in accounts receivable and increases in prepaid expenses are added. b. decreases in inventory and increases in accrued liabilities are added. c. decreases in accounts payable and decreases in inventory are deducted. d. increases in accounts receivable and increases in accrued liabilities are deducted.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
In the Rogers Company, land decreased $75,000 because of a cash sale for $75,000, the equipment account increased $20,000 as a result of a cash purchase, and Bonds Payable increased $70,000 from an issuance for cash at face value. The net cash provided by investing activities is a. $75,000. b. $125,000. c. $55,000. d. $50,000.
Ans: c, SO: 3, 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 29
a
153. Corgan Company uses the direct method in determining net cash provided by operating activities, During the year, operating expenses were $290,000, prepaid expenses increased $20,000, and accrued expenses payable increased $30,000. Cash payments for operating expenses were a. $240,000. b. $340,000. c. $300,000. d. $280,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: P roblem Solving, IMA: Reporting a
154. Bath Company uses the direct method in determining net cash provided by operating activities. The income statement shows income tax expense $80,000. Income taxes payable were $35,000 at the beginning of the year and $25,000 at the end of the year. Cash payments for income taxes are a. $50,000. b. $80,000. c. $90,000. d. $140,000.
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
155. When a worksheet is used, all but one of the following statements is correct. The incorrect statement is a. Reconciling items on the worksheet are not journalized or posted. b. The bottom portion of the worksheet shows the statement of cash flows effects. c. The balance sheet accounts portion of the worksheet is divided into two parts: assets, and liabilities and stockholders' equity. d. Each line pertaining to a balance sheet account should foot across.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
156.
Under IFRS, the cash flow statement can be prepared using a. the direct method only. b. the indirect method only. c. either the direct or indirect method. d. the T-account method only.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
157.
Under IFRS, bank overdrafts are classified as a. operating activities. b. investing activities. c. financing activities. d. cash and cash equivalents.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
158.
Which of the following activities is excluded from the statement of cash flows under IFRS? a. Financing activities b. Investing activities c. Noncash investing and financing activities d. Operating activities
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 30 Test Bank for Accounting Principles, Tenth Edition 159.
Each of the following items may be classified as operating or financing activities under IFRS except a. dividends paid. b. dividends received. c. interest paid. d. All of the above may be classified as such.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
160.
Under IFRS, some companies present which section of the cash flow statement as a single line item? a. Operating activities b. Investing activities c. Financing activities d. Noncash investing and financing activities
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
a b a c a b a d d b c a a c a a a c
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
d b b a c c a c b d a c d a c b d b
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.
a b b b a b b d b c d b a c b a d b
91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
c b c d b c b a d b a b d d a c b a
109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. a 124. a 125. a 126.
b c a b c d c c c d c a c c c a a a
FOR INSTRUCTOR USE ONLY
Item a
127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144.
Ans.
b c b b c a b c a a a c c b c b c d
Item a
145. 146. 147. 148. 149. 150. 151. 152. a 153. a 154. a 155. 156. 157. 158. 159. 160.
Ans.
d d d b a b b c d c c c d c b a
Statement of Cash Flows
17 - 31
BRIEF EXERCISES BE 161 Selected transactions for the Ecker Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Collected accounts receivable. Declared and paid dividends on common stock. Sold long-term investments for cash. Issued stock for equipment. Repaid five year note payable. Paid employee wages. Converted bonds payable to common stock. Acquired long-term investment with cash. Sold buildings and equipment for cash. Sold merchandise to customers.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 161 1. 2. 3. 4. 5.
(a) (c) (b) (d) (c)
(5 min.)
Operating activity Financing activity Investing activity Noncash activity Financing activity
6. 7. 8. 9. 10.
(a) (d) (b) (b) (a)
Operating activity Noncash activity Investing activity Investing activity Operating activity
BE 162 Barton Company had net income of $193,000 in 2012. Depreciation expense for the year is $48,000. During the year, Accounts Receivable increased $9,000 and Prepaid Expenses decreased $1,000. The company also sold equipment at a loss of $3,000. Instructions Calculate net cash flows from operating activities using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 162
(5 min.)
Net Income Add: Depreciation Loss on sale of equipment Decrease in Prepaid Expenses Deduct: Increase in Accounts Receivable Net cash flows from operating activities
$193,000 48,000 3,000 1,000 (9,000) $236,000
FOR INSTRUCTOR USE ONLY
17 - 32 Test Bank for Accounting Principles, Tenth Edition BE 163 During 2012, Blaine Company sold a building with a book value of $145,000 for proceeds of $175,000. The company also sold long-term investments for proceeds of $32,000. The company purchased land and a new building for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2012. Instructions Compute net cash flows from investing activities. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 163
(3 min.)
Net cash flows from investing = $175,000 + $32,000 = $207,000 BE 164 Monroe Company issued common stock for proceeds of $21,000 during 2012. The company paid dividends of $3,000. The company also issued a long-term note payable for $30,000 in exchange for equipment during the year. The company sold treasury stock that had a cost of $3,000 for $8,000. Instructions Compute net cash flows from financing activities. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164
(3 min.)
Net cash flows from financing activities = $21,000 - $3,000 + $8,000 = $26,000 BE 165 At January 1, 2012, Benny Enterprises reported a balance in the Equipment account of $45,000. During the year the company purchased equipment with a cost of $60,000 and sold equipment with a book value of $30,000. The company reported a loss on the sale of equipment of $4,000. Assume the indirect method is used. Instructions Determine what amount will be reported in (a) the operating activities section and (b) the investing activities section with regard to the purchase and sale of equipment. Ans: N/A, SO: 3, Bloom: K, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 165
(3 min.)
a. Loss on Sale of Equipment, $4,000 b. Proceeds from the Sale of Equipment, $26,000 ($30,000 – $4,000) Purchase of Equipment, $60,000
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 33
BE 166 Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Increase in income taxes payable Depreciation expense Loss on sale of investment Gain on disposal of equipment Amortization expense
Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 166 1. 2. 3. 4. 5.
D D A D A
(5 min.) 6. 7. 8. 9. 10.
A A A D A
BE 167 Doctor Company prepared the tabulation below at December 31, 2012. Net Income ............................................................................................................
$307,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $32,000 .....................................................................
______
Decrease in accounts receivable, $50,000 ....................................................
______
Increase in inventory, $12,000.......................................................................
______
Decrease in accounts payable, $8,600 ..........................................................
______
Increase in income taxes payable, $1,500 .....................................................
______
Loss on sale of land, $5,000 ..........................................................................
______
Net cash provided (used) by operating activities ...........................................
______
FOR INSTRUCTOR USE ONLY
17 - 34 Test Bank for Accounting Principles, Tenth Edition BE 167
(Cont.)
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 167
(6 min.)
Net Income ............................................................................................................
$307,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................... Decrease in accounts receivable .................................................................. Increase in inventory..................................................................................... Decrease in accounts payable ...................................................................... Increase in income taxes payable ................................................................. Loss on sale of land ...................................................................................... Net cash provided (used) by operating activities ..................................
32,000 50,000 (12,000) (8,600) 1,500 5,000 $374,900
BE 168 Dugan Enterprises reported cash flow from operations of $277,000. The company made capital expenditures of $112,000 and paid dividends of $34,000. Instructions Compute free cash flow. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 168
(3 min.)
Free cash flow = $277,000 - $112,000 - $34,000 = $131,000 a
BE 169
Small Company reported cost of goods sold of $179,000 on its 2012 income statement. The company’s beginning inventory was $35,000. The ending inventory was valued at $40,000. The Accounts Payable balance at January 1 was $25,000. The December 31 balance in Accounts Payable was $22,000. Instructions Compute cash payments to suppliers. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 169
(5 min.)
Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers
$179,000 5,000 184,000 3,000 $187,000
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 35
a
BE 170
Show Company had total operating expenses of $155,000 in 2012, which included Depreciation Expense of $33,000. Also during 2012, prepaid expenses decreased by $9,000 and accrued expenses increased by $7,500. Instructions Calculate the amount of cash payments for operating expenses in 2012 using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 170
(4 min.)
Operating expenses ............................................................ Less: Noncash depreciation expense.................................. Decrease in prepaid expenses ............................................ Increase in accrued liabilities .............................................. Cash payments for operating expenses ..............................
$155,000 (33,000) (9,000) (7,500) $ 105,500
EXERCISES Ex. 171 Classify each of the following as a(n): A. Operating Activity B. Investing Activity C. Financing Activity _____ 1
Issuance of bonds.
_____ 2. Sale of equipment. _____ 3. Amortization expense. _____ 4. Purchase of treasury stock. _____ 5. Receipt of dividends on investment. _____ 6. Purchase of land. Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 171 1. C 2. B 3. A
(3 min.) 4. C 5. A 6. B
FOR INSTRUCTOR USE ONLY
17 - 36 Test Bank for Accounting Principles, Tenth Edition Ex. 172 Selected transactions of Alton Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Common stock is sold for cash above par value. Bonds payable are issued for cash at a discount. Interest receivable on a short-term note receivable is collected. Land is sold for cash at book value. Accounts payable are paid in cash. Equipment is purchased by signing a 3-year, 10% note payable. Cash dividends on common stock are declared and paid. 100 shares of XYZ common stock are purchased for cash. Merchandise is sold to customers for cash. Bonds payable are converted into common stock.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 172 1. 2. 3. 4. 5.
(c) (c) (a) (b) (a)
(8–11 min.)
Financing activity Financing activity Operating activity Investing activity Operating activity
6. 7. 8. 9. 10.
(d) (c) (b) (a) (d)
Noncash activity Financing activity Investing activity Operating activity Noncash activity
Ex. 173 (a) Identify several alternatives for presenting significant noncash activities in financial statements. (b) Give three examples of significant noncash transactions. Ans: N/A, SO: 2, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 173
(8–12 min.)
(a)
Significant noncash transactions may appear at the bottom of the statement of cash flows as a separate schedule under the heading "Noncash investing and financing activities." They may also be presented in a separate note or supplementary schedule to the financial statements.
(b)
1. 2. 3. 4.
Issuance of stock for assets Issuance of stock to liquidate debt Issuance of bonds or notes for assets Noncash exchanges of property, plant, and equipment
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 37
Ex. 174 The following information is available for Segway Company: Receipts from customers Dividends from stock investments Proceeds from sale of equipment Proceeds from issuance of stock Payments for goods Payments for operating expenses Interest paid Taxes paid Dividends paid
$210,000 3,000 18,000 90,000 100,000 75,000 5,000 4,000 20,000
Instructions Based on the preceding information, compute the net cash provided by operating activities. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 174
(7 min.)
Receipts from customers Dividends from stock investments
$210,000 3,000 213,000
Payments for goods $100,000 Payments for operating expenses 75,000 Interest paid 5,000 Taxes paid 4,000 Net cash provided by operating activities
184,000 $ 29,000
Ex. 175 Plough Company reported net income of $180,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Cash Accounts receivable Inventories Prepaid expenses Accounts payable Income taxes payable
End of Year $20,000 24,000 50,000 9,500 12,000 1,600
Beginning of Year $15,000 32,000 65,000 5,000 18,000 1,200
Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 38 Test Bank for Accounting Principles, Tenth Edition Solution 175
(10–15 min.)
Net income ......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ Decrease in accounts receivable ............................................................... Decrease in inventories ............................................................................. Increase in prepaid expenses .................................................................... Decrease in accounts payable ................................................................... Increase in income taxes payable .............................................................. Net cash provided by operating activities ...................................................
$180,000 80,000 8,000 15,000 (4,500) (6,000) 400 $272,900
Ex. 176 Nexis Company reported net income of $140,000. For 2012, depreciation was $45,000, and the company reported a gain on sale of investments of $10,000. Accounts receivable increased $25,000 and accounts payable decreased $20,000. Instructions Compute net cash provided by operating activities using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 176
(6 min.)
Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Gain on sale of investments Increase in accounts receivable Decrease in accounts payable Net cash provided by operating activities
$140,000
$45,000 (10,000) (25,000) (20,000)
(10,000) $130,000
Ex. 177 Assuming a statement of cash flows is prepared, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income Deduct from Net Income Cash Flows From Investing Activities Cash Flows From Financing Activities
A D IA FA Category
1.
Common stock is issued for cash at an amount above par value.
_____
2.
Merchandise inventory increased during the period.
_____
3.
Depreciation expense recorded for the period.
_____
4.
Building was purchased for cash.
_____
5.
Bonds payable were acquired and retired at their carrying value.
_____
6.
Accounts payable decreased during the period.
_____
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows Ex. 177
17 - 39
(Cont.)
7.
Prepaid expenses decreased during the period.
_____
8.
Treasury stock was acquired for cash.
_____
9.
Land is sold for cash at an amount equal to book value.
_____
10.
Patent amortization expense recorded for a period.
_____
Ans: N/A, SO: 3, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 177 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
(8–12 min.)
Common stock is issued for cash at an amount above par value. Merchandise inventory increased during the period. Depreciation expense recorded for the period. Building was purchased for cash. Bonds payable were acquired and retired at their carrying value. Accounts payable decreased during the period. Prepaid expenses decreased during the period. Treasury stock was acquired for cash. Land is sold for cash at an amount equal to book value. Patent amortization expense recorded for a period.
Category FA D A IA FA D A FA IA A
Ex. 178 A comparative balance sheet for Rocker Company appears below: ROCKER COMPANY Comparative Balance Sheet Dec. 31, 2012
Dec. 31, 2011
$ 33,000 18,000 25,000 6,000 -060,000 (20,000) $122,000
$10,000 14,000 18,000 9,000 18,000 32,000 (14,000) $87,000
Assets Cash Accounts receivable Inventory Prepaid expenses Long-term investments Equipment Accumulated depreciation—equipment Total assets
Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity
$ 17,000 37,000 40,000 28,000 $122,000
FOR INSTRUCTOR USE ONLY
$ 7,000 47,000 23,000 10,000 $87,000
17 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 178
(Cont.)
Additional information: 1. Net income for the year ending December 31, 2012 was $33,000. 2. Cash dividends of $15,000 were declared and paid during the year. 3. Long-term investments that had a cost of $18,000 were sold for $14,000. 4. Sales for 2012 were $120,000. Instructions Prepare a statement of cash flows for the year ended December 31, 2012, using the indirect method. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178
(25–30 min.) ROCKER COMPANY Statement of Cash Flows For the Year Ended December 31, 2012
Cash flows from operating activities Net income .................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ Loss on sale of long-term investments ................................ Increase in accounts receivable ......................................... Decrease in prepaid expenses ........................................... Increase in inventories ....................................................... Increase in accounts payable ............................................. Net cash provided by operating activities ........................... Cash flows from investing activities Sale of long-term investments .................................................... Purchase of equipment ............................................................... Net cash used by investing activities .................................. Cash flows from financing activities Issuance of common stock ......................................................... Retirement of bonds payable ...................................................... Payment of cash dividends ......................................................... Net cash used by financing activities .................................. Net increase in cash ............................................................................ Cash at beginning of period ................................................................. Cash at end of period ..........................................................................
FOR INSTRUCTOR USE ONLY
$33,000
$ 6,000 4,000 (4,000) 3,000 (7,000) 10,000
12,000 45,000
14,000 (28,000) (14,000) 17,000 (10,000) (15,000) (8,000) 23,000 10,000 $33,000
Statement of Cash Flows
17 - 41
Ex. 179 A comparative balance sheet for Halpern Corporation is presented below: HALPERN CORPORATION Comparative Balance Sheet 2012
2011
$ 36,000 70,000 25,000 18,000 70,000 (20,000) $199,000
$ 31,000 60,000 17,000 40,000 60,000 (13,000) $195,000
Liabilities and Stockholders' Equity Accounts payable $ 11,000 Bonds payable 27,000 Common stock 140,000 Retained earnings 21,000 Total liabilities and stockholders' equity $199,000
$ 6,000 19,000 115,000 55,000 $195,000
Assets Cash Accounts receivable (net) Prepaid insurance Land Equipment Accumulated depreciation Total Assets
Additional information: 1. Net loss for 2012 is $20,000. 2. Cash dividends of $14,000 were declared and paid in 2012. 3. Land was sold for cash at a loss of $4,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $22,000 of bonds were retired during the year at carrying (book) value. 6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000. Instructions Prepare a statement of cash flows for the year ended 2012, using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 42 Test Bank for Accounting Principles, Tenth Edition Solution 179
(22–27 min.)
HALPERN CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 ——————————————————————————————————————————— Cash flows from operating activities Net loss ....................................................................................... $(20,000) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation (a) ................................................................. $17,000 Loss on sale of land (b) ...................................................... 4,000 Increase in accounts receivable ......................................... (10,000) Increase in prepaid insurance ............................................ (8,000) Increase in accounts payable ............................................. 5,000 8,000 Net cash used by operating activities ................................. (12,000) Cash flows from investing activities Proceeds from the sale of land (b) .............................................. 18,000 Proceeds from the sale of equipment ......................................... 5,000 Net cash provided by investing activities ............................ 23,000 Cash flows from financing activities Retirement of bonds payable ...................................................... (22,000) Issuance of bonds payable ......................................................... 30,000 Payment of dividends ................................................................. (14,000) Net cash used by financing activities .................................. (6,000) Increase in cash .................................................................................. 5,000 Cash at beginning of period ................................................................. 31,000 Cash at end of period .......................................................................... $36,000 Noncash investing and financing activities Purchase of equipment through issuance of common stock ....... (a)
Accumulated Depreciation 12/31/11 Accumulated Depreciation 12/31/12 Difference Add: Accumulated depreciation on equipment sold Depreciation expense
$13,000 20,000 7,000 10,000 $17,000
(b)
Cost of land sold Less: Loss on sale of land Proceeds from sale of land
$22,000 (4,000) $18,000
FOR INSTRUCTOR USE ONLY
$25,000
Statement of Cash Flows
17 - 43
Ex. 180 The following information is available for Modre Corporation for the year ended December 31, 2012: Collection of principal on long-term loan to a supplier Acquisition of equipment for cash Proceeds from the sale of long-term investment at book value Issuance of common stock for cash Depreciation expense Redemption of bonds payable at carrying (book) value Payment of cash dividends Net income Purchase of land by issuing bonds payable
$15,000 10,000 22,000 25,000 30,000 34,000 14,000 20,000 40,000
In addition, the following information is available from the comparative balance sheet for Modre at the end of 2011 and 2012:
Cash Accounts receivable (net) Prepaid insurance Total current assets
2012 $ 67,000 20,000 17,000 $104,000
2011 $14,000 15,000 13,000 $42,000
Accounts payable Salaries payable Total current liabilities
$ 30,000 4,000 $ 34,000
$19,000 7,000 $26,000
Instructions Prepare Modre's statement of cash flows for the year ended December 31, 2012 using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(22–27 min.)
MODRE CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 ——————————————————————————————————————————— Cash flows from operating activities Net income .................................................................................. $20,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation ....................................................................... $30,000 Increase in accounts receivable .......................................... (5,000) Increase in prepaid insurance ............................................. (4,000) Increase in accounts payable ............................................. 11,000 Decrease in salaries payable .............................................. (3,000) 29,000 Net cash provided by operating activities ............................ 49,000
FOR INSTRUCTOR USE ONLY
17 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 180
(Cont.)
Cash flows from investing activities Collection of long-term loan ......................................................... Proceeds from the sale of investments ........................................ Purchase of equipment ................................................................ Net cash provided by investing activities ............................. Cash flows from financing activities Issuance of common stock .......................................................... Redemption of bonds................................................................... Payment of dividends .................................................................. Net cash used by financing activities................................... Increase in cash ................................................................................... Cash at beginning of period .................................................................. Cash at end of period ...........................................................................
15,000 22,000 (10,000) 27,000 25,000 (34,000) (14,000)
Noncash investing and financing activities Purchase of land by issuing bonds ..............................................
(23,000) 53,000 14,000 $67,000 $40,000
Ex. 181 Towson Company prepared the tabulation below at December 31, 2012. Net Income ............................................................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $43,000 .................................................................... Increase in accounts receivable, $50,000 ..................................................... Decrease in inventory, $13,000 .................................................................... Amortization of patent, $4,000 ...................................................................... Increase in accounts payable, $5,600 ........................................................... Decrease in interest receivable, $7,000 ........................................................ Increase in prepaid expenses, $6,000 .......................................................... Decrease in income taxes payable, $1,500 .................................................. Gain on sale of land, $5,000 ......................................................................... Net cash provided (used) by operating activities ...........................................
$340,000 ______ ______ ______ ______ ______ ______ ______ ______ ______ ______
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181
(10–14 min.)
Net Income ............................................................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................... Increase in accounts receivable .................................................................... Decrease in inventory ................................................................................... Amortization of patent ................................................................................... Increase in accounts payable ....................................................................... Decrease in interest receivable ..................................................................... Increase in prepaid expenses ....................................................................... Decrease in income taxes payable ............................................................... FOR INSTRUCTOR USE ONLY
$340,000 43,000 (50,000) 13,000 4,000 5,600 7,000 (6,000) (1,500)
Statement of Cash Flows Solution 181
17 - 45
(Cont.)
Gain on sale of land ...................................................................................... Net cash provided (used) by operating activities ...................................
(5,000) $350,100
Ex. 182 The current sections of Marie Inc.'s balance sheets at December 31, 2011 and 2012, are presented here. Marie's net income for 2012 was $200,000. Depreciation expense was $24,000. 2012 2011 Current assets Cash $115,000 $99,000 Accounts receivable 105,000 89,000 Inventory 153,000 172,000 Prepaid expense 27,000 22,000 Total current assets $400,000 $382,000 Current liabilities Accrued expenses payable Accounts payable Total current liabilities
$ 15,000 85,000 $100,000
$ 5,000 92,000 $ 97,000
Instructions Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2012, using the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 182
(15 min.)
MARIE INC. Partial Statement of Cash Flows For the Year Ended December 31, 2012 _____________________________________________________________________________ Cash flows from operating activities Net income .................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ........................................ Decrease in inventory ........................................ Increase in accrued expenses payable .............. Increase in prepaid expenses ............................ Decrease in accounts payable ........................... Increase in accounts receivable ......................... Net cash provided by operating activities ...........
FOR INSTRUCTOR USE ONLY
$200,000
$24,000 19,000 10,000 (5,000) (7,000) (16,000)
25,000 $225,000
17 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 183 Wayne Company reported net income of $265,000 for 2012. Wayne also reported depreciation expense of $45,000 and a loss of $8,000 on the sale of equipment. The comparative balance sheet shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a $6,000 decrease in prepaid expenses. Instructions Prepare the operating activities section of the statement of cash flows for 2012. Use the indirect method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(15 min.)
WAYNE COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2012 _____________________________________________________________________________ Cash flows from operating activities Net income ..................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense.......................................... Loss on sale of equipment................................... Decrease in accounts receivable ......................... Decrease in prepaid expenses ............................ Increase in accounts payable .............................. Net cash provided by operating activities ............
$265,000
$45,000 8,000 15,000 6,000 17,000
91,000 $356,000
Ex. 184 The three accounts shown below appear in the general ledger of Garson Corp. during 2012. Equipment Date Jan. 1 July 31 Sept. 2 Nov. 10
Date Jan. 1 Nov. 10 Dec. 31
Debit Balance Purchase of equipment Cost of equipment constructed Cost of equipment sold
Credit
70,000 58,000 46,000
Accumulated Depreciation—Equipment Debit Credit Balance Accumulated depreciation on equipment sold Depreciation for year
30,000
FOR INSTRUCTOR USE ONLY
21,000
Balance 160,000 230,000 288,000 242,000
Balance 71,000 41,000 62,000
Statement of Cash Flows Ex. 184
17 - 47
(Cont.) Retained Equipment
Date Jan. 1 Aug. 23 Dec. 31
Debit Balance Dividends (cash) Net income
Credit
14,000 52,000
Balance 105,000 91,000 143,000
Instructions From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale of equipment was $5,000. (Hint: Cost of equipment constructed is reported in the investing activities section as a decrease in cash of $58,000.) Ans: N/A, SO: 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(20 min.)
GARSON CORP Partial Statement of Cash Flows For the Year Ended December 31, 2012 _____________________________________________________________________________ Cash flows from operating activities Net income .............................................................. Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ............................................. Loss on sale of equipment ....................................... Net cash provided by operating activities ............................................................... Cash flows from investing activities Sale of equipment ................................................... Purchase of equipment ............................................ Construction of equipment ....................................... Net cash used by investing activities ..................
$52,000
$ 21,000 5,000
78,000 11,000* (70,000) (58,000) (117,000)
Cash flows from financing activities Payment of cash dividends ................................ *
Cost of equipment sold...................................... Accumulated depreciation .................................. Book value ......................................................... Loss on sale of equipment ................................. Cash proceeds ...................................................
FOR INSTRUCTOR USE ONLY
26,000
(14,000) $ 46,000 (30,000) 16,000 (5,000) $ 11,000
17 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 185 Planner Corporation's comparative balance sheets are presented below. PLANNER CORPORATION Comparative Balance Sheets December 31 Cash Accounts receivable Land Building Accumulated depreciation Total
2012 $ 21,570 18,200 18,000 70,000 (15,000) $112,770
2011 $ 10,700 23,400 26,000 70,000 (10,000) $120,100
Accounts payable Common stock Retained earnings Total
$ 12,370 75,000 25,400 $112,770
$31,100 69,000 20,000 $120,100
Additional information: 1. Net income was $27,900. Dividends declared and paid were $22,500. 2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $5,900. Instruction (a) Prepare a statement of cash flows for 2012 using the indirect method. (b) Compute free cash flow. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 185
(20 min.)
PLANNER CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 _____________________________________________________________________________ Cash flows from operating activities Net income ....................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .......................................... Loss on sale of land ............................................ Decrease in accounts receivable .......................... Decrease in accounts Payable ............................ Net cash provided by operating activities .......................
FOR INSTRUCTOR USE ONLY
$27,900
$ 5,000 2,100 5,200 (18,730)
(6,430) 21,470
Statement of Cash Flows Solution 185
17 - 49
(Cont.)
Cash flows from investing activities Sale of land .....................................................................
5,900
Cash flows from financing activities Issuance of common stock .............................................. Payment of dividends ...................................................... Net cash used by financing activities ...............................
$ 6,000 (22,500) (16,500)
Net increase in cash .................................................................... Cash at beginning of period ........................................................ Cash at end of period ..................................................................
10,870 10,700 $ 21,570
Ex. 186 Nichol Corporation's comparative balance sheets are presented below. NICHOL CORPORATION Comparative Balance Sheets December 31 Cash Accounts receivable Investments Equipment Accumulated depreciation Total
2012 $ 12,200 25,200 25,000 60,000 (14,000) $108,400
2011 $ 17,700 22,300 16,000 70,000 (10,000) $116,000
Accounts payable Bonds payable Common stock Retained earnings Total
$ 14,600 10,000 50,000 33,800 $108,400
$11,100 30,000 45,000 29,900 $116,000
Additional information: 1. Net income was $17,300. Dividends declared and paid were $13,400. 2. Equipment which cost $10,000 and had accumulated depreciation of $2,200 was sold for $3,800. 3. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. Instruction (a) Prepare a statement of cash flows for 2012 using the indirect method. (b) Compute free cash flow. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 186
(20 min.)
(a)
NICHOL CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 _____________________________________________________________________________ Cash flows from operating activities Net income .................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense.......................................... Loss on sale of equipment................................... Increase in accounts Payable .............................. Increase in accounts receivable .......................... Net cash provided by operating activities .......................
$17,300
$ 6,200* 4,000** 3,500 (2,900)
Cash flows from investing activities Sale of equipment .......................................................... Purchase of investments ................................................ Net cash used by investing activities ..............................
3,800 (9,000)
Cash flows from financing activities Issuance of common stock ............................................. Retirement of bonds ..................................................... Payment of dividends ................................................... Net cash used by financing activities ............................
$ 5,000 (20,000) (13,400)
Net decrease in cash ................................................................ Cash at beginning of period ...................................................... Cash at end of period ............................................................... *[$14,000 – ($10,000 – $2,200)]
10,800 28,100
(5,200)
(28,400) (5,500) 17,700 $ 12,200
**[3,800 – ($10,000 – $2,200)]
(b) $28,100 – $0 – $13,400 = $14,700 a
Ex. 187
The following information is available for Young Corporation: Capital expenditures Cash dividends Cash provided by operations Net income Sales
$115,000 75,000 220,000 130,000 600,000
Instructions Compute Young Corporation's free cash flow. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows a
Solution 187
17 - 51
(3 min.)
Free cash flow = $30,000 ($220,000 – $115,000 – $75,000) a
Ex. 188
Judge Company has begun a worksheet for preparing a statement of cash flows. The following additional information is provided: 1. Cash dividends of $10,000 were paid during the year. 2. Land which originally cost $60,000 was sold for $52,000. 3. Common stock was issued at par value for cash. Instructions Complete the worksheet for Judge Company. JUDGE COMPANY Worksheet Statement of Cash Flows For the Year Ended December 31, 2012 Balance 12/31/11
Balance Sheet Accounts Debits Cash Accounts receivable Inventory Land Equipment Total Credits Accounts payable Bonds payable Accumulated depreciation— equipment Common stock Retained earnings Total Statement of Cash Flows Effects Operating activities Net income
Reconciling Items Debits Credits
Balance 12/31/12
30,000 40,000 90,000 60,000 131,000 351,000
65,000 53,000 110,000 -0140,000 368,000
15,000 25,000
12,000 10,000
81,000 170,000 60,000 351,000
95,000 180,000 71,000 368,000
21,000
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 27, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 52 Test Bank for Accounting Principles, Tenth Edition a
Solution 188
(27–32 min.) JUDGE COMPANY Worksheet Statement of Cash Flows For the Year Ended December 31, 2012 Balance 12/31/11
Balance Sheet Accounts Debits Cash Accounts receivable (net) Inventory Land Equipment Total Credits Accounts payable Bonds payable Accumulated depreciation— equipment Common stock Retained earnings Total
Investing activities Sale of land Purchase of equipment Financing activities Issuance of common stock Retirement of bonds Payment of dividend
30,000 40,000 90,000 60,000 131,000 351,000
(k) 35,000 (c) 13,000 (d) 20,000
15,000 25,000
(e) 3,000 (i) 15,000
81,000 170,000 60,000 351,000
Statement of Cash Flows Effects Operating activities Net income Depreciation expense Loss on sale of land Increase in accounts receivable Increase in inventory Decrease in accounts payable
Reconciling Items Debits Credits
(g) 60,000 (h)
9,000
(b) 10,000
Balance 12/31/12 65,000 53,000 110,000 -0140,000 368,000 12,000 10,000
(f) 14,000 (j) 10,000 (a) 21,000
95,000 180,000 71,000 368,000
(a) 21,000 (f) 14,000 (g) 8,000 (c) 13,000 (d) 20,000 (e) 3,000
(g) 52,000 (h)
9,000
(j) 10,000
210,000 Increase in cash 210,000
(i) 15,000 (b) 10,000 175,000 (k) 35,000 210,000
a
Ex. 189
Dense Company's income statement showed revenues of $275,000 and operating expenses of $135,000. Accounts receivable decreased by $40,000 and accounts payable increased by $35,000 during the year.
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows Ex. 189
17 - 53
(Cont.)
Instructions Compute (a) cash receipts from customers and (b) cash payments for operating expenses using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 189
(5 min.)
(a)
Cash receipts from customers = $315,000 ($275,000 + $40,000)
(b)
Cash payments for operating expenses = $100,000 ($135,000 – $35,000)
a
Ex. 190
Blair Company had total operating expenses of $180,000 in 2012, which included Depreciation Expense of $35,000. Also, during 2012, prepaid expenses increased by $9,000 and accrued expenses decreased by $6,700. Instructions Calculate the amount of cash payments for operating expenses in 2012 using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 190
(5–8 min.)
Operating expenses ............................................................ Less: Noncash depreciation expense.................................. Add: Increase in prepaid expenses ..................................... Add: Decrease in accrued liabilities..................................... Cash payments for operating expenses ..............................
$180,000 (35,000) 9,000 6,700 $160,700
a
Ex. 191
The general ledger of Link Company provides the following information: End of Year $ 55,000 310,000 40,000
Accounts Receivable Inventory Accounts Payable
Beginning of Year $ 94,000 210,000 65,000
The company's net sales for the year was $2,200,000 and cost of goods sold amounted to $1,500,000. Instructions Compute the following: (a) Cash receipts from customers. (b) Cash payments to suppliers. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 191
(a)
(8–12 min.)
Cash receipts from customers Sales + Decrease in Accounts Receivable $2,200,000 + $39,000 = $2,239,000 FOR INSTRUCTOR USE ONLY
17 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 191 (b)
(Cont.)
Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending inventory Cost of goods sold
$ 210,000 ? ? 310,000 $1,500,000
$210,000 + Purchases – $310,000 = $1,500,000 Purchases = $1,600,000 Amount of cash payments to suppliers = Purchases + Decrease in accounts payable = $1,600,000 + $25,000 = $1,625,000 a
Ex. 192
The income statement of Roman Inc. for the year ended December 31, 2012, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income
$700,000 360,000 340,000 60,000 $280,000
Roman's balance sheet contained the following comparative data at December 31: 2012 $75,000 40,000 6,000
Accounts receivable Accounts payable Income taxes payable
2011 $40,000 50,000 3,000
Roman has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the statement of cash flows using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 9, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 192
(9–14 min.) ROMAN INC. Statement of Cash Flows For the Year Ended December 31, 2012
Cash flows from operating activities Cash receipts from customers ($700,000 – $35,000) Cash payments: For operating expenses ($360,000 + $10,000) For income taxes ($60,000 – $3,000) Net cash provided by operating activities
FOR INSTRUCTOR USE ONLY
$665,000 $370,000 57,000
427,000 $238,000
Statement of Cash Flows
17 - 55
a
Ex. 193
The income statement of Frank Company is shown below: FRANK COMPANY Income Statement For the Year Ended December 31, 2012 Sales Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expense Depreciation expense Amortization expense Net income
$8,400,000 5,400,000 3,000,000 $500,000 700,000 90,000 30,000
1,320,000 $1,680,000
Additional information: 1. Accounts receivable increased $400,000 during the year. 2. Inventory increased $250,000 during the year. 3. Prepaid expenses increased $200,000 during the year. 4. Accounts payable to merchandise suppliers increased $100,000 during the year. 5. Accrued expenses payable increased $160,000 during the year. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2012, for Frank Company, using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 193
(15–20 min.) FRANK COMPANY Statement of Cash Flows For the Year Ended December 31, 2012
Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers For operating expenses Net cash provided by operations
$8,000,000 (1) $5,550,000 (2) 1,240,000 (3)
(1)
Sales Deduct: Increase in accounts receivable Cash receipts from customers
$8,400,000 400,000 $8,000,000
(2)
Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers
$5,400,000 250,000 5,650,000 100,000 $5,550,000
FOR INSTRUCTOR USE ONLY
6,790,000 $1,210,000
17 - 56 Test Bank for Accounting Principles, Tenth Edition Solution 193 (3)
(Cont.)
Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses
$1,200,000 200,000 (160,000) $1,240,000
a
Ex. 194
The financial statements of Costco Company appear below: COSTCO COMPANY Comparative Balance Sheet December 31 2012
2011
$ 38,000 26,000 30,000 50,000 (20,000) $124,000
$ 23,000 34,000 15,000 78,000 (24,000) $126,000
$ 17,000 13,000 7,000 41,000 46,000 $124,000
$ 23,000 8,000 33,000 24,000 38,000 $126,000
Assets Cash Accounts receivable Merchandise inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total
COSTCO COMPANY Income Statement For the Year Ended December 31, 2012 Sales Cost of goods sold Gross profit Operating expenses Income from operations Interest expense Income before income taxes Income tax expense Net income
$400,000 280,000 120,000 46,000 74,000 4,000 70,000 21,000 $ 49,000
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows Ex. 194
17 - 57
(Cont.)
The following additional data were provided: 1. Dividends declared and paid were $41,000. 2. During the year, equipment was sold for $15,000 cash. This equipment cost $28,000 originally and had a book value of $15,000 at the time of sale. 3. All depreciation expense is in the operating expenses. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions Prepare a statement of cash flows for Costco Company using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 194
(22–28 min.) COSTCO COMPANY Statement of Cash Flows For the Year Ended December 31, 2012
Cash flows from operating activities Cash receipts from customers ($400,000 + $8,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes ($21,000 – $5,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Net cash provided by investing activities Cash flows from financing activities Redemption of bonds payable Issuance of common stock Payment of cash dividend Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period
$408,000 $301,000 (1) 37,000 (2) 4,000 16,000
15,000 15,000 (26,000) 17,000 (41,000) (50,000) 15,000 23,000 $ 38,000
(1)
Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers
$280,000 15,000 295,000 6,000 $301,000
(2)
Operating expenses Less: Depreciation expense Cash payments for operating expenses
$46,000 (9,000)* $37,000
*$24,000 – $13,000 = $11,000 balance in accumulated depreciation after sale. Ending balance, $20,000 – $11,000 = $9,000 depreciation expense.
FOR INSTRUCTOR USE ONLY
358,000 50,000
17 - 58 Test Bank for Accounting Principles, Tenth Edition +
Ex. 195
Condensed financial data of Drake Company appear below: DRAKE COMPANY Comparative Balance Sheet December 31 2012
2011
$ 41,000 75,000 120,000 19,000 100,000 325,000 (65,000) $615,000
$ 35,000 53,000 132,000 25,000 75,000 250,000 (60,000) $510,000
$ 93,000 29,000 120,000 275,000 98,000 $615,000
$ 75,000 24,000 160,000 170,000 81,000 $510,000
Assets Cash Accounts receivable Inventories Prepaid expenses Investments Plant assets Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total
DRAKE COMPANY Income Statement For the Year Ended December 31, 2012 Sales Less: Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Income taxes Interest expense Loss on sale of plant assets Net income
$450,000 $300,000 60,000 17,000 20,000 18,000 3,000
418,000 $ 32,000
Additional information: 1. New plant assets costing $100,000 were purchased for cash in 2012. 2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000. 3. Bonds with a face value of $40,000 were converted into $40,000 of common stock. 4. A cash dividend of $15,000 was declared and paid during the year. 5. Accounts payable pertain to merchandise purchases. Instructions Prepare a statement of cash flows for the year using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows a
Solution 195
17 - 59
(25–30 min.) DRAKE COMPANY Statement of Cash Flows For the Year Ended December 31, 2012
Cash flows from operating activities Cash receipts from customers ($450,000 – $22,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
$428,000 $270,000 (1) 49,000 (2) 20,000 18,000
357,000 71,000
(25,000) (100,000) 10,000 (115,000) 65,000 (15,000) 50,000 6,000 35,000 $ 41,000
Noncash investing and financing activities Conversion of bonds payable into common stock
$ 40,000
(1)
Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers
$300,000 (12,000) 288,000 (18,000) $270,000
(2)
Operating expenses Deduct: Decrease in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses
$60,000 (6,000) (5,000) $49,000
a
Ex. 196
The income statement for James Company showed cost of goods sold of $90,000 and operating expenses of $62,000. The comparative balance sheets for the year show that inventory decreased $4,000, prepaid expenses increased $8,000, accounts payable increased $5,000, and accrued expenses payable decreased $6,000. Instructions Compute (a) cash payments to suppliers and (b) cash payments for operating expenses using the direct method. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
17 - 60 Test Bank for Accounting Principles, Tenth Edition a
Solution 196
(5 min.)
(a) Cash payments to suppliers = $81,000 ($90,000 – $4,000 – $5,000) (b) Cash payments for operating expenses = $76,000 ($62,000 + $8,000 + $6,000)
COMPLETION STATEMENTS 197. A statement of cash flows summarizes the operating, ____________, and ___________ activities of an entity. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
198. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
199. The operating activities section of the statement of cash flows may be prepared using the ______________ method or the ______________ method. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
200. Net income from operations is generally not the same as cash provided from operations because revenues and expenses are recognized in the income statement on the ______________ basis. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
201. Using the indirect approach, noncash charges in the income statement are ______________ to net income and noncash credits are ______________ to compute cash provided by operations. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
202. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
203. The sale of equipment at less than its book value is a(n) ______________ of cash that is reported in the ______________ activities section. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
204. Free _______________ equals cash provided by operations less capital expenditures and cash dividends. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
205. Under the direct method, noncash charges, such as depreciation, are _______________ in the statement of cash flows.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
206. Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 61
a
207. Cost of goods sold for the year amounted to $130,000, and during the year, accounts payable ______________ by $8,000 and inventory ______________ by $7,000 resulting in cash paid to suppliers of $115,000.
Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
208. In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
209. In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 197. investing, financing 198. operating 199. indirect, direct (or vice versa) 200. accrual 201. added, deducted 202. higher (greater) 203. inflow, investing
204. cash flow 205. not reported a 206. receipts from customers, payments to suppliers a 207. increased, decreased a 208. deducted, deducted a 209. added a
MATCHING Set 1 — Indirect Method 210. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. A. B. C. D. E. F. G.
Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity
____
1. Decrease in accounts payable during a period
____
2. Declaration and payment of a cash dividend.
____
3. Loss on sale of land.
____
4. Decrease in accounts receivable during a period.
____
5. Redemption of bonds for cash.
____
6. Proceeds from sale of equipment at book value.
____
7. Issuance of common stock for cash. FOR INSTRUCTOR USE ONLY
17 - 62 Test Bank for Accounting Principles, Tenth Edition Set 1 (Cont.) ____
8. Purchase of a building for cash.
____
9. Acquisition of land in exchange for common stock.
____ 10. Increase in merchandise inventory during a period. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
B E A A E
6. 7. 8. 9. 10.
D F C G B
Set 2 — Direct Method a
211. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method. A. B. C. D. E. F. G. H. I. J.
Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown
____ 1. Decrease in accounts payable during a period. ____ 2. Declaration and payment of a cash dividend. ____ 3. Decrease in accounts receivable during a period. ____ 4. Depreciation expense. ____ 5. Conversion of bonds payable into common stock. ____ 6. Decrease in merchandise inventory during a period. ____ 7. Sale of equipment for cash at book value. ____ 8. Issuance of preferred stock for cash. ____ 9. Purchase of land for cash. ____ 10. Loss on sale of a plant asset. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 63
Answers to Matching 1. 2. 3. 4. 5.
C G A J I
6. 7. 8. 9. 10.
D F H E J
SHORT-ANSWER ESSAY QUESTIONS S-A E 212 Distinguish among the three types of activities reported in the statement of cash flows The three activities are: Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 212 Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive longlived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends. S-A E 213 Why is the statement of cash flows useful? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 213 The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company's ability to generate future cash flows, (2) the company's ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash investing and financing transactions during the period. S-A E 214 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
17 - 64 Test Bank for Accounting Principles, Tenth Edition Solution 214 The information used to prepare the statement of cash flows usually comes from three sources. These sources are (1) a comparative balance sheet, (2) current income statement, and (3) additional information. The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred. Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses which have not yet been paid for in cash. These noncash revenues and noncash expenses do not affect the cash balance. Therefore, the noncash revenues and noncash expenses must be eliminated to determine the net cash provided by operating activities. S-A E 215 Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 215 The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by operating activities. There are two types of adjustments: (1) changes in current assets and current liabilities and (2) noncash charges and credits. For example, an increase in accounts receivable is deducted from net income and an increase in accounts payable is added to net income. Similarly, a noncash charge for depreciation expense is added to net income. The adjustments are the difference between net income and the net cash provided by operating activities. Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section, only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities. S-A E 216 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
Solution 216 A net loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such noncash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss.
FOR INSTRUCTOR USE ONLY
Statement of Cash Flows
17 - 65
S-A E 217 (Ethics) Flint Hills Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better. Ed Gray, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers. Mike Cane, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures. Required: 1. Were Ed Gray's actions ethical? Explain. 2. Were Mike Cane's actions ethical? Explain. 3. Were the company president's actions ethical? Explain. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 217 1. There is a valid question as to whether Ed Gray's actions are ethical or not. Either answer could be considered correct. On the one hand, he was probably within his legal rights to reclassify the workers. He also might be commended for allowing more workers to have a job than was previously the case. On the other hand, however, he has removed a very real benefit from the former full-time workers, and he has done it fairly arbitrarily. He may have harmed morale, and harmed the company if the workers quit and new workers have to be hired. 2. Mike Cane's actions all appear to be ethical. 3. The company president may have placed undue pressure on the employees to show better results. The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits. S-A E 218
(Communication)
You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you present a schedule of predicted cash sources and cash needs at the end of each week for the following week. Ken Harmon, the company's president, has asked whether a statement of cash flows would also be useful. Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
17 - 66 Test Bank for Accounting Principles, Tenth Edition Solution 218
TO:
Ken Harmon
FROM: Nancy Jenks RE:
Statement of Cash Flows vs. Cash Sources and Needs
You asked whether a Statement of Cash Flows would be useful, in addition to the Cash Sources and Needs statement. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the Cash Sources and Needs does. A Statement of Cash Flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. It is a summary of our performance. The Cash Sources and Needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained. One is our plan, the other is our result. Please let me know if you'd like more details about the Statement of Cash Flows. (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 18 FINANCIAL STATEMENT ANALYSIS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 5 6 6 7 7 2 3
C C K K K K K K
sg
33. 34. sg 35. sg 36.
4 5 5 6
K K K K
5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AN C AP AP AP K K AP
153. 154. 155. 156. 157. 158. 159. 160. sg 161. sg 162. sg 163. st 164. sg 165. sg 166. sg 167. sg 168. sg 169. sg 170. sg 171. sg 172. 173. 174. 175. 176. 177. 178. 179. 180.
6 6 6 6 6 6 6 7 1 1 3 4 4 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6
AP C K K K C K C K K AN K K K K K K K AP K K K K K K K K K
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 2 2 3
C K K K K K K K
9. 10. 11. 12. 13. 14. 15. 16.
3 3 3 4 4 4 4 4
K AP C K C C C C
17. 18. 19. 20. 21. 22. 23. 24.
4 5 5 5 5 5 5 5
K K K K K C C C
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. sg st
1 1 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4
K K C C C C C K K K K K K K K K K AP K C C C AP AP AP AP K K C
66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.
4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
C C C C C C K K K AP AP AP AP K C C K AP AP AP C K AP K C C C C C
95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
C AP C C K C AP AP C K AP C C AP K C K K K AP AP AP AP AP AP AP AP AP AP
124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
18 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Brief Exercises 181. 182. 183.
3 3 3
AP AP AN
184. 185. 186.
3 4 4
AP AP AP
187. 188. 189.
5 5 5
K AP AP
190. 191.
5 6
AP AP
213. 214. 215. 216. 217. 218. 219.
5 5 5 5 6 6 6
AP AP AP AN AP AP AP
220. 221. 222.
6 6 6
AP AP AP
5 6 6
K K K
235.
6
K
1
S
Exercises 192. 193. 194. 195. 196. 197. 198.
3 3 3 3 3,4 3,4 3,4
AP AP AP AN AP AP AP
199. 200. 201. 202. 203. 204. 205.
3,4 4 4 5 5 5 5
AP AP AN AP AP AP AP
206. 207. 208. 209. 210. 211. 212.
5 5 5 5 5 5 5
AP AP AP AP AP E AN
Completion Statements 223. 224. 225.
1 3 4
K K K
226. 227. 228.
5 5 5
K K AP
229. 230. 231.
5 5 5
AP K K
232. 233. 234.
Matching Statements 236.
5
AN
237.
2
K
Short-Answer Essay 238. 239.
1 1
K K
240. 241.
2 7
K K
242. 243.
6 7
K K
244.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3.
TF TF TF
4. 5. 37.
TF TF MC
38. 39. 40.
6. 7.
TF TF
31. 45.
TF MC
46. 47.
8. 9. 10. 11. 32.
TF TF TF TF TF
51. 52. 53. 54. 55.
MC MC MC MC MC
56. 57. 58. 59. 60.
12. TF 16. TF 62. 13. TF 17. TF 63. 14. TF 33. TF 64. 15. TF 61. MC 65. Note: TF = True-False MC = Multiple Choice
Type
Item
Type
Item
Study Objective 1 MC 41. MC 44. MC 42. MC 161. MC 43. MC 162. Study Objective 2 MC 48. MC 50. MC 49. MC 237. Study Objective 3 MC 163. MC 192. MC 181. BE 193. MC 182. BE 194. MC 183. BE 195. MC 184. BE 196. Study Objective 4 MC 66. MC 164. MC 67. MC 165. MC 68. MC 185. MC 69. MC 186. BE = Brief Exercise Ex = Exercise
Type
Item
Type
Item
Type
MC MC MC
215. 238. 239.
C SA SA
244.
SA
MC MA
240.
SA
Ex Ex Ex Ex Ex
197. 198. 199. 224.
Ex MC MC C
MC MC BE BE
196. Ex 200. 197. Ex 201. 198. MC 225. 199. MC C = Completion
Ex Ex C
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE 18. 19. 20. 21. 22. 23. 24. 25. 26. 34. 35. 70. 71. 72. 73. 74. 75.
TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC
76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
27. 28. 36. 45. 46. 147.
TF TF TF MC MC MC
148. 149. 150. 151. 152. 153.
MC MC MC MC MC MC
154. 155. 156. 157. 158. 159.
29.
TF
30.
TF
160.
Note: TF = True-False MC = Multiple Choice
Study Objective 5 MC 110. MC 127. MC 111. MC 128. MC 112. MC 129. MC 113. MC 130. MC 114. MC 131. MC 115. MC 132. MC 116. MC 133. MC 117. MC 134. MC 118. MC 135. MC 119. MC 136. MC 120. MC 137. MC 121. MC 138. MC 122. MC 139. MC 123. MC 140. MC 124. MC 141. MC 125. MC 142. MC 126. MC 143. Study Objective 6 MC 170. MC 176. MC 171. MC 177. MC 172. MC 178. MC 173. MC 179. MC 174. MC 180. MC 175. MC 191. Study Objective 7 MC 241. SA 243.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
144. 166. 167. 168. 169. 187. 188. 189. 190. 202. 203. 204. 205. 206. 207. 208. 209.
MC MC MC MC MC BE BE BE BE Ex Ex Ex Ex Ex Ex Ex Ex
210. 211. 212. 213. 214. 215. 216. 226. 227. 228. 229. 230. 231. 232. 236.
Ex Ex Ex Ex Ex Ex Ex C C C C C C C MA
MC MC MC MC MC BE
217. 218. 219. 220. 221. 222.
Ex Ex Ex Ex Ex Ex
233. 234. 235. 242.
C C C SA
SA
BE = Brief Exercise Ex = Exercise
C = Completion
CHAPTER STUDY OBJECTIVES 1. Discuss the need for comparative analysis. There are three bases of comparison: (1) intracompany, which compares an item or financial relationship with other data within a company. (2) Industry, which compares company data with industry averages. (3) Intercompany, which compares an item or financial relationship of a company with data of one or more competing companies. 2. Identify the tools of financial statement analysis. Financial statements can be analyzed horizontally, vertically, and with ratios. 3. Explain and apply horizontal (trend) analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. 4. Describe and apply vertical analysis. Vertical analysis is a technique that expresses each item within a financial statement in terms of a percentage of a relevant total or a base amount.
FOR INSTRUCTOR USE ONLY
18 - 4
Test Bank for Accounting Principles, Tenth Edition
5. Identify and compute ratios used in analyzing a firm's liquidity, profitability, and solvency. The formula and purpose of each ratio is presented in Illustration 18–27. 6. Understand the concept of earning power, and indicate how irregular items are presented. Earning power refers to a company’s ability to sustain its profits from operations. “Irregular items”—discontinued operations and extraordinary items—are presented net of tax below income from continuing operations to highlight their unusual nature. 7. Understand the concept of quality of earnings. A high quality of earnings provides full and transparent information that will not confuse or mislead users of financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition.
TRUE-FALSE STATEMENTS 1.
Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
2.
Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
3.
Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
4.
Analysis of financial statements is enhanced with the use of comparative data.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
5.
Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
6.
Vertical and horizontal analyses are concerned with the format used to prepare financial statements.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
9.
Another name for trend analysis is horizontal analysis.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 10.
18 - 5
If a company has sales of $110 in 2010 and $154 in 2011, the percentage increase in sales from 2010 to 2011 is 140%.
Ans: F, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
11.
In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
12.
Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
13.
Vertical analysis is a more sophisticated analytical tool than horizontal analysis.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
14.
Vertical analysis is useful in making comparisons of companies of different sizes.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
15.
Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
16.
Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
17.
In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
18.
A ratio can be expressed as a percentage, a rate, or a proportion.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
19.
A solvency ratio measures the income or operating success of an enterprise for a given period of time.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
20.
The current ratio is a measure of all the ratios calculated for the current year.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
21.
Inventory turnover measures the number of times on the average the inventory was sold during the period.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
FOR INSTRUCTOR USE ONLY
18 - 6 22.
Test Bank for Accounting Principles, Tenth Edition Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
23.
The rate of return on total assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
24.
From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Investment Decisions
25.
A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
26.
Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
27.
When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Variations among companies in the application of generally accepted accounting principles may reduce quality of earnings.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
A percentage change can be computed only if the base amount is zero or positive.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
In vertical analysis, the base amount in an income statement is usually net sales.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
Profitability ratios measure the ability of the enterprise to survive over a long period of time.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 35.
18 - 7
The days in inventory is computed by multiplying inventory turnover by 365.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
Extraordinary items are reported net of applicable taxes in a separate section of the income statement.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T F F T T F
7. 8. 9. 10. 11. 12.
F F T F T T
13. 14. 15. 16. 17. 18.
F T F F F T
19. 20. 21. 22. 23. 24.
F F T T F F
25. 26. 27. 28. 29. 30.
T F T F T T
31. 32. 33. 34. 35. 36.
T F T F F T
MULTIPLE CHOICE QUESTIONS 37.
Which one of the following is primarily interested in the liquidity of a company? a. Federal government b. Stockholders c. Long-term creditors d. Short-term creditors
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
38.
Which one of the following is not a characteristic generally evaluated in analyzing financial statements? a. Liquidity b. Profitability c. Marketability d. Solvency
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
39.
In analyzing the financial statements of a company, a single item on the financial statements a. should be reported in bold-face type. b. is more meaningful if compared to other financial information. c. is significant only if it is large. d. should be accompanied by a footnote.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
40.
Short-term creditors are usually most interested in evaluating a. solvency. b. liquidity. c. marketability. d. profitability.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 8
Test Bank for Accounting Principles, Tenth Edition
41.
Long-term creditors are usually most interested in evaluating a. liquidity and solvency. b. solvency and marketability. c. liquidity and profitability. d. profitability and solvency.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
42.
Stockholders are most interested in evaluating a. liquidity and solvency. b. profitability and solvency. c. liquidity and profitability. d. marketability and solvency.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
43.
A stockholder is interested in the ability of a firm to a. pay consistent dividends. b. appreciate in share price. c. survive over a long period. d. all of these.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
44.
Comparisons of financial data made within a company are called a. intracompany comparisons. b. interior comparisons. c. intercompany comparisons. d. intramural comparisons.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is a. common size analysis. b. horizontal analysis. c. ratio analysis. d. vertical analysis.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46.
Which one of the following is not a tool in financial statement analysis? a. Horizontal analysis b. Circular analysis c. Vertical analysis d. Ratio analysis
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 47.
18 - 9
In analyzing financial statements, horizontal analysis is a a. requirement. b. tool. c. principle. d. theory.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
Horizontal analysis is also called a. linear analysis. b. vertical analysis. c. trend analysis. d. common size analysis.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
49.
Vertical analysis is also known as a. perpendicular analysis. b. common size analysis. c. trend analysis. d. straight-line analysis.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
50.
In ratio analysis, the ratios are never expressed as a a. rate. b. negative figure. c. percentage. d. simple proportion.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
51.
The formula for horizontal analysis of changes since the base period is the current year amount a. divided by the base year amount. b. minus the base year amount divided by the base year amount. c. minus the base year amount divided by the current year amount. d. plus the base year amount divided by the base year amount.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
52.
Horizontal analysis evaluates a series of financial statement data over a period of time a. that has been arranged from the highest number to the lowest number. b. that has been arranged from the lowest number to the highest number. c. to determine which items are in error. d. to determine the amount and/or percentage increase or decrease that has taken place.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 10 Test Bank for Accounting Principles, Tenth Edition 53.
Horizontal analysis evaluates financial statement data a. within a period of time. b. over a period of time. c. on a certain date. d. as it may appear in the future.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
54.
Assume the following sales data for a company: 2014 2013 2012 2011
$1,050,000 950,000 800,000 550,000
If 2011 is the base year, what is the percentage increase in sales from 2011 to 2013? a. 100% b. 90.9% c. 72.7% d. 52.4% Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
55.
Comparative balance sheets are usually prepared for a. one year. b. two years. c. three years. d. four years.
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
56.
Horizontal analysis is appropriately performed a. only on the income statement. b. only on the balance sheet. c. only on the statement of retained earnings. d. on all three of these statements.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
57.
A horizontal analysis performed on a statement of retained earnings would not show a percentage change in a. dividends paid. b. net income. c. expenses. d. beginning retained earnings.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 58.
18 - 11
Under which of the following cases may a percentage change be computed? a. The trend of the balances is decreasing but all balances are positive. b. There is no balance in the base year. c. There is a positive balance in the base year and a negative balance in the subsequent year. d. There is a negative balance in the base year and a positive balance in the subsequent year.
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
Assume the following sales data for a company: 2013 2012 2011
$945,000 877,500 650,000
If 2011 is the base year, what is the percentage increase in sales from 2011 to 2012? a. 24% b. 35% c. 76% d. 135% Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
60.
Assume the following cost of goods sold data for a company: 2013 2012 2011
$1,680,000 1,400,000 1,200,000
If 2011 is the base year, what is the percentage increase in cost of goods sold from 2011 to 2013? a. 140% b. 40% c. 23% d. 17% Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
61.
Darius, Inc. has the following income statement (in millions): DARIUS, INC. Income Statement For the Year Ended December 31, 2012 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
$300 120 180 44 $136
FOR INSTRUCTOR USE ONLY
18 - 12 Test Bank for Accounting Principles, Tenth Edition MC 61. (Cont.) Using vertical analysis, what percentage is assigned to Cost of Goods Sold? a. 30% b. 40% c. 100% d. None of the above Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
62.
Darius, Inc. has the following income statement (in millions): DARIUS, INC. Income Statement For the Year Ended December 31, 2012 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
$300 120 180 44 $136
Using vertical analysis, what percentage is assigned to Net Income? a. 100% b. 75.6% c. 45.3% d. None of the above Ans: c, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
63.
Vertical analysis is also called a. common size analysis. b. horizontal analysis. c. ratio analysis. d. trend analysis.
Ans: a, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
64.
Vertical analysis is a technique which expresses each item within a financial statement a. in dollars and cents. b. in terms of a percentage of the item in the previous year. c. in terms of a percent of a base amount. d. starting with the highest value down to the lowest value.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
65.
In common size analysis, a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis.
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 66.
18 - 13
In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities and stockholders' equity. d. prepaid expenses.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
67.
In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales. b. sales. c. net income. d. cost of goods available for sale.
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
68.
In performing a vertical analysis, the base for sales returns and allowances is a. sales. b. sales discounts. c. net sales. d. total revenues.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
69.
In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses. b. net sales. c. total revenues. d. total expenses.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
70.
Each of the following is a liquidity ratio except the a. acid-test ratio. b. current ratio. c. debt to total assets ratio. d. inventory turnover.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
71.
A ratio calculated in the analysis of financial statements a. expresses a mathematical relationship between two numbers. b. shows the percentage increase from one year to another. c. restates all items on a financial statement in terms of dollars of the same purchasing power. d. is meaningful only if the numerator is greater than the denominator.
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 14 Test Bank for Accounting Principles, Tenth Edition 72.
A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
73.
The current ratio is a. calculated by dividing current liabilities by current assets. b. used to evaluate a company's liquidity and short-term debt paying ability. c. used to evaluate a company's solvency and long-term debt paying ability. d. calculated by subtracting current liabilities from current assets.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
74.
The acid-test (quick) ratio a. is used to quickly determine a company's solvency and long-term debt paying ability. b. relates cash, short-term investments, and net receivables to current liabilities. c. is calculated by taking one item from the income statement and one item from the balance sheet. d. is the same as the current ratio except it is rounded to the nearest whole percent.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
75.
Harvey Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to $3,000,000. The average collection period of the receivables in terms of days was a. 30 days. b. 365 days. c. 274 days. d. 48.7 days.
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
76.
Parker Hardware Store had net credit sales of $8,000,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was a. 7.7 times. b. 4.6 times. c. 11.4 times. d. 12.3 times.
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 77.
18 - 15
Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,000,000. Inventory turnover for the year is a. 8 times. b. 15 times. c. 7.5 times. d. 5 times.
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
78.
Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,000,000. The average number of days in inventory during the year was a. 365 days. b. 48.7 days. c. 46 days. d. 30 days.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
79.
Each of the following is included in computing the acid-test ratio except a. cash. b. inventory. c. receivables. d. short-term investments.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
80.
Which one of the following would not be considered a liquidity ratio? a. Current ratio b. Inventory turnover c. Acid-test ratio d. Return on assets
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
81.
Asset turnover measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
82.
Profit margin is calculated by dividing a. sales by cost of goods sold. b. gross profit by net sales. c. net income by stockholders' equity. d. net income by net sales.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 16 Test Bank for Accounting Principles, Tenth Edition 83.
Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Stout Corporation's common stock is selling for $75 per share on the New York Stock Exchange. Stout Corporation's price-earnings ratio is a. 3.8 times. b. 15 times. c. 18.8 times. d. 12 times.
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
84
Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Stout Corporation's common stock is selling for $60 per share on the New York Stock Exchange. Stout Corporation's payout ratio for 2012 is a. $4 per share. b 25%. c. 20%. d. 12.5%.
Ans: c, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
85
Flake Company reported the following on its income statement: Income before income taxes Income tax expense Net income
$600,000 150,000 $450,000
An analysis of the income statement revealed that interest expense was $50,000. Flake Company's times interest earned was a. 13 times. b. 12 times. c. 6 times. d. 7 times. Ans: a, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
86.
The debt to total assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors.
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
87.
Trading on the equity (leverage) refers to the a. amount of working capital. b. amount of capital provided by owners. c. use of borrowed money to increase the return to owners. d. number of times interest is earned.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 88.
18 - 17
The current assets of Margo Company are $300,000. The current liabilities are $100,000. The current ratio expressed as a proportion is a. 300%. b. 3.0 : 1 c. .33 : 1 d. $300,000 ÷ $100,000.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
89.
The current ratio may also be referred to as the a. short run ratio. b. acid-test ratio. c. working capital ratio. d. contemporary ratio.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
90.
A weakness of the current ratio is a. the difficulty of the calculation. b. that it doesn't take into account the composition of the current assets. c. that it is rarely used by sophisticated analysts. d. that it can be expressed as a percentage, as a rate, or as a proportion.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
91.
A supplier to a company would be most interested in the company’s a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
92.
Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a. Current ratio b. Acid-test ratio c. Asset turnover d. Receivables turnover
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
93.
Ratios are used as tools in financial analysis a. instead of horizontal and vertical analyses. b. because they may provide information that is not apparent from inspection of the individual components of the ratio. c. because even single ratios by themselves are quite meaningful. d. because they are prescribed by GAAP.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 18 Test Bank for Accounting Principles, Tenth Edition 94.
The ratios that are used to determine a company's short-term debt paying ability are a. asset turnover, times interest earned, current ratio, and receivables turnover. b. times interest earned, inventory turnover, current ratio, and receivables turnover. c. times interest earned, acid-test ratio, current ratio, and inventory turnover. d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
95.
A measure of the percentage of each dollar of sales that results in net income is a. profit margin. b. return on assets. c. return on common stockholders' equity. d. earnings per share.
Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
96.
West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of West Company's working capital? a. No effect b. $75,000 increase c. $150,000 increase d. $75,000 decrease
Ans: a, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
97.
West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on West Company's current ratio? a. The ratio remained unchanged. b. The change in the current ratio cannot be determined. c. The ratio decreased. d. The ratio increased.
Ans: c, SO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
98.
If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always a. increase. b. decrease. c. stay the same. d. equal zero.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
99.
The acid-test ratio a. is a quick calculation of an approximation of the current ratio. b. does not include all current liabilities in the calculation. c. does not include inventory as part of the numerator. d. does include prepaid expenses as part of the numerator.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 100.
18 - 19
If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivable a. Increase No effect b. Increase Increase c. Decrease No effect d. Decrease Decrease
Ans: c, SO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
101.
A company has a receivables turnover of 10 times. The average receivables during the period are $500,000. What is the amount of net credit sales for the period? a. $50,000 b. $5,000,000 c. $500,000 d. Cannot be determined from the information given
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
102.
If the average collection period is 60 days, what is the receivables turnover? a. 6.0 times b. 6.1 times c. 12.2 times d. None of these
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
103.
A general rule to use in assessing the average collection period is that a. it should not exceed 30 days. b. it can be any length as long as the customer continues to buy merchandise. c. it should not greatly exceed the discount period. d. it should not greatly exceed the credit term period.
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
104.
Inventory turnover is calculated by dividing a. cost of goods sold by the ending inventory. b. cost of goods sold by the beginning inventory. c. cost of goods sold by the average inventory. d. average inventory by cost of goods sold.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
105.
A company has an average inventory on hand of $40,000 and the days in inventory is 73 days. What is the cost of goods sold? a. $200,000 b. $2,920,000 c. $400,000 d. $1,460,000
Ans: a, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 20 Test Bank for Accounting Principles, Tenth Edition 106.
A successful grocery store would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
107.
An aircraft company would most likely have a. a high inventory turnover. b. low profit margin. c. high volume. d. a low inventory turnover.
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
108.
Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 3.0 times. What is the ending total asset balance? a. $2,000,000 b. $1,200,000 c. $2,800,000 d. $2,200,000
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
109.
Earnings per share is calculated a. only for common stock. b. only for preferred stock. c. for common and preferred stock. d. only for treasury stock.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
110.
Which of the following is not a profitability ratio? a. Payout ratio b. Profit margin c. Times interest earned d. Return on common stockholders' equity
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
111.
Times interest earned is also called the a. money multiplier. b. interest coverage ratio. c. coupon coverage ratio. d. premium ratio.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 112.
18 - 21
The ratio that uses weighted average common shares outstanding in the denominator is the a. price-earnings ratio. b. return on common stockholders' equity. c. earnings per share. d. payout ratio.
Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
113.
Net income does not appear in the numerator of the a. profit margin. b. return on assets. c. return on common stockholders' equity. d. payout ratio.
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
114.
Bria Clothing Store had a balance in the Accounts Receivable account of $920,000 at the beginning of the year and a balance of $980,000 at the end of the year. Net credit sales during the year amounted to $7,600,000. The receivables turnover ratio was a. 8.0 times. b. 8.4 times. c. 7.8 times. d. 8.3 times.
Ans: a, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
115.
Bria Clothing Store had a balance in the Accounts Receivable account of $810,000 at the beginning of the year and a balance of $850,000 at the end of the year. Net credit sales during the year amounted to $6,640,000. The average collection period of the receivables in terms of days was a. 91.3 days. b. 45.6 days. c. 30 days. d. 46.7 days.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
116.
Donner Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Donner Corporation's common stock is selling for $35 per share on the New York Stock Exchange. Donner Corporation's price-earnings ratio is a. 5 times. b. 8.75 times. c. 4 times. d. 10.9 times.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 22 Test Bank for Accounting Principles, Tenth Edition 117.
Donner Corporation had net income of $400,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Donner Corporation's common stock is selling for $50 per share on the New York Stock Exchange. Donner Corporation's payout ratio for 2012 is a. $8 per share. b. 10%. c. 12.5%. d. 20%.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
118.
Town Company reported the following on its income statement: Income before income taxes $750,000 Income tax expense 150,000 Net income $600,000 An analysis of the income statement revealed that interest expense was $100,000. Town Company's times interest earned was a. 5 times. b. 8.5 times. c. 6 times. d. 7.5 times.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
119.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 20,000 210,000 $300,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 160,000 $300,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of shares of common stock Market price of common stock Dividends per share
FOR INSTRUCTOR USE ONLY
6,000 $20 .50
Financial Statement Analysis MC 119.
18 - 23
(Cont.)
What is the current ratio for Sampson? a. 1.80 b. 1.30 c. 1.40 d. .64 Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
120.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 35,000 20,000 210,000 $310,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 160,000 $310,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 105,000 66,000 39,000 30,000 $ 9,000
Number of shares of common stock Market price of common stock Dividends per share
6,000 $20 .50
What is the receivables turnover for Sampson? a. 1.5 times b. 1.1 times c. 3.0 times d. 12.9 times Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 24 Test Bank for Accounting Principles, Tenth Edition 121.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 11,000 210,000 $291,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 151,000 $291,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 120,000 55,000 65,000 30,000 $ 35,000
Number of shares of common stock Market price of common stock Dividends per share
6,000 $20 .50
What is the inventory turnover for Sampson? a. 3,2 times b. 5 times c. 10.9 times d. 0.20 times Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
122.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 20,000 210,000 $300,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 160,000 $300,000
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis MC 122.
18 - 25
(Cont.) Income Statement
Sales Cost of goods sold Gross profit Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of shares of common stock Market price of common stock Dividends per share
6,000 $20 .50
What is the return on assets for Sampson? a. 8.0% b. 7.0% c. 18.0% d. 16.0% Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
123.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 20,000 310,000 $400,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 260,000 $400,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 300,000 66,000 234,000 30,000 $ 204,000
Number of shares of common stock Market price of common stock Dividends per share
FOR INSTRUCTOR USE ONLY
6,000 $20 .50
18 - 26 Test Bank for Accounting Principles, Tenth Edition MC 123.
(Cont.)
What is the profit margin for Sampson? a. 115% b. 28.2% c. 68% d. 51% Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
124.
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 20,000 230,000 $320,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 180,000 $320,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 150,000 66,000 84,000 30,000 $ 54,000
Number of shares of common stock Market price of common stock Dividends per share
6,000 $20 .50
What is the return on common stockholders’ equity for Sampson? a. 30% b. 46.7% c. 36% d. 16.9% Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 125.
18 - 27
The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Cash and short-term investments Accounts receivable (net) Inventory Property, plant and equipment Total Assets
$ 45,000 25,000 20,000 210,000 $300,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 50,000 90,000 160,000 $300,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 120,000 66,000 54,000 18,000 $ 36,000
Number of shares of common stock Market price of common stock Dividends per share
6,000 $33 .50
What is the price-earnings ratio for Sampson? a. 5.5 times b. 1.1 times c. 6 times d. 6.6 times Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
126.
The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 215,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
$ 60,000 75,000 175,000 $310,000
18 - 28 Test Bank for Accounting Principles, Tenth Edition MC 126.
(Cont.) Income Statement
Sales Cost of goods sold Gross profit Operating expenses Net income
$ 90,000 45,000 45,000 25,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share
5,000 $22 1.00
What is the return on assets for Eura? a. 4.8% b. 9.7% c. 6.5% d. 12.9% Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
127.
The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 215,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 60,000 75,000 175,000 $310,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 135,000 45,000 90,000 25,000 $ 65,000
Number of shares of common stock Market price of common stock Dividends per share
5,000 $22 1.00
What is the profit margin for Eura? a. 27.8% b. 51.9% c. 72.2% d. 48.1% Ans: d, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 29
128.
The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 30,000 Inventory 45,000 Property, plant and equipment 215,000 Total Assets $330,000 Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
$ 60,000 75,000 195,000 $330,000
Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income
$ 90,000 45,000 45,000 30,000 $ 15,000
Number of shares of common stock Market price of common stock Dividends per share
5,000 $22 1.00
What is the return on common stockholders’ equity for Eura? a. 4.8% b. 7.7% c. 23.1% d. 46.2% Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
129.
The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 215,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
$ 60,000 75,000 175,000 $310,000
18 - 30 Test Bank for Accounting Principles, Tenth Edition MC 129.
(Cont.) Income Statement
Sales Cost of goods sold Gross profit Operating expenses Net income
$ 90,000 45,000 45,000 25,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share
5,000 $22 1.00
What is the price-earnings ratio for Eura? a. 5 times b. 4.0 times c. 7.3 times d. 5.5 times Ans: d, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
130.
The following information is available for Compton Company:
Accounts receivable Inventory Net credit sales Cost of goods sold Net income
2012 $ 460,000 280,000 2,470,000 1,860,000 300,000
2011 $ 500,000 320,000 1,400,000 1,060,000 170,000
The receivables turnover ratio for 2012 is a. 1.6 times. b. 5.4 times. c. 5.1 times. d. 3.9 times. Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
131.
The following information is available for Compton Company:
Accounts receivable Inventory Net credit sales Cost of goods sold Net income
2012 $ 360,000 340,000 2,470,000 1,860,000 300,000
2011 $ 400,000 420,000 1,400,000 1,060,000 170,000
The inventory turnover ratio for 2012 is a. 6.2 times. b. 4.9 times. c. 5.5 times. d. 4.4 times. Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 132.
18 - 31
The following amounts were taken from the financial statements of Plant Company:
2012 Total assets $800,000 Net sales 720,000 Gross profit 352,000 Net income 126,000 Weighted average number of common shares outstanding 90,000 Market price of common stock $35
2011 $1,000,000 650,000 320,000 117,000 90,000 $39
The return on assets ratio for 2012 is a. 16%. b. 14%. c. 32%. d. 28%. Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
133.
The following amounts were taken from the financial statements of Plant Company:
2012 Total assets $800,000 Net sales 840,000 Gross profit 352,000 Net income 155,400 Weighted average number of common shares outstanding 90,000 Market price of common stock $35
2011 $1,000,000 650,000 320,000 117,000 90,000 $39
The profit margin ratio for 2012 is a. 19.4%. b. 44.1%. c. 18.5%. d. 10.7%. Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
134.
The following amounts were taken from the financial statements of Plant Company:
2012 Total assets $800,000 Net sales 720,000 Gross profit 352,000 Net income 150,000 Weighted average number of common shares outstanding 60,000 Market price of common stock $67.50
2011 $1,000,000 650,000 320,000 117,000 90,000 $39
The price-earnings ratio for 2012 is a. 27 times. b. 45 times. c. 11 times. d. 2.5 times. Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 32 Test Bank for Accounting Principles, Tenth Edition 135.
Star Corporation had net income of $300,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Star Corporation's common stock is selling for $36 per share on the New York Stock Exchange. Star Corporation's price-earnings ratio is a. 5.2 times. b. 6 times. c. 18 times. d. 6.9 times.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
136.
Star Corporation had net income of $320,000 and paid dividends to common stockholders of $80,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Star Corporation's common stock is selling for $30 per share on the New York Stock Exchange. Star Corporation's payout ratio for 2012 is a. 16%. b. 25%. c. 9%. d. $4 per share.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
137.
The following financial statement information is available for Houser Corporation: 2012 2011 Inventory $ 44,000 $ 43,000 Current assets 81,000 106,000 Total assets 432,000 358,000 Current liabilities 30,000 36,000 Total liabilities 102,000 88,000 The current ratio for 2012 is a. .37:1. b. 2.7:1. c. .79:1. d. 4.24:1.
Ans: b, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
138.
The following financial statement information is available for Jones Corporation: 2012 2011 Net sales $784,000 $697,000 Cost of goods sold 406,000 377,000 Net income 112,000 80,000 Tax expense 48,000 29,000 Interest expense 14,000 14,000 The profit margin ratio for 2012 is a. 14.3%. b. 16.1%. c. 48.2%. d. 11.7%.
Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 139.
18 - 33
The following financial statement information is available for Henn Corporation: 2012 2011 Stockholders' equity - common $330,000 $270,000 Net sales 784,000 697,000 Cost of goods sold 406,000 377,000 Net income 112,000 80,000 Inc tax expense 48,000 29,000 Interest expense 14,000 14,000 Dividends paid to preferred stockholders 22,000 20,000 Dividends paid to common stockholders 15,000 10,000 The return on common stockholders’ equity for 2012 is a. 25.0%. b. 37.3%. c. 27.3%. d. 30.0%.
Ans: d, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
140.
The following financial statement information is available for Bongo Corporation: 2012 2011 Net income $115,000 $ 80,000 Income tax expense 50,000 29,000 Interest expense 15,000 14,000 Dividends paid to preferred stockholders 22,000 20,000 Dividends paid to preferred stockholders 15,000 10,000 The times interest earned for 2012 is a. 8.8 times. b. 7.7 times. c. 12 times. d. 11 times.
Ans: c, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
141.
Dean Corporation reported net income $48,000, net sales $400,000, and average assets $800,000 for 2012. The 2012 profit margin was: a. 6%. b. 12%. c. 50%. d. 200%.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 34 Test Bank for Accounting Principles, Tenth Edition 142.
Goin Company reports the following amounts for 2012: Net income $ 150,000 Average stockholders’ equity 2,000,000 Preferred dividends 48,000 Par value preferred stock 200,000 The 2012 rate of return on common stockholders’ equity is: a. 5.1%. b. 5.7%. c. 7.5%. d. 8.3%.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
143.
Gamble Corporation had beginning inventory $100,000, cost of goods purchased $700,000, and ending inventory $140,000. What was Gamble's inventory turnover? a. 5 times. b. 5.5 times. c. 5.83 times. d. 6.6 times.
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
144.
In 2012 Shum Corporation reported income from operations $180,000, interest expense $50,000, and income tax expense $40,000. Shum’s times interest earned ratio was: a. 5.4 times. b. 4.6 times. c. 4.4 times. d. 3.6 times.
Ans: d, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
145.
Reynolds Company has income before taxes of $360,000 and an extraordinary loss of $80,000. If the income tax rate is 30% on all items, the income statement should show income before irregular items and an extraordinary loss, respectively, of: a. $360,000 and ($80,000) b. $252,000 and ($24,000) c. $252,000 and ($56,000) d. $108,000 and ($24,000)
Ans: c, SO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
146.
All of the following statements regarding changes in accounting principles are true except: a. Most changes in accounting principles are only reported in current periods when the principle change takes place. b. Changes in accounting principles are allowed when new principles are preferable to old ones. c. Most changes in accounting principles are retroactively reported. d. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.
Ans: a, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 147.
18 - 35
Alpha’s Bunny Barn has experienced a $60,000 loss due to tornado damage to its inventory. Tornados have never before occurred in this area. Assuming that the company’s tax rate is 30%, what amount will be reported for this loss on the income statement? a. $60,000 b. $42,000 c. $18,000 d. $54,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
148.
Wing Company reported income before taxes of $900,000 and an extraordinary loss of $250,000. Assume that the company’s tax rate is 30%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively? a. $630,000 and $250,000 b. $630,000 and $175,000 c. $650,000 and $250,000 d. $650,000 and $175,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
149.
Krug Corporation has income before taxes of $900,000 and an extraordinary gain of $300,000. If the income tax rate is 25% on all items, the income statement should show income before irregular items and extraordinary items, respectively, of a. $600,000 and $300,000. b. $600,000 and $225,000. c. $675,000 and $300,000. d. $675,000 and $225,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
150.
Hook Inc. has an investment in available-for-sale securities of $80,000. This investment experienced an unrealized loss of $5,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be a. no effect. b. $80,000 increase. c. $28,000 decrease. d. $5,000 decrease.
Ans: d, SO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
151.
The disposal of a significant component of a business is called a. a change in accounting principle. b. an extraordinary item. c. an other expense. d. discontinued operations.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 36 Test Bank for Accounting Principles, Tenth Edition 152.
ACME Company reports income before income taxes of $2,400,000 and had an extraordinary loss of $800,000. If the tax rate is 30%, a. the income before the extraordinary item is $1,920,000. b. the extraordinary loss would be reported on the income statement at $800,000. c. the income before the extraordinary item is $1,680,000. d. the extraordinary loss will be reported at $240,000.
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
153.
Eaton, Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $360,000 loss in the year of disposal. The loss on disposal of the segment was $180,000. If the tax rate is 30%, and income before income taxes was $2,250,000, a. the income tax expense on the income before discontinued operations is $513,000. b. the income from continuing operations is $1,575,000. c. net income is $1,710,000. d. the losses from discontinued operations are reported net of income taxes at $270,000.
Ans: b, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
154.
Each of the following is an extraordinary item except the a. effects of major casualties, if rare in the area. b. effects of a newly enacted law or regulation. c. expropriation of property by a foreign government. d. losses attributable to labor strikes.
Ans: d, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
155.
The discontinued operations section of the income statement refers to a. discontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant segment of a business.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
156.
Which one of the following would be classified as an extraordinary item? a. Expropriation of property by a foreign government b. Losses attributed to a labor strike c. Write-down of inventories d. Gains or losses from sales of equipment
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
157.
A loss on the write down of obsolete inventory should be reported as a. "other expenses and losses." b. part of discontinued operations. c. an operating expense. d. an extraordinary item.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 158.
18 - 37
If an item meets one (but not both) of the criteria for an extraordinary item, it a. only needs to be disclosed in the footnotes of the financial statements. b. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss). c. is reported as an "other revenue or gain" or "other expense and loss," net of tax. d. is reported at its gross amount as an "other revenue or gain" or "other expense or loss."
Ans: d, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
159.
The order of presentation of nontypical items that may appear on the income statement is a. Extraordinary items, Discontinued operations, Other revenues and expenses. b. Discontinued operations, Extraordinary items, Other revenues and expenses. c. Other revenues and expenses, Discontinued operations, Extraordinary items. d. Other revenues and expenses, Extraordinary items, Discontinued operations.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
160.
Each of the following is a factor affecting quality of earnings except a. alternative accounting methods. b. improper recognition. c. pro forma income. d. extraordinary items.
Ans: d, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
161.
Comparisons can be made on each of the following bases except a. industry averages. b. intercompany basis. c. intracompany basis. d. Each of these is a basis for comparison.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
162.
Comparisons of data within a company are an example of the following comparative basis: a. Industry averages b. Intercompany c. Intracompany d. Interregional
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
163.
Center Corporation reported net sales of $200,000, $350,000, and $550,000 in the years 2011, 2012, and 2013 respectively. If 2011 is the base year, what is the trend percentage for 2013? a. 100% b. 75% c. 175% d. 275%
Ans: d, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 38 Test Bank for Accounting Principles, Tenth Edition 164.
In vertical analysis, the base amount for each income statement item is a. gross profit. b. net income. c. net sales. d. sales.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
165.
When performing vertical analysis, the base amount for administrative expense is generally a. administrative expense in a previous year. b. net sales. c. gross profit. d. fixed assets.
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
166.
Ratios that measure the short-term ability of the company to pay its maturing obligations are a. liquidity ratios. b. profitability ratios. c. solvency ratios. d. trend ratios.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
167.
What type of ratios best measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash? a. Leverage b. Solvency c. Profitability d. Liquidity
Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
168.
The acid-test ratio is also known as the a. current ratio. b. quick ratio. c. fast ratio. d. times interest earned ratio.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
169.
The debt to total assets ratio a. is a solvency ratio. b. is computed by dividing total assets by total debt. c. measures the total assets provided by stockholders. d. is a profitability ratio.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis 170.
18 - 39
An extraordinary item is one that a. occurs infrequently and is uncontrollable in nature. b. occurs infrequently and is unusual in nature. c. is material and is unusual in nature. d. is material and is uncontrollable in nature.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
171.
Parrish, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,250,000 are sold for $850,000. Operating income from January 1 to June 30 for the division amounted to $125,000. Ignoring income taxes, what total amount should be reported on Parrish’s income statement for the current year under the caption, Discontinued Operations? a. $125,000 b. $275,000 loss c. $400,000 loss d. $525,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
When there has been a change in accounting principle, a. the old principle should be used in reporting the results of operations for the current year. b. the cumulative effect of the change should be reported in the current year’s retained earnings statement. c. the change should be reported retroactively. d. the new principle should be used in reporting the results of operations of the current year, but there is no change to prior years.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173.
Under IFRS, there is no classification for a. changes in accounting estimates. b. changes in accounting principles. c. discontinued operations. d. extraordinary items.
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
174.
The accounting for each of the following is the same under IFRS and GAAP except for a. extraordinary items. b. discontinued operations. c. changes in accounting principles. d. changes in accounting estimates.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
175.
Distinguishing normal levels of income from irregular items is of interest for the FASB IASB a. no no b. no yes c. yes no d. yes yes
Ans: d, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
18 - 40 Test Bank for Accounting Principles, Tenth Edition 176.
All revenue and expense items are considered ordinary in nature under a. both IFRS and GAAP. b. GAAP. c. IFRS. d. neither IFRS or GAAP.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
177.
Under IFRS, the statement of comprehensive income can be prepared under a. the one-statement approach only. b. the two-statement approach only. c. either the one-statement approach or the two-statement approach d. either the two-statement approach or the stockholders' equity statement approach.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178.
Under IFRS, the components of other comprehensive income can be reported in each of the following ways except a. the one-statement approach. b. the two-statement approach. c. the statement of stockholders' equity approach. d. All of the above are acceptable.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179.
Which of the following is not an acceptable way of displaying the components of other comprehensive income? a. Combined statement of retained earnings b. Second income statement c. Combined statement of comprehensive income d. All of the above are acceptable.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
180.
Under IFRS, other comprehensive income must be displayed (reported) in a. the equity section of the statement of financial position. b. a second income statement. c. the income statement. d. the retained earnings statement.
Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 41
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.
d c b b d b d a c b b c b b b d b c b d c
58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.
a b b b c a c a b a c b c a c b b d d c b
79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.
b d b d c c a d c b c b c c b d a a c b c
100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
c b b d c a b d b a c b c d a b b b b a c
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141.
b a c a a c d b d c b b c a b b b a d c b
142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.
b b d c a b b d d d c b d d a a d c d d c
163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180.
d c b a d b a b b c d a d c c c a b
FOR INSTRUCTOR USE ONLY
18 - 42 Test Bank for Accounting Principles, Tenth Edition
BRIEF EXERCISES BE 181 The following items were taken from the financial statements of Henager, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit
2013 $355,000 214,000 $141,000
2012 $340,000 202,000 $138,000
2011 $300,000 186,000 $114,000
Instructions Compute the following for each of the above time periods. a. The amount and percentage change from 2011 to 2012. b. The amount and percentage change from 2012 to 2013. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 181
(6 min.)
Item
2013 $ 15,000 12,000 3,000
Net Sales Cost of Goods Sold Gross Profit
Percent 4.4 5.9 2.2
2012 $___ Percent 40,000 13.3 16,000 8.6 24,000 21.1
BE 182 If Parton Company had net income of $540,000 in 2013 and it experienced a 30% increase in net income over 2012, what was its 2012 net income? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 182
(4 min.)
Net Income
2013 $540,000
2012 X
Increase 30%
$540,000 − X X .30X = $540,000 – X 1.30X = $540,000 X = $415,385 .30 =
BE 183 Horizontal analysis (trend analysis) percentages for Staas Company’s sales, cost of goods sold, and expenses are listed here. Horizontal Analysis Sales Cost of goods sold Expenses
2013 98.2% 102.5 108.6
2012 104.8% 98.0 96.4
FOR INSTRUCTOR USE ONLY
2011 100.0% 100.0 100.0
Financial Statement Analysis BE 183
18 - 43
(Cont.)
Instructions Explain whether Staas’ net income increased, decreased, or remained unchanged over the 3year period. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 183
(5 min.)
Comparing the percentages presented results in the following conclusions: The net income for Staas increased in 2012 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2013 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. BE 184 Using the following operating data for Simple Corporation, illustrate horizontal analysis. Net sales Cost of goods sold Operating expenses Net income
2012 $350,000 240,000 80,000 30,000
2011 $320,000 180,000 100,000 40,000
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 184
(5 min.)
Net sales Cost of goods sold Operating expenses Net income
2012 109% 133% 80% 75%
2011_ 100% 100% 100% 100%
BE 185 Using the following operating data for Simple Corporation, prepare a schedule showing a vertical analysis for 2012. Net sales Cost of goods sold Operating expenses Net income
2012 $360,000 210,000 112,000 28,000
2011 $320,000 180,000 100,000 40,000
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 185
(4 min.)
Net sales Cost of goods sold Gross profit Operating expenses Net income
Amount $360,000 210,000 150,000 112,000 $ 38,000
Percent 100% 58.3% 41.7% 31.1% 10.6%
FOR INSTRUCTOR USE ONLY
18 - 44 Test Bank for Accounting Principles, Tenth Edition BE 186 Using these data from the comparative balance sheet of Tanner Company, perform vertical analysis. December 31, 2013 $ 510,000 780,000 4,000,000
Accounts receivable Inventory Total assets
December 31, 2012 $ 400,000 600,000 3,000,000
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 186
(6 min.)
Accounts receivable Inventory Total assets
Dec. 31, 2013 Amount Percentage* $ 510,000 13% 780,000 20% 4,000,000 100.0%
* $510,000 = .13 $4,000,000
** $400,000 = .13 $3,000,000
$780,000 = .20 $4,000,000
$600,000 = .20 $3,000,000
Dec. 31, 2012 Amount Percentage** $ 400,000 13% 600,000 20% 3,000,000 100.0%
BE 187 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio (L), a profitability ratio (P), or a solvency ratio (S). ____ 1. Times interest earned ratio ____ 2. Asset turnover ____ 3. Receivables turnover ____ 4. Debt to total assets ratio ____ 5. Current ratio ____ 6. Payout ratio Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 187 1. 2. 3. 4. 5. 6.
(3 min.)
S P L S L P
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 45
BE 188 Selected financial statement data for Morgan Company are presented below. 12/31/12 $ 10,000 15,000 60,000 75,000 100,000
Cash Short-term investments Accounts receivable Inventories Total current liabilities Instructions Compute the following ratios at December 31, 2012: (a) Current. (b) Acid-test.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 188
(3 min.)
(a) Current = 1.60:1 ($160,000 $100,000) (b) Acid-test = .85:1 ($85,000 $100,000) BE 189 Barnes Company had net income of $175,000 and net sales of $625,000 in 2012. The company’s total assets for 2011/2012 averaged $4,000,000. Its common stockholders’ equity for the period averaged $2,340,000. Calculate (a) profit margin, (b) return on assets, and (c) return on common stockholders’ equity. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 189
(5 min.)
(a) Profit margin = $175,000 ÷ $625,000 = 28% (b) Return on assets = $175,000 ÷ $4,000,000 = 4.4% (c) Return on common stockholders’ equity = $175,000 ÷ $2,340,000 = 7.5% BE 190 Berman Company reported the following financial information: Accounts receivable Net credit sales
12/31/12 $ 320,000 2,550,000
12/31/11 $ 360,000 2,420,000
Compute (a) the receivables turnover and (b) the average collection period for 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 190
(3 min.)
a) Receivables turnover = $2,550,000 ÷ $340,000 = 7.5 times b) Average collection period = 365 ÷ 7.5 = 49 days
FOR INSTRUCTOR USE ONLY
18 - 46 Test Bank for Accounting Principles, Tenth Edition BE 191 Prepare a partial income statement, beginning with income before income taxes using the following information for Stone Corporation for the fiscal year ended December 31, 2012: Sales Extraordinary loss Operating expenses Cost of goods sold Loss on sale of land Stone Corporation is subject to a 30% income tax rate.
$720,000 80,000 180,000 400,000 25,000
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 191
(5 min.) STONE CORPORATION Partial Income Statement For the Year Ended December 31, 2012
Income before income taxes ($720,000 – $400,000 – $180,000 – $25,000) Income tax expense ($115,000 × 30%) Income before extraordinary item Extraordinary loss, net of $24,000 tax savings ($80,000 × 30%) Net income
$115,000 34,500 80,500 (56,000) $24,500
EXERCISES Ex. 192 Selected financial information for Brant Corporation is presented below. Current assets Long-term liabilities Retained earnings
December 31, 2013 $ 55,000 92,000 120,000
December 31, 2012 $ 45,000 80,000 100,000
Instructions Prepare a schedule showing a horizontal analysis for 2013 using 2012 as the base year. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 192
(10 min.)
Current assets Long-term liabilities Retained earnings
2013 $ 55,000 92,000 120,000
2012 $ 45,000 80,000 100,000
Increase (Decrease) Amount Percentage $10,000 22% 12,000 15% 20,000 20%
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 47
Ex. 193 Comparative information taken from the Wimbley Company financial statements is shown below: (a) (b) (c) (d) (e) (f)
2013 $ 20,000 175,000 30,000 55,000 900,000 160,000
Notes receivable Accounts receivable Retained earnings Income taxes payable Sales Operating expenses
2012 $ -0140,000 (40,000) 20,000 750,000 200,000
Instructions Using horizontal analysis, show the percentage change from 2012 to 2013 with 2012 as the base year. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 193 (a) (b) (c) (d) (e) (f)
(8–12 min.)
Base year is zero. Not possible to compute. $35,000 ÷ $140,000 = 25% increase Base year is negative. Not possible to compute. $35,000 ÷ $20,000 = 175% increase $150,000 ÷ $750,000 = 20% increase $40,000 ÷ $200,000 = 20% decrease
Ex. 194 Fork Corporation had net income of $2,000,000 in 2011. Using 2011 as the base year, net income decreased by 75% in 2012 and increased by 190% in 2013. Instructions Compute the net income reported by Fork Corporation for 2012 and 2013. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 194
(6–9 min.)
2012: X ÷ $2,000,000 = 75% X = $2,000,000 × .75 = $1,500,000 The decrease is $1,500,000; therefore net income for 2012 is $500,000. 2013: X ÷ $2,000,000 = 190% X = $2,000,000 × 1.90 X = $3,800,000 The net income for 2013 is $5,800,000 ($2,000,000 + $3,800,000).
FOR INSTRUCTOR USE ONLY
18 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 195 The following items were taken from the financial statements of Rug, Inc., over a four-year period: Item Net Sales Cost of Goods Sold Gross Profit
2014 $900,000 580,000 $320,000
2013 $650,000 460,000 $190,000
2012 $600,000 420,000 $180,000
2011 $500,000 400,000 $100,000
Instructions Using horizontal analysis and 2011 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 195
(10–15 min.)
Item Net Sales Cost of Goods Sold Gross Profit
2014 180% 145% 320%
2013 130% 115% 190%
2012 120% 105% 180%
2011 100% 100% 100%
The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend. Ex. 196 The comparative balance sheet of Hale Company appears below: HALE COMPANY Comparative Balance Sheet December 31, ——————————————————————————————————————————— Assets 2013 2012 Current assets ..................................................................................... $ 360 $300 Plant assets ......................................................................................... 640 500 Total assets ......................................................................................... $1,000 $800 Liabilities and stockholders' equity Current liabilities .................................................................................. Long-term debt .................................................................................... Common stock .................................................................................... Retained earnings ............................................................................... Total liabilities and stockholders' equity .........................................
$ 150 240 350 260 $1,000
$120 160 280 240 $800
Instructions (a) Using horizontal analysis, show the percentage change for each balance sheet item using 2012 as a base year. (b) Using vertical analysis, prepare a common size comparative balance sheet. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 196
18 - 49
(14–19 min.) HALE COMPANY Comparative Balance Sheet December 31,
Assets Current assets Plant assets Total assets
2013 $ 360 640 $1,000
(b) Percent 36% 64 100%
2012 $300 500 $800
(b) Percent 38% 62 100%
(a) Percent 20% 28% 25%
Liabilities and stockholders' equity Current liabilities Long-term debt Common stock Retained earnings Total liabilities and stockholders' equity
$ 150 240 350 260 $1,000
15% 24 35 26 100%
$120 160 280 240 $800
15% 20 35 30 100%
25% 50% 25% 8% 25%
Ex. 197 Using the following selected items from the comparative balance sheet of Ames Company, illustrate horizontal and vertical analysis. Accounts Receivable Inventory Total Assets
December 31, 2013 $ 960,000 975,000 4,000,000
December 31, 2012 $ 600,000 780,000 2,500,000
Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 197
(10–15 min.) HORIZONTAL ANALYSIS
Accounts Receivable Inventory Total Assets
December 31, 2013 160% 125% 160%
December 31, 2012 100% 100% 100%
VERTICAL ANALYSIS Accounts Receivable Inventory Total Assets
December 31, 2013 24.0% 24.4% 100%
December 31, 2012 24% 31.2% 100%
FOR INSTRUCTOR USE ONLY
18 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 198 The comparative condensed balance sheets of Baker Corporation are presented below. BAKER CORPORATION Comparative Condensed Balance Sheets December 31 Assets Current assets Property, plant, and equipment (net) Intangibles Total assets Liabilities and stockholders' equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity
2013
2012
$ 70,000 94,500 33,500 $198,000
$ 80,000 90,000 40,000 $210,000
$ 40,800 141,000 16,200 $198,000
$ 48,000 150,000 12,000 $210,000
Instructions (a) Prepare a horizontal analysis of the balance sheet data for Baker Corporation using 2012 as a base. (b) Prepare a vertical analysis of the balance sheet data for Baker Corporation in columnar form for 2013. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198
(20–25 min.)
BAKER CORPORATION Condensed Balance Sheets December 31 ——————————————————————————————————————————— Percentage Increase Change 2013 2012 (Decrease) from 2012 Assets Current assets $ 70,000 $ 80,000 $ (10,000) (12.5%) Property, plant, & equipment (net) 94,500 90,000 4,500 5.0% Intangibles 33,500 40,000 6,500 (16.3%) Total assets $198,000 $210,000 $(12,000) (5.7%) Liabilities and stockholders' equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and Stockholders' equity
$ 40,800
$ 48,000
$ (7,200)
(15.0%)
141,000
150,000
(9,000)
(6.0%)
16,200
12,000
4,200
35.0%
$198,000
$210,000
$(12,000)
(5.7%)
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 51
Solution 198 (Cont.) (b)
BAKER CORPORATION Condensed Balance Sheets December 31, 2013 ——————————————————————————————————————————— Amount
Percent
Assets Current assets Property, plant, and equipment (net) Intangibles Total assets
$ 70,000 94,500 33,500 $198,000
35.4% 47.7% 16.9% 100.0%
Liabilities and stockholders' equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity
$ 40,800 141,000 16,200 $198,000
20.6% 71.2% 8.2% 100.0%
Ex. 199 The comparative condensed income statements of Marks Corporation are shown below. MARKS CORPORATION Comparative Condensed Income Statements For the Years Ended December 31 Net sales Cost of goods sold Gross profit Operating expenses Net income
2013 $620,000 450,000 170,000 54,000 $116,000
2012 $500,000 400,000 100,000 40,000 $ 60,000
Instructions (a) Prepare a horizontal analysis of the income statement data for Marks Corporation using 2012 as a base. (Show the amounts of increase or decrease.) (b) Prepare a vertical analysis of the income statement data for Marks Corporation in columnar form for both years. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
18 - 52 Test Bank for Accounting Principles, Tenth Edition Solution 199
(20–25 min.)
(a)
MARKS CORPORATION Condensed Income Statements For the Years Ended December 31 ——————————————————————————————————————————— Increase or (Decrease) During 2012 2013 2012 Amount Percentage Net sales $620,000 $500,000 $120,000 24% Cost of goods sold 450,000 400,000 50,000 12.5% Gross profit 170,000 100,000 70,000 70.0% Operating expenses 54,000 40,000 14,000 35.0% Net income $116,000 $ 60,000 $ 56,000 93.3%
(b)
MARKS CORPORATION Condensed Income Statements For the Years Ended December 31 ——————————————————————————————————————————— 2013 2012 Amount Percentage Amount Percentage Net sales $620,000 100.0% $500,000 100.0% Cost of goods sold 450,000 72.6% 400,000 80.0% Gross profit $170,000 27.4% 100,000 20.0% Operating expenses 54,000 8.7% 40,000 8.0% Net income $116,000 18.7% $ 60,000 12.0% Ex. 200 Operating data for Martin Corporation are presented below. Net sales Cost of goods sold Operating expenses Net income
2012 $600,000 320,000 130,000 150,000
Instructions Prepare a schedule showing a vertical analysis for 2012. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 200
(10 min.)
Net sales Cost of goods sold Gross profit Operating expenses Net income
Amount $600,000 320,000 280,000 130,000 $150,000
Percent 100% 53% 47% 22% 25%
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 53
Ex. 201 The following information was taken from the financial statements of Lawson Company: Gross profit on sales ........................................................... Income before income taxes ............................................... Net income .......................................................................... Net income as a percentage of net sales.............................
2013 $900,000 280,000 240,000 8%
2012 $840,000 230,000 216,000 9%
Instructions (a) Compute the net sales for each year. (b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year. (c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses). Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 201 (a)
(12–15 min.)
To calculate net sales, divide the net income by the percentage of net income to net sales.
Net Sales
2013 $240,000 ÷ 8% = $3,000,000
2012 $216,000 ÷ 9% = $2,400,000
(b) Using the net sales information from (a) and the gross profits given, it is possible to calculate the cost of goods sold.
Net Sales Less: Gross profit Cost of goods sold % of net sales (c) Gross profit Less: Income before income taxes Operating Expenses % of net sales
2013 $3,000,000 900,000 $2,100,000
2012 $2,400,000 840,000 $1,560,000
70%
65%
2013 $900,000 280,000 $620,000
2012 $840,000 230,000 $610,000
20.7%
25.4%
Ex. 202 Selected financial statement data for Moor Company are presented below. Cash Short-term investments Receivables (net) Inventories Total current liabilities
December 31, 2013 $ 40,000 25,000 100,000 85,000 100,000
FOR INSTRUCTOR USE ONLY
December 31, 2012 $30,000 18,000 80,000 65,000 90,000
18 - 54 Test Bank for Accounting Principles, Tenth Edition Ex. 202
(Cont.)
During 2013, net sales were $950,000, and cost of goods sold was $775,000. Instructions Compute the following ratios at December 31, 2013: (a) Current. (b) Acid-test. (c) Receivables turnover. (d) Inventory turnover. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 202 (a) (b) (c) (d)
(10 min.)
Current = 2.5:1 ($250,000 $100,000) Acid-test = 1.65:1 ($165,000 $100,000) Receivables turnover = 10.6 times [$950,000 ($100,000 + $80,000) 2] Inventory turnover = 10.3 times [$775,000 ($85,000 + $65,000) 2]
Ex. 203 Selected information from the comparative financial statements of Fava Company for the year ended December 31, appears below: 2013 2012 Accounts receivable (net) $ 180,000 $200,000 Inventory 140,000 160,000 Total assets 1,200,000 800,000 Current liabilities 140,000 110,000 Long-term debt 400,000 300,000 Net credit sales 1,330,000 700,000 Cost of goods sold 900,000 530,000 Interest expense 50,000 25,000 Income tax expense 60,000 29,000 Net income 150,000 85,000 Instructions Answer the following questions relating to the year ended December 31, 2013. Show computations. 1. Inventory turnover for 2013 is __________. 2. Times interest earned in 2013 is __________. 3. The debt to total assets ratio for 2013 is __________. 4. Receivables turnover for 2013 is __________. 5. Return on assets for 2013 is __________. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 203
18 - 55
(9–14 min.)
1. Inventory turnover for 2013 is 6 times.
$900,000 ———————————— = 6 times. ($140,000 + $160,000) ÷ 2
2. Times interest earned in 2013 is 5.2 times.
$150,000 + $60,000 + $50,000 —————————————— = 5.2 times. $50,000
3. The debt to total assets ratio for 2013 is 45%.
$140,000 + $400,000 —————————— = 45%. $1,200,000
4. Receivables turnover for 2013 is 7 times.
$1,330,000 ———————————— = 7 times. ($180,000 + $200,000) ÷ 2
5. Return on assets for 2013 is 15%.
$150,000 ————————————— = 15%. ($1,200,000 + $800,000) ÷ 2
Ex. 204 The financial statements of Gaines Company appear below: GAINES COMPANY Comparative Balance Sheet December 31, ——————————————————————————————————————————— Assets 2013 2012 Cash .............................................................................................. $ 25,000 $ 40,000 Short-term investments .................................................................. 15,000 60,000 Accounts receivable (net) ............................................................... 50,000 30,000 Inventory ........................................................................................ 50,000 70,000 Property, plant and equipment (net) ............................................... 260,000 300,000 Total assets ............................................................................. $400,000 $500,000 Liabilities and stockholders' equity Accounts payable........................................................................... Short-term notes payable ............................................................... Bonds payable ............................................................................... Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders' equity ....................................
FOR INSTRUCTOR USE ONLY
$ 20,000 30,000 90,000 150,000 110,000 $400,000
$ 30,000 90,000 160,000 150,000 70,000 $500,000
18 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 204 (cont.) GAINES COMPANY Income Statement For the Year Ended December 31, 2013 Net sales ........................................................................................ Cost of goods sold.......................................................................... Gross profit..................................................................................... Expenses Operating expenses ................................................................. Interest expense ....................................................................... Total expenses ................................................................... Income before income taxes .......................................................... Income tax expense ....................................................................... Net income .....................................................................................
$400,000 240,000 160,000 $42,000 18,000 60,000 100,000 30,000 $ 70,000
Additional information: a. Cash dividends of $23,000 were declared and paid in 2013. b. Weighted-average number of shares of common stock outstanding during 2013 was 30,000 shares. c. Market value of common stock on December 31, 2013, was $21 per share. Instructions Using the financial statements and additional information, compute the following ratios for Gaines Company for 2013. Show all computations. Computations 1.
Current ratio _________.
2.
Return on common stockholders' equity _________.
3.
Price-earnings ratio _________.
4.
Acid-test ratio _________.
5.
Receivables turnover _________.
6.
Times interest earned _________.
7.
Profit margin _________.
8.
Days in inventory _________.
9.
Payout ratio _________.
10.
Return on assets _________.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 204
18 - 57
(15–20 min.)
1.
Current ratio 2.8:1.
$140,000 ———— = 2.8 $50,000
2.
Return on common stockholders' equity 29.2%.
$70,000 ———————————— = .292 ($260,000 + $220,000) ÷ 2
3.
Price-earnings ratio 9 times.
$70,000 EPS = ———— = $2.33 30,000 $21 ——— = 9 times $2.33
4.
Acid-test ratio 1.8:1.
$90,000 ———— = 1.8:1 $50,000
5.
Receivables turnover 10 times.
$400,000 ——————————— = 10 ($50,000 + $30,000) ÷ 2
6.
Times interest earned 6.6 times.
$70,000 + $30,000 + $18,000 ————————————— = 6.6 $18,000
7.
Profit margin 17.5%.
$70,000 ———— = .175 $400,000
8.
Days in inventory 91.3 days. Inventory turnover =
$240,000 ——————————— = 4.0; ($50,000 + $70,000) ÷ 2 365 days ———— = 91.3 4.0
9.
Payout ratio 32.9%.
$23,000 ———— = .329 $70,000
10.
Return on assets 15.6%.
$70,000 ———————————— = .156 ($400,000 + $500,000) ÷ 2
FOR INSTRUCTOR USE ONLY
18 - 58 Test Bank for Accounting Principles, Tenth Edition Ex. 205 The following ratios have been computed for Mason Company for 2013. Profit margin Times interest earned Receivables turnover Acid-test ratio Current ratio Debt to total assets ratio
12.5% 7 times 4 times 2:1 3:1 20%
Mason Company’s 2013 financial statements with missing information follow: MASON COMPANY Comparative Balance Sheet December 31, ——————————————————————————————————————————— Assets 2013 2012 Cash......................................................................................... $ 30,000 $ 45,000 Short-term Investments ............................................................ 10,000 25,000 Accounts receivable (net) ......................................................... ? (6) 40,000 Inventory .................................................................................. ? (8) 50,000 Property, plant, and equipment (net) ........................................ 200,000 160,000 Total assets....................................................................... $ ? (9) $320,000 Liabilities and stockholders' equity Accounts payable ..................................................................... Short-term notes payable ......................................................... Bonds payable ......................................................................... Common stock ......................................................................... Retained earnings .................................................................... Total liabilities and stockholders' equity .............................
$
? (7) 40,000 ? (10) 220,000 60,000 $ ? (11)
$ 30,000 35,000 20,000 200,000 35,000 $320,000
MASON COMPANY Income Statement For the Year Ended December 31, 2013 ——————————————————————————————————————————— Net sales .................................................................................. $200,000 Cost of goods sold.................................................................... 75,000 Gross profit............................................................................... 125,000 Expenses: Depreciation expense ......................................................... $ ? (5) Interest expense ................................................................. 5,000 Selling expenses ................................................................ 8,000 Administrative expenses ..................................................... 12,000 Total expenses ............................................................. ? (4) Income before income taxes .................................................... ? (2) Income tax expense ........................................................... ? (3) Net income ............................................................................... $ ? (1)
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Ex. 205
18 - 59
(Cont.)
Instructions Use the above ratios and information from the Mason Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 35, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(35–45 min.)
MASON COMPANY Comparative Balance Sheet December 31, ——————————————————————————————————————————— Assets 2013 2012 Cash ................................................................................... $ 30,000 $ 35,000 Short-term investments ....................................................... 10,000 15,000 Accounts receivable (net) .................................................... 60,000 (6) 60,000 Inventory ............................................................................. 50,000 (8) 50,000 Property, plant, and equipment (net) ................................... 200,000 150,000 Total assets ................................................................. $350,000 (9) $320,000 Liabilities and stockholders' equity Accounts payable................................................................ Short-term notes payable .................................................... Bonds payable .................................................................... Common stock .................................................................... Retained earnings ............................................................... Total liabilities and stockholders' equity .......................
$ 10,000 (7) 40,000 20,000 (10) 220,000 60,000 $350,000 (11)
$ 30,000 35,000 20,000 200,000 35,000 $320,000
MASON COMPANY Income Statement For the Year Ended December 31, 2013 ——————————————————————————————————————————— Net sales ............................................................................. $200,000 Cost of goods sold .............................................................. 75,000 Gross profit ......................................................................... 125,000 Expenses Depreciation expense.................................................... $65,000 (5) Interest expense............................................................ 5,000 Selling expenses ........................................................... 8,000 Administrative expenses ............................................... 12,000 Total expenses ........................................................ 90,000 (4) Income before income taxes ............................................... 35,000 (2) Income tax expense ............................................................ 10,000 (3) Net income.......................................................................... $ 25,000 (1) (1)
Net income = $25,000 ($200,000 × 12.5%).
FOR INSTRUCTOR USE ONLY
18 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 205 (cont.) (2)
Income before income taxes = $35,000. Let X = Income before income taxes and interest expense. X ——— = 7 times $5,000 X = $35,000 $35,000 – $5,000 = $30,000
(3)
Income tax expense = $10,000 ($35,000 – $25,000).
(4)
Total operating expenses = $90,000 ($125,000 – $35,000).
(5)
Depreciation expense = $65,000
(6)
Accounts receivable (net) = $60,000. Let X = Average receivables. $200,000 ———— = 4 times X 4X = $200,000. X = $50,000.
[$90,000 – ($5,000 + $8,000 + $12,000)].
Let Y = Accounts receivable at 12/31/13. $40,000 + Y —————— = $50,000 2 $40,000 + Y = $100,000 Y = $60,000 (7) Accounts payable = $10,000. Let X = Current liabilities. $30,000 + $10,000 + $60,000 ————————————— = 2 X 2X = $100,000 X = $50,000 $50,000 – $40,000 = $10,000 (8) Inventory = $50,000 Let X = Total current assets X ———— = 3 $50,000 X = $150,000 $150,000 – ($30,000 + $10,000 + $60,000) = $50,000 (9) Total assets = $350,000
($30,000 + $10,000 + $60,000 + $50,000 + $200,000)
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 205
18 - 61
(cont.)
(10) Bonds payable = $20,000 Let X = Total debt X ———— = 20% $350,000 X = $70,000 $70,000 – ($10,000 + $40,000) = $20,000 (11) Total liabilities and stockholders' equity = $350,000; same as total assets—see (9) above. Ex. 206 Selected data for Norma's Store appear below. Net sales Cost of goods sold Inventory at end of year Accounts receivable at end of year
2013 $900,000 700,000 75,000 100,000
2012 $520,000 345,000 95,000 80,000
Instructions Compute the following for 2013: (a) Gross profit rate. (b) Inventory turnover. (c) Receivables turnover. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 206 (a)
(6–10 min.)
Gross profit = Net Sales – Cost of goods sold = $900,000 – $700,000 = $200,000 Gross profit rate = Gross profit ÷ Net sales = $200,000 ÷ $900,000 = 22.2%
(b)
Inventory turnover = Cost of goods sold ÷ Average inventory = $700,000 ÷ [($75,000 + $95,000) ÷ 2] = 8.24 times
(c)
Receivables turnover = Net credit sales ÷ Average accounts receivables = $900,000 ÷ [($100,000 + $80,000) ÷ 2] = $900,000 ÷ $90,000 = 10 times
FOR INSTRUCTOR USE ONLY
18 - 62 Test Bank for Accounting Principles, Tenth Edition Ex. 207 Selected financial statement data for Homer Company are presented below. Net sales Cost of goods sold Interest expense Net income Total assets (ending) Total common stockholders' equity (ending)
$1,500,000 700,000 10,000 205,000 $900,000 $600,000
Total assets at the beginning of the year were $800,000; total common stockholders' equity was $500,000 at the beginning of the period. Instructions Compute each of the following: (a) Asset turnover (b) Profit margin (c) Return on assets (d) Return on common stockholders' equity Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 207 (a) (b) (c) (d)
(10 min.)
Asset turnover = 1.76 [$1,500,000 ($800,000 + $900,000) 2] Profit margin = 13.7% ($205,000 $1,500,000) Return on assets = 24.1% [$205,000 ($800,000 + $900,000) 2] Return on common stockholders' equity = 37.3% [$205,000 ($500,000 + $600,000) 2]
Ex. 208 Wings Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements. Beginning inventory Purchases Ending inventory Average accounts receivable Average common stockholders' equity Sales (all on credit) Net income
$ 482,000 4,836,000 ? 800,000 3,500,000 6,000,000 420,000
Instructions Compute the following: (a) Receivables turnover and the average collection period. (b) Inventory turnover and the days in inventory. (c) Return on common stockholders' equity. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 208 (a)
(13–18 min.)
Receivables turnover = = = Average collection period
Credit sales ————————————— Average accounts receivable $6,000,000 ÷ $800,000 7.5 times = = =
(b)
18 - 63
365 days ————————— Receivables turnover 365 ÷ 7.5 times 48.7 days
Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 4,836,000 – Cost of Goods Sold (4,800,000)* Ending Inventory $ 518,000 *Since the gross profit ratio is 20%, the cost of goods sold ratio is 80%. 80% × $6,000,000 (net sales) = $4,800,000. Ending Inventory = $518,000 (per above) Average Inventory = ($482,000 + $518,000) ÷ 2 = $500,000 Inventory Turnover = $4,800,000 ÷ $500,000 = 9.6 times Days in Inventory = 365 days ÷ 9.6 times = 38 days
(c)
Net income Return on common stockholders' equity = ————————————————— Average common stockholders' equity $420,000 ÷ $3,500,000 = 12%
Ex. 209 Booker Corporation had the following comparative current assets and current liabilities: Dec. 31, 2013 Dec. 31, 2012 Current assets Cash $ 60,000 $ 30,000 Short-term investments 40,000 10,000 Accounts receivable 55,000 95,000 Inventory 110,000 90,000 Prepaid expenses 35,000 20,000 Total current assets $300,000 $245,000 Current liabilities Accounts payable $140,000 $110,000 Salaries payable 40,000 30,000 Income tax payable 20,000 15,000 Total current liabilities $200,000 $155,000 During 2013, credit sales and cost of goods sold were $750,000 and $400,000, respectively.
FOR INSTRUCTOR USE ONLY
18 - 64 Test Bank for Accounting Principles, Tenth Edition Ex. 209
(Cont.)
Instructions Compute the following liquidity measures for 2013: 1. Current ratio. 2. Working capital. 3. Acid-test ratio. 4. Receivables turnover. 5. Inventory turnover. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 209
(10–15 min.)
1. Current ratio = Current assets ÷ Current liabilities = $300,000 ÷ $200,000 = 1.5 : 1 2. Working capital = $300,000 – $200,000 = $100,000 Cash + Short-term investments + Accounts receivable 3. Acid-test ratio = ———————————————————————— Current liabilities $60,000 + $40,000 + $55,000 = ————————————— = .78 : 1 $200,000 4. Receivables turnover
=
Net credit sales ————————————— Average accounts receivables
=
$750,000 ———— = 10 times $75,000
Cost of goods sold 5. Inventory turnover = ————————— Average inventory $400,000 = ———— = 4 times $100,000 Ex. 210 Selected data from Octo Company are presented below: Total assets Average assets Net income Net sales Average common stockholders' equity
$1,600,000 2,000,000 375,000 1,400,000 1,000,000
Instructions Calculate the profitability ratios that can be computed from the above information. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 210
18 - 65
(9–13 min.)
With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Net income ÷ Net sales = $375,000 ÷ $1,400,000 = 26.8% 2. Asset turnover = Net sales ÷ Average assets = $1,400,000 ÷ $2,000,000 = 70% 3. Return on assets = Net income ÷ Average assets = $375,000 ÷ $2,000,000 = 18.8% Net income 4. Return on common stockholders' equity = ————————————————— Average common stockholders' equity = $375,000 ÷ $1,000,000 = 37.5% Ex. 211 The following data are taken from the financial statements of Dands Company:
Monthly average accounts receivable Net sales on account Terms for all sales are 2/10, n/30
2013 $ 565,000 $6,200,000
2012 $ 700,000 $7,000,000
Instructions (a) Compute the receivables turnover and the average collection period for both years. (b) What conclusion can an analyst draw about the management of the accounts receivable? Ans: N/A, SO: 5, Bloom: E, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 211
(8–12 min.)
(a) Receivables turnover
Average collection period
2013
2012
$6,200,000 ————— 565,000
$7,000,000 ————— 700,000
11 times
10 times
365 days ————– 11 times
365 days ———— 10 times
33.2 days
36.5 days
FOR INSTRUCTOR USE ONLY
18 - 66 Test Bank for Accounting Principles, Tenth Edition Solution 211 (b)
(Cont.)
The receivables are turning faster in 2013 than they did in 2012. There is still a problem since the normal credit period is 30 days, and the average collection period for both years exceeds this target. Therefore, improvement in the management of the receivables would appear to be desirable.
Ex. 212 State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer. (a) Collection of an accounts receivable. (b) Declaration of cash dividends. (c) Additional stock is sold for cash. (d) Short-term investments are purchased for cash. (e) Equipment is purchased for cash. (f) Inventory purchases are made for cash. (g) Accounts payable are paid. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 212 (a) (b) (c) (d) (e) (f) (g)
(7–11 min.)
no effect decrease increase no effect decrease no effect increase
Ex. 213 The balance sheet for Flavor Corporation at the end of the current year indicates the following: Bonds payable, 8% ............................................................. 6% Preferred stock, $100 par .............................................. Common stock, $10 par ......................................................
$4,000,000 1,000,000 2,000,000
Income before income taxes was $480,000 and income taxes expense for the current year amounted to $144,000. Cash dividends paid on common stock were $300,000, and the common stock was selling for $22 per share at the end of the year. There were no ownership changes during the year. Instructions Determine each of the following: (a) times that bond interest was earned. (b) earnings per share for common stock. (c) price-earnings ratio. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 213
18 - 67
(9–14 min.)
(a) Times interest earned =
Income before income taxes and interest expense —————————————————————— Interest expense
$480,000 + $320,000 —————————— = 2.5 times $320,000 (b)
Net income – Preferred dividends Earnings per share = ————————————————————— Weighted average common shares outstanding $336,000 – $60,000 ————————— = $1.38 per share 200,000 shares
(c)
Market price per share Price-earnings ratio = —————————— Earnings per share $22.00 ——— = 15.9 $1.38
Ex. 214 The income statement for Dana Company for the year ended December 31, 2012 appears below. Sales Cost of goods sold Gross profit Expenses Net income
$720,000 380,000 340,000 190,000* $150,000
*Includes $20,000 of interest expense and $22,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2012 was 50,000 shares. On July 1, 2012, 10,000 more shares were issued. 2. The market price of Dana's stock was $12 at the end of 2012. 3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred stockholders. Instructions Compute the following ratios for 2012: (a) earnings per share. (b) price-earnings. (c) times interest earned. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
18 - 68 Test Bank for Accounting Principles, Tenth Edition Solution 214 (a)
(8–13 min.)
Earnings per share $150,000 – $6,000 $144,000 —————————— = ———— = $2.62 [50,000 + (10,000 ÷ 2)] 55,000
(b)
Price-earnings $12.00 ——— = 4.6 times $2.62
(c)
Times interest earned $150,000 + $20,000 + $22,000 ————————————— = 9.6 times $20,000
Ex. 215 Selected comparative statement data for Willow Products Company are presented below. All balance sheet data are as of December 31. Net sales Cost of goods sold Interest expense Net income Accounts receivable Inventory Total assets Total common stockholders' equity
2013 $800,000 480,000 7,000 60,000 120,000 85,000 600,000 430,000
2012 $720,000 440,000 5,000 42,000 100,000 75,000 500,000 320,000
Instructions Compute the following ratios for 2013: (a) Profit margin. (b) Asset turnover. (c) Return on assets. (d) Return on common stockholders' equity. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 215
(8–13 min.)
(a) Profit margin (b) Asset turnover
(c) Return on assets
$60,000 = 7.5% $800,000
$800,000 = 1.5 times $500,000 + $600,000 2 $60,000 = 10.9% $550,000
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis Solution 215
18 - 69
(Cont.)
$60,000 = 16% $320,000 + $430,000 2
(d) Return on common stockholders' equity
Ex. 216 Sinclair Corporation experienced a fire on December 31, 2013, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances. Cash Receivables (net) Inventory Accounts payable Notes payable Common stock, $100 par Retained earnings
December 31, 2013 $ 30,000 84,000 200,000 50,000 30,000 400,000 130,000
December 31, 2012 $ 10,000 126,000 180,000 90,000 60,000 400,000 101,000
Additional information: 1. The inventory turnover is 4.5 times 2. The return on common stockholders' equity is 22%. The company had no additional paid-in capital. 3. The receivables turnover is 8.8 times. 4. The return on assets is 20%. 5. Total assets at December 31, 2012, were $585,000. Instructions Compute the following for Santo Corporation. (a) Cost of goods sold for 2013. (b) Net sales (credit) for 2013. (c) Net income for 2013. (d) Total assets at December 31, 2013. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216
(8–13 min.)
Cost of goods sold $200,000 + $180,000 2 4.5 X $190,000 = Cost of goods sold Cost of goods sold = $855,000.
(a) Inventory turnover = 4.5 =
(b) Receivables turnover = 8.8 =
Net sales(credit) $84,000 + $126,000 2
8.8 X $105,000 = Net sales (credit) = $924,000
FOR INSTRUCTOR USE ONLY
18 - 70 Test Bank for Accounting Principles, Tenth Edition Solution 216
(Cont.)
(c) Return on common stockholders' equity = 22% =
Net income $400,000 + $130,000 + $400,000 + $101,000 2 .22 X $515,500 = Net income = $113,410 (d) Return on assets = 20% =
Average assets =
$113,410[see(c)above] Average assets
$113,410 = $567,050 .20
Total assets(Dec.31,2013) + $585,000 = $567,050 2
Total assets (Dec. 31, 2013) = ($567,050 X 2) – $585,000 = $549,100 Ex. 217 For its fiscal year ending October 31, 2012, Conner Corporation reported the following partial data Income before income taxes $1,200,000 Income tax expense (30% x 950,000) 285,000 Income before extraordinary items 915,000 Extraordinary loss from flood 250,000 Net income $665,000 The flood loss is considered an extraordinary item. The income tax rate is 30% on all items. Instructions Prepare a correct income statement, beginning with income before income taxes. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217
(5–8 min.)
CONNER CORPORATION Partial Income Statement For the Year Ended December 31, 2012 ——————————————————————————————————————————— Income before income taxes ................................................................ $1,200,000 Income tax expense ($1,200,000 x 30%) ................................................. 360,000 Income before extraordinary item ............................................................. 840,000 Extraordinary loss from flood, net of $75,000 ........................................... tax savings ($250,000 x 30%)............................................................. 175,000 Net income ............................................................................................... $665,000
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Financial Statement Analysis
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Ex. 218 Grande Corporation had income from continuing operations of $425,000 for the year ended December 31, 2012. It also had the following items (before income taxes): 1. Extraordinary flood loss of $120,000. 2. Loss of $50,000 on discontinuance of a division. All items are subject to income taxes at a 30% tax rate. Instructions Prepare a partial income statement, beginning with income from continuing operations. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 218
(9–12 min.)
Income from continuing operations Discontinued operations Loss on discontinued division, net of $15,000 income tax savings Income before extraordinary item Extraordinary item Flood loss, net of $36,000 income tax savings Net income
$425,000 (35,000) 390,000 (84,000) $306,000
Ex. 219 Nola Corporation gathered the following information for the fiscal year ended December 31, 2012: Sales $1,300,000 Extraordinary fire loss 110,000 Selling and administrative expenses 160,000 Cost of goods sold 900,000 Loss on sale of equipment 40,000 Nola Corporation is subject to a 30% income tax rate. Instructions Prepare a partial income statement, beginning with income before income taxes. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 219
(8–12 min.) NOLA CORPORATION Partial Income Statement For the Fiscal Year Ended December 31, 2012
Income before income taxes ($1,300,000 – $900,000 – $160,000 – $40,000) Income tax expense ($200,000 × 30%) Income before extraordinary item Extraordinary fire loss, net of $33,000 tax saving ($110,000 × 30%) Net income
FOR INSTRUCTOR USE ONLY
$200,000 60,000 140,000 (77,000) $ 63,000
18 - 72 Test Bank for Accounting Principles, Tenth Edition Ex. 220 Whyte Corporation had the information listed below available in preparing an income statement for the year ended December 31, 2012. All amounts are before income taxes. Assume a 30% income tax rate for all items. Sales $ 700,000 Expropriation of property by a foreign government (loss) $ (90,000) Income from operation of discontinued cement division $ 100,000 Loss from disposal of cement division $ (80,000) Operating expenses $ 125,000 Gain on sale of equipment $ 65,000 Cost of goods sold $ 420,000 Instructions Prepare a multiple-step income statement in good form which takes into account intraperiod income tax allocation. Ignore EPS computations. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 17, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220
(17–22 min.)
WHYTE CORPORATION Income Statement For the Year Ended December 31, 2012 ——————————————————————————————————————————— Sales ................................................................................................ Cost of goods sold............................................................................ Gross profit....................................................................................... Operating expenses ......................................................................... Operating income ............................................................................. Other revenues and gains Gain on sale of equipment ....................................................... Income before income taxes ............................................................ Income taxes .................................................................................... Income from continuing operations ................................................... Discontinued operations Income from operation of discontinued cement division, net of $30,000 income taxes .................................... $70,000 Loss from disposal of cement division, net of $24,000 income tax savings......................................... (56,000) Income before extraordinary item ..................................................... Extraordinary item Loss on expropriation of property, net of $27,000 income tax saving .......................................... Net income ......................................................................................
FOR INSTRUCTOR USE ONLY
$700,000 420,000 280,000 125,000 155,000 65,000 220,000 66,000 154,000
14,000 168,000
(63,000) $105,000
Financial Statement Analysis
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Ex. 221 Indicate whether the following items would be reported as an ordinary or an extraordinary item in Mallak Corporation's income statement. (a)
Loss attributable to labor strike.
(b)
Gain on sale of fixed assets.
(c)
Loss from fire. Mallak is a chemical company.
(d)
Loss from sale of short-term investments.
(e)
Expropriation of property by a foreign government.
(f)
Loss from hurricane damage. Mallak Corporation is located in the New Orleans area.
(g)
Loss from government condemnation of property through newly enacted law.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 221 (a) ordinary (b) ordinary (c) ordinary (d) ordinary
(6–9 min.) (e) (f) (g)
extraordinary ordinary extraordinary
Ex. 222 Martin Company has income from continuing operations of $520,000 for the year ended December 31, 2012. It also has the following items (before considering income taxes): (1)
An extraordinary fire loss of $150,000.
(2)
A gain of $90,000 on the discontinuance of a major segment.
(3)
A correction of an error in last year's financial statement that resulted in a $70,000 overstatement of 2011 net income.
Assume all items are subject to income taxes at a 30% tax rate. Instructions (a) Prepare an income statement, beginning with income from continuing operations. (b) Indicate the statement presentation of any item not included in (a) above. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 222 (a)
(10–15 min.) MARTIN COMPANY Partial Income Statement For the Year Ended December 31, 2012
Income from continuing operations ............................................................. Discontinued operations Gain on discontinued segment, net of $27,000 income taxes ............ Income before extraordinary item ............................................................... Extraordinary item Fire loss, net of $45,000 tax saving ................................................... Net income ................................................................................................ FOR INSTRUCTOR USE ONLY
$520,000 63,000 583,000 (105,000) $478,000
18 - 74 Test Bank for Accounting Principles, Tenth Edition Solution 222 (b)
(Cont.)
The correction of an error in last year's financial statements is a prior period adjustment. The correction is reported in the 2012 retained earnings statement as an adjustment that decreases the reported beginning balance of retained earnings by $49,000 [$70,000 – ($70,000 × 30%)].
COMPLETION STATEMENTS 223. In analyzing and interpreting financial statement information, three major characteristics are generally evaluated: (1)____________, (2)_____________, and (3)_____________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
224. ______________ analysis, also called trend analysis, is a technique for evaluating a percentage increase or decrease for a financial statement item over a period of time. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
225. Expressing each item within a financial statement as a percentage of a base amount is called ______________ analysis. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
226. The ratios used in evaluating a company's liquidity and short-term debt paying ability that complement each other are the ______________ ratio and the ______________ ratio. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
227. The receivables turnover is calculated by dividing _________________ by average ___________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
228. If inventory turnover is 10 times, and the average inventory was $400,000, the cost of goods sold during the year was $______________ and the days in inventory was ______________ days. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
229. Hansen Corporation had net income for the year of $200,000 and a profit margin of 25%. If total average assets were $400,000, the asset turnover ratio was ____________ times. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 75
230. The ______________ ratio measures the percentage of earnings distributed in the form of cash dividends. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
231. The lower the ______________ to ______________ ratio, the more equity "buffer" there is available to the creditors. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
232. Times interest earned is calculated by dividing _____________ before _______________ and ________________ by interest expense. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
233. Discontinued operations refers to the disposal of a ______________ of a business. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
234. The two criteria necessary for an item to be classified as an extraordinary item are that the transaction or event must be (1) __________________ and (2) ___________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
235. A change in inventory methods during the year would be classified as a change in __________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 223. 224. 225. 226. 227. 228. 229.
liquidity, profitability, solvency Horizontal vertical (common size) current, acid-test (quick) net credit sales, net receivables 4,000,000, 36.5 2
230. 231. 232. 233. 234.
payout debt, total assets income, income taxes, interest expense significant segment unusual in nature, infrequent in occurrence 235. accounting principle
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18 - 76 Test Bank for Accounting Principles, Tenth Edition
MATCHING SET A 236. For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =
Liquidity ratio Profitability ratio Solvency ratio
____ 1. Price-earnings ratio ____ 2. Asset turnover ____ 3. Receivables turnover ____ 4. Earnings per share ____ 5. Payout ratio ____ 6. Current ratio ____ 7. Acid-test ratio ____ 8. Debt to total assets ratio ____ 9. Times interest earned ____ 10. Inventory turnover Ans: N/A, SO: 5, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Matching P
1. Price-earnings ratio
P
2. Asset turnover
L
3. Receivables turnover
P
4. Earnings per share
P
5. Payout ratio
L
6. Current ratio
L
7. Acid-test ratio
S
8. Debt to total assets ratio
S
9. Times interest earned
L 10.
Inventory turnover
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 77
SET B 237. Match the ratios with the appropriate ratio computation by entering the appropriate letter in the space provided. A. Current ratio B. Acid-test ratio C. Profit margin D. Asset turnover E. Price-earnings ratio
F. Times interest earned G. Inventory turnover H. Average collection period I. Days in inventory J. Payout ratio
Cost of goods sold ____ 1. ————————— Average inventory Net income ____ 2. ————— Net sales Cash dividends ____ 3. ——————— Net income Net sales ____ 4. ——————— Average assets Current assets ____ 5. ———————— Current liabilities 365 days ____ 6. —————————— Receivables turnover Market price per share of stock ____ 7. —————————————— Earnings per share 365 days ____ 8. ———————— Inventory turnover Income before income taxes and interest expense ____ 9. —————————————————————— Interest expense Cash + short-term investments + receivables (net) ____ 10. ——————————————————————— Current liabilities Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 78 Test Bank for Accounting Principles, Tenth Edition
Answers to Matching 1. 2. 3. 4. 5.
G C J D A
6. 7. 8. 9. 10.
H E I F B
SHORT-ANSWER ESSAY QUESTIONS S-A E 238 Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 238 Horizontal analysis allows an analyst to develop a picture of current trends in a company's operations. The analyst can see whether the accounts are increasing or decreasing and how large these changes actually are. Vertical analysis allows an analyst to evaluate financial statement items within a single financial statement. This technique helps the analyst to evaluate the relative size of the financial statement items and how the items relate to the financial statement as a whole. An example would be if current liabilities were a very large percentage of total liabilities and stockholders' equity. Both techniques allow the company to evaluate their performance and position relative to their competitors and their industry as a whole. For example, the company could evaluate its current trend in sales and see how favorably its sales performance compared to the sales performance of other companies in the industry. Another example would be comparing the relative size of longterm liabilities or retained earnings. This would show which companies have taken on a large amount of debt and which companies have invested in themselves. S-A E 239 Eric Harden, the CEO of Mystical Products, is a successful entrepreneur but a poor student of accounting. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
18 - 79
Solution 239 To: Eric Harden From: Student name Re: Bases of Comparison for Ratio Analysis There are three bases of comparison for ratio analysis. They include: Intra-company: This basis compares a ratio for the current year to the same ratio for one or more prior years. Inter-company: This basis compares a ratio for one company with the same ratio for one or more competing companies. Industry averages: This basis compares a ratio for a company with the industry average for the same ratio. (Signed)
S-A E 240 What do the following classes of ratios measure? (a) (c) Solvency ratios.
Liquidity ratios. (b)
Profitability ratios.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 240 (a) Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c) Solvency ratios measure the ability of the company to survive over a long period of time. S-A E 241 (a) What is meant by trading on the equity? (b) How would you determine the profitability of trading on the equity? Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 241 (a) Trading on the equity means that the company has borrowed money at a lower rate of interest than it is able to earn by using the borrowed money. Simply stated, it is using money supplied by nonowners to increase the return to the owners. (b) A comparison of the return on total assets with the rate of interest paid for borrowed money indicates the profitability of trading on the equity. S-A E 242 Why is it important to report discontinued operations separately from income from continuing operations? Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
18 - 80 Test Bank for Accounting Principles, Tenth Edition Solution 242 Discontinued operations refers to the disposal of a significant component of the business such as the stopping of an entire activity or eliminating a major class of customers. It is important to report discontinued operations separately from continuing operations because the discontinued component will not affect future income statements. S-A E 243 (Ethics) A trusted employee of Wilderness Tours was caught in the act of embezzling funds. He confessed to earlier embezzlements, but retracted the confession on the advice of his attorney. Over the course of the most recent quarter, it has been determined that $20,000 was embezzled. Wilderness Tours has suffered adverse publicity in the recent past because of serious injury to five tourists that occurred during a two week "Winter Wilds Adventure" tour. The company has therefore decided to avoid publicity and has agreed to drop all charges against the embezzling employee. In return, the employee has agreed to a notation of "Terminated—Not to be Rehired" to be appended to his personnel file. Required: 1. Who are the stakeholders in the decision not to prosecute? 2. Was it ethical for the company to decide not to prosecute? Explain. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 243 1. The stakeholders include • The embezzling employee • The other employees • Company management • Other companies who might hire the embezzling employee 2. The company was certainly within its legal rights not to prosecute the embezzling employee. However, the decision not to prosecute may not be ethical. First, it does not serve public justice. The embezzling employee could find a job elsewhere, and harm someone else financially. Second, to the extent that other employees know of the act and of the decision, morale may be harmed. The decision is also not the best one for the employee. Having never been forced to face the consequences of his dishonest acts, he is not deterred from (and may even feel encouraged to) commit similar acts in the future. The one argument that would support the premise that the decision was ethical is that the public disclosure would cause harm greater than that caused by keeping silent. Even this argument lacks force, because it implies a lack of moral courageousness.
FOR INSTRUCTOR USE ONLY
Financial Statement Analysis
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S-A E 244 (Communication) Kwik Express specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release. • The financial statements are being released. • Net income this year was $2.1 million. Last year's net income had been $2.0 million. • The current ratio has changed to 2:1 from last year's 1.5:1 • The debt/total assets ratio has changed to 4:5 from last year's 3:5 • The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans. • The company is now the largest medical courier in the mid-Atlantic region. Required: Prepare a brief press release incorporating the information above. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 244 Press Release Kwik Express released its financial statements today, disclosing a 5% increase in earnings, to $2.1 million from $2 million last year. The company also improved its short-term liquidity. Its current ratio improved to 2:1 from last year's 1.5:1. Part of the improved performance is no doubt due to the addition of ten new delivery vans to its fleet, allowing it to become the largest medical courier in the mid-Atlantic region. The purchase of the vans, however, caused the debt/total asset ratio to decline. There are now $4 of debt for every $5 in assets, while last year, there were only $3 of debt to $5 in assets.
FOR INSTRUCTOR USE ONLY
CHAPTER 19 MANAGERIAL ACCOUNTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
6 7 7 8 8 8 1 2
C C K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
3 4 5 6 7
C K K K K
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129.
6 6 6 5 6 6 6 6 5 6 6 6 5 6 6 6 5 6 6 6 6 6 6
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. sg 142. sg 143. sg 144. sg 145. st 146. sg 147. st 148. sg 149. st 150. sg 151.
6 6 6 6 7 7 8 8 8 8 8 8 1 2 4 4 5 5 5 6 6 7
AP AP AP AP C C C K K C K K C K K K K C K K K K
158. 159.
6 6
AP AP
160. 161.
6 7
AP AP
177. 178. 179. 180. 181.
6 6 6 6 6
AP AP AP AN AN
182. 183. 184. 185.
6 6 6,7 7
AP AP C AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 2 2 2
C K K K K K C K
9. 10. 11. 12. 13. 14. 15. 16.
2 3 3 3 3 3 3 4
K C K K K C K K
17. 18. 19. 20. 21. 22. 23. 24.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2
K C K C K C K C C K K K K C C K K K K C K C K
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.
2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4
C K C C K C K K K C C K K C K C K K C K K C C
84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
152. 153.
3 3
K K
154. 155.
3 3
K K
156. 157.
162. 163. 164. 165. 166.
1 3 3 3 3,4
C C C C AP
167. 168. 169. 170. 8. 171.
4 4 4 5,6 5–7
AP C C AP C
172. 173. 174. 175. 176.
4 4 4 4 5 5 5 6
C K K K K K K K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 4 4 4 4 4 4 4 4 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6
AP C C C C K C K K C C C C AP K C C K AP AP AP K AP
Brief Exercises 4 6
C AP
Exercises 5–7 5–7 5,6 5,6 6
AP AP AP AP AN
19 - 2
Test Bank for Accounting Principles, Tenth Edition
Completion Statements 186. 187. 188.
1 1 1
K K K
189. 190. 191.
2 2 2
K K K
192. 193. 194.
3 3 3
K K K
195. 196. 197.
4 5 6
K K K
3
K
198. 199. 200.
6 6 7
K K K
Item
Type
Matching Statements 201.
1
K
202. 203.
1 2
K K
Short-Answer Essay
sg st
204. 205.
3 4
K K
206. 207.
3 8
K K
208.
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5.
TF TF TF TF TF
31. 38. 39. 40. 41.
TF MC MC MC MC
42. 43. 44. 45. 46.
6. 7. 8. 9.
TF TF TF TF
32. 55. 56. 57.
TF MC MC MC
58. 59. 60. 61.
10. 11. 12. 13. 14. 15.
TF TF TF TF TF TF
33. 64. 65. 66. 67. 68.
TF MC MC MC MC MC
69. 70. 71. 72. 73. 74.
16. 17. 18. 19.
TF TF TF TF
20. 34. 82. 83.
TF TF MC MC
84. 85. 86. 87.
21. 22. 23. 35.
TF TF TF TF
92. 93. 94. 95.
MC MC MC MC
96. 110. 115. 119.
Type
Item
Type
Item
Study Objective 1 MC 47. MC 52. MC 48. MC 53. MC 49. MC 54. MC 50. MC 142. MC 51. MC 162. Study Objective 2 MC 62. MC 190. MC 63. MC 191. MC 143. MC 203. MC 189. C Study Objective 3 MC 75. MC 81. MC 76. MC 152. MC 77. MC 153. MC 78. MC 154. MC 79. MC 155. MC 80. MC 163. Study Objective 4 MC 88. MC 144. MC 89. MC 145. MC 90. MC 156. MC 91. MC 166. Study Objective 5 MC 123. MC 170. MC 146. MC 171. MC 147. MC 172. MC 148. MC 173.
Type
Item
Type
MC MC MC MC Ex
186. 187. 188. 201. 202.
C C C MA SA
MC BE BE BE BE Ex
164. 165. 166. 192. 193. 194.
Ex Ex Ex C C C
204. 206. 208.
SA SA SA
MC MC BE Ex
167. 168. 169. 195.
Ex Ex Ex C
205.
SA
Ex Ex Ex Ex
174. 175. 196.
Ex Ex C
C C SA
FOR INSTRUCTOR USE ONLY
Managerial Accounting
24. 25. 36. 97. 98. 99. 100. 101. 102.
TF TF TF MC MC MC MC MC MC
103. 104. 105. 106. 107. 108. 109. 111. 112.
MC MC MC MC MC MC MC MC MC
113. 114. 116. 117. 118. 120. 121. 122. 124.
26. 27. 37.
TF TF TF
128. 129. 130.
MC MC MC
134. 135. 136.
28. 29.
TF TF
30. 136.
TF MC
137. 138.
Note: TF = True-False MC = Multiple Choice
Study Objective 6 MC 125. MC 149. MC 126. MC 150. MC 127. MC 157. MC 128. MC 158. MC 129. MC 159. MC 130. MC 160. MC 131. MC 170. MC 132. MC 171. MC 133. MC 172. Study Objective 7 MC 151. MC 172. MC 161. BE 173. MC 171. Ex 184. Study Objective 8 MC 139. MC 141. MC 140. MC 207.
MC MC BE BE BE BE Ex Ex Ex
173. 174. 175. 176. 177. 178. 179. 180. 181.
Ex Ex Ex Ex Ex Ex Ex Ex Ex
Ex Ex Ex
185. 200.
Ex C
182. 183. 184. 197. 198. 199.
19 - 3
Ex Ex Ex C C C
MC SA
BE = Brief Exercise Ex = Exercise
C = Completion
CHAPTER STUDY OBJECTIVES 1. Explain the distinguishing features of managerial accounting. The primary users of managerial accounting reports are internal users, who are officers, department heads, managers, and supervisors in the company. Managerial accounting issues internal reports as frequently as the need arises. The purpose of these reports is to provide special-purpose information for a particular user for a specific decision. The content of managerial accounting reports pertains to subunits of the business and may be very detailed and may extend beyond the double-entry accounting system. The reporting standard is relevance to the decision being made. No independent audits are required in managerial accounting. 2. Identify the three broad functions of management. The three functions are planning, directing, and controlling. Planning requires management to look ahead and to establish objectives. Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. Controlling is the process of keeping the activities on track. 3. Define the three classes of manufacturing costs. Manufacturing costs are typically classified as either (1) direct materials, (2) direct labor, or (3) manufacturing overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is considered direct labor. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product.
FOR INSTRUCTOR USE ONLY
19 - 4
Test Bank for Accounting Principles, Tenth Edition
4. Distinguish between product and period costs. Product costs are costs that are a necessary and integral part of producing the finished product. Product costs are also called inventoriable costs. Under the matching principle, these costs do not become expenses until the company sells the inventory to which they attach. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs. 5. Explain the difference between a merchandising and a manufacturing income statement. The difference between a merchandising and a manufacturing income statement is in the cost of goods sold section. A manufacturing cost of goods sold section shows beginning and ending finished goods inventories and the cost of goods manufactured. 6. Indicate how cost of goods manufactured is determined. The cost of the beginning work in process is added to the total manufacturing costs for the current year to arrive at the total cost of work in process for the year. The ending work in process is then subtracted from the total cost of work in process to arrive at the cost of goods manufactured. 7. Explain the difference between a merchandising and a manufacturing balance sheet. The difference between a merchandising and a manufacturing balance sheet is in the current assets section. The current assets section of a manufacturing company's balance sheet presents three inventory accounts: finished goods inventory, work in process inventory, and raw materials inventory. 8 Identify trends in managerial accounting. Managerial accounting has experienced many changes in recent years. Among these are a shift toward addressing the needs of service companies and improving practices to better meet the needs of managers. Improved practices include a focus on managing the value chain through techniques such as just-intime inventory and total quality management. In addition, techniques such as activity-based costing (ABC) have been developed to improve decision making. Finally, the balanced scorecard is now used by many companies in order to attain a more comprehensive view of the company's operations.
TRUE-FALSE STATEMENTS 1.
Reports prepared in financial accounting are general-purpose reports, whereas reports prepared in managerial accounting are usually special-purpose reports.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
2.
Managerial accounting information generally pertains to an entity as a whole and is highly aggregated.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
3.
Managerial accounting applies to all forms of business organizations.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
4.
Determining the unit cost of manufacturing a product is an output of financial accounting.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Managerial Accounting 5.
19 - 5
Managerial accounting internal reports are prepared more frequently than are classified financial statements.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
6.
The management function of organizing and directing is mainly concerned with setting goals and objectives for the entity.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Decision Analysis
7.
The Sarbanes-Oxley Act replaces generally accepted accounting principles in a manufacturing company.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Controlling is the process of determining whether planned goals are being met.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls
9.
Decision-making is an integral part of the planning, directing, and controlling functions.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Decision Analysis
10.
Both direct labor cost and indirect labor cost are product costs.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
11.
Manufacturing costs that cannot be classified as direct materials or direct labor are classified as manufacturing overhead.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
12.
Raw materials are equal to direct materials minus indirect materials.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
13.
Raw materials that can be conveniently and directly associated with a finished product are called materials overhead.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
14.
The total cost of a finished product does not generally contain equal amounts of materials, labor, and overhead costs.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
15.
Direct materials costs and indirect materials costs are manufacturing overhead.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
16.
Period costs include selling and administrative expenses.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
17.
Indirect materials and indirect labor are both inventoriable costs.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
19 - 6
Test Bank for Accounting Principles, Tenth Edition
18.
Direct materials and direct labor are the only product costs.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
19.
Total period costs are deducted from total cost of work in process to calculate cost of goods manufactured.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
20.
Period costs are not inventoriable costs.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Ending finished goods inventory appears on both the balance sheet and the income statement of a manufacturing company.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
The beginning work in process inventory appears on both the balance sheet and the cost of goods manufactured schedule of a manufacturing company.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
In calculating gross profit for a manufacturing company, the cost of goods manufactured is deducted from net sales.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
Finished goods inventory does not appear on a cost of goods manufactured schedule.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
If the ending work in process inventory is greater than the beginning work in process inventory, then the cost of goods manufactured will be less than total manufacturing costs for the period.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
26.
Finished goods inventory for a manufacturing company is equivalent to merchandise inventory for a merchandising company.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
Raw materials inventory shows the cost of completed goods available for sale to customers.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
The balanced scorecard approach attempts to maintain as little inventory on hand as possible.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Performance Measurement
29.
The supply chain is all the activities associated with providing a product or service.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Global Business
30.
Many companies have significantly lowered inventory levels and costs using just-in-time inventory methods.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Managerial Accounting 31.
19 - 7
Managerial accounting is primarily concerned with managers and external users.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics
32.
Planning involves coordinating the diverse activities and human resources of a company to produce a smooth running operation.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics
33.
When the physical association of raw materials with the finished product is too small to trace in terms of cost, they are usually classified as indirect materials.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
34.
Product costs are also called inventoriable costs.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
35.
Direct materials become a cost of the finished goods manufactured when they are acquired, not when they are used.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
36.
The sum of the direct materials costs, direct labor costs, and beginning work in process is the total manufacturing costs for the year.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
In a manufacturing company balance sheet, manufacturing inventories are reported in the current assets section in the order of their expected use in production.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T F T F T F
7. 8. 9. 10. 11. 12.
F T T T T F
13. 14. 15. 16. 17. 18.
F T F T T F
19. 20. 21. 22. 23. 24.
F T T F F T
25. 26. 27. 28. 29. 30.
T T F F F T
31. 32. 33. 34. 35. 36.
F F T T F F
37.
F
MULTIPLE CHOICE QUESTIONS 38.
Managerial accounting applies to each of the following types of businesses except a. service firms. b. merchandising firms. c. manufacturing firms. d. Managerial accounting applies to all types of firms.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 8
Test Bank for Accounting Principles, Tenth Edition
39.
Managerial accounting information is generally prepared for a. stockholders. b. creditors. c. managers. d. regulatory agencies.
Ans: c, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
Managerial accounting information a. pertains to the entity as a whole and is highly aggregated. b. pertains to subunits of the entity and may be very detailed. c. is prepared only once a year. d. is constrained by the requirements of generally accepted accounting principles.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
The major reporting standard for presenting managerial accounting information is a. relevance. b. generally accepted accounting principles. c. the cost principle. d. the current tax law.
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Managerial accounting is also called a. management accounting. b. controlling. c. analytical accounting. d. inside reporting.
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
Which of the following is not an internal user? a. Creditor b. Department manager c. Controller d. Treasurer
Ans: a, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics
44.
Managerial accounting does not encompass a. calculating product cost. b. calculating earnings per share. c. determining cost behavior. d. profit planning.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics
45.
Managerial accounting is applicable to a. service entities. b. manufacturing entities. c. not-for-profit entities. d. all of these.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting 46.
19 - 9
Management accountants would not a. assist in budget planning. b. prepare reports primarily for external users. c. determine cost behavior. d. be concerned with the impact of cost and volume on profits.
Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
Internal reports must be communicated a. daily. b. monthly. c. annually. d. as needed.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Financial statements for external users can be described as a. user-specific. b. general-purpose. c. special-purpose. d. managerial reports.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
Managerial accounting reports can be described as a. general-purpose. b. macro-reports. c. special-purpose. d. classified financial statements.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
The reporting standard for external financial reports is a. industry-specific. b. company-specific. c. generally accepted accounting principles. d. department-specific.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Which of the following statements about internal reports is not true? a. The content of internal reports may extend beyond the double-entry accounting system. b. Internal reports may show all amounts at market values. c. Internal reports may discuss prospective events. d. Most internal reports are summarized rather than detailed.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
In an analogous sense, external user is to internal user as generally accepted accounting principles are to a. timely. b. special-purpose. c. relevance to decision. d. SEC.
Ans: c, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 10 Test Bank for Accounting Principles, Tenth Edition 53.
Internal reports are generally a. aggregated. b. detailed. c. regulated. d. unreliable.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
A distinguishing feature of managerial accounting is a. external users. b. general-purpose reports. c. very detailed reports. d. quarterly and annual reports.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
What activities and responsibilities are not associated with management's functions? a. Planning b. Accountability c. Controlling d. Directing
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting
56.
Planning is a function that involves a. hiring the right people for a particular job. b. coordinating the accounting information system. c. setting goals and objectives for an entity. d. analyzing financial statements.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
57.
The managerial function of controlling a. is performed only by the controller of a company. b. is only applicable when the company sustains a loss. c. is concerned mainly with operating a manufacturing segment. d. includes performance evaluation by management.
Ans: d, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
58.
Which of the following is not a management function? a. Constraining b. Planning c. Controlling d. Directing
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
59.
A manager that is establishing objectives is performing which management function? a. Controlling b. Directing c. Planning d. Constraining
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
FOR INSTRUCTOR USE ONLY
Managerial Accounting 60.
19 - 11
The management function that requires managers to look ahead and establish objectives is a. controlling. b. directing. c. planning. d. constraining.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Decision Analysis
61.
In determining whether planned goals are being met, a manager is performing the function of a. planning. b. follow-up. c. directing. d. controlling.
Ans: d, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Decision Analysis
62.
Which of the following is not a separate management function? a. Planning b. Directing c. Decision-making d. Controlling
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Decision Analysis
63.
Directing includes a. providing a framework for management to have criteria to terminate employees when needed. b. running a department under quality control standards universally accepted. c. coordinating a company's diverse activities and human resources to produce a smooth-running operation. d. developing a complex performance ranking system to give certain high performers good raises.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Decision Analysis
64.
Both direct materials and indirect materials are a. raw materials. b. manufacturing overhead. c. merchandise inventory. d. sold directly to customers by a manufacturing company.
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
65.
The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is a. manufacturing overhead. b. indirect materials. c. indirect labor. d. direct labor.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
19 - 12 Test Bank for Accounting Principles, Tenth Edition 66.
Which one of the following would not be classified as manufacturing overhead? a. Indirect labor b. Direct materials c. Insurance on factory building d. Indirect materials
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
Manufacturing costs include a. direct materials and direct labor only. b. direct materials and manufacturing overhead only. c. direct labor and manufacturing overhead only. d. direct materials, direct labor, and manufacturing overhead.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
Which one of the following is not a direct material? a. A tire used for a lawn mower b. Plastic used in the covered case for a home PC c. Steel used in the manufacturing of steel-radial tires d. Lubricant for a ball-bearing joint for a large crane
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
69.
Which one of the following is not a cost element in manufacturing a product? a. Manufacturing overhead b. Direct materials c. Office salaries d. Direct labor
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
70.
A manufacturing process requires small amounts of glue. The glue used in the production process is classified as a(n) a. period cost. b. indirect material. c. direct material. d. miscellaneous expense.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
71.
The wages of a timekeeper in the factory would be classified as a. a period cost. b. direct labor. c. indirect labor. d. compliance costs.
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
72.
Which one of the following is not considered as material costs? a. Partially completed motor engines for a motorcycle plant b. Bolts used in manufacturing the compressor of an engine c. Rivets for the wings of a new commercial jet aircraft d. Lumber used to build tables
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Managerial Accounting 73.
19 - 13
Which of the following is not a manufacturing cost category? a. Cost of goods sold b. Direct materials c. Direct labor d. Manufacturing overhead
Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
As current technology changes manufacturing processes, it is likely that direct a. labor will increase. b. labor will decrease. c. materials will increase. d. materials will decrease.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
75.
For the work of factory employees to be considered as direct labor, the work must be conveniently and a. materially associated with raw materials conversion. b. periodically associated with raw materials conversion. c. physically associated with raw materials conversion. d. promptly associated with raw materials conversion.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
Which of the following is not classified as direct labor? a. Bottlers of beer in a brewery b. Copy machine operators at a copy shop c. Wages of supervisors d. Bakers in a bakery
Ans: c, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
77.
Cotter pins and lubricants used irregularly in a production process are classified as a. miscellaneous expense. b. direct materials. c. indirect materials. d. nonmaterial materials.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
Which of the following is not another name for the term manufacturing overhead? a. Factory overhead b. Pervasive costs c. Burden d. Indirect manufacturing costs
Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
Because of automation, which component of product cost is declining? a. Direct labor b. Direct materials c. Manufacturing overhead d. Advertising
Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
19 - 14 Test Bank for Accounting Principles, Tenth Edition 80.
The product cost that is most difficult to associate with a product is a. direct materials. b. direct labor. c. manufacturing overhead. d. advertising.
Ans: c, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
81.
Manufacturing costs that cannot be classified as either direct materials or direct labor are known as a. period costs. b. nonmanufacturing costs. c. selling and administrative expenses. d. manufacturing overhead.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
82.
Which one of the following is an example of a period cost? a. A change in benefits for the union workers who work in the New York plant of a Fortune 1000 manufacturer b. Workers' compensation insurance on factory workers' wages allocated to the factory c. A box cost associated with computers d. A manager's salary for work that is done in the corporate head office
Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
83.
Which one of the following costs would not be inventoriable? a. Period costs b. Factory insurance costs c. Indirect materials d. Indirect labor costs
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
Direct materials and direct labor of a company total $8,000,000. If manufacturing overhead is $4,000,000, what is direct labor cost? a. $4,000,000 b. $8,000,000 c. $0 d. Cannot be determined from the information provided
Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
Which of the following are period costs? a. Raw materials b. Direct materials and direct labor c. Direct labor and manufacturing overhead d. Selling expenses
Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
Sales commissions are classified as a. overhead costs b. period costs. c. product costs. d. indirect labor.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting 87.
19 - 15
Product costs consist of a. direct materials and direct labor only. b. direct materials, direct labor, and manufacturing overhead. c. selling and administrative expenses. d. period costs.
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
88.
Which one of the following represents a period cost? a. The VP of Sales' salary and benefits b. Overhead allocated to the manufacturing operations c. Labor costs associated with quality control d. Fringe benefits associated with factory workers
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
89.
Product costs are also called a. direct costs. b. overhead costs. c. inventoriable costs. d. capitalizable costs.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
For inventoriable costs to become expenses under the matching principle, a. the product must be finished and in stock. b. the product must be expensed based on its percentage-of-completion. c. the product to which they attach must be sold. d. all accounts payable must be settled.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
91.
As inventoriable costs expire, they become a. selling expenses. b. gross profit. c. cost of goods sold. d. sales revenue.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
92.
A manufacturing company calculates cost of goods sold as follows: a. Beginning FG inventory + cost of goods purchased – ending FG inventory. b. Ending FG inventory – cost of goods manufactured + beginning FG inventory. c. Beginning FG inventory – cost of goods manufactured – ending FG inventory. d. Beginning FG inventory + cost of goods manufactured – ending FG inventory.
Ans: d, SO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
93.
A manufacturing company reports cost of goods manufactured as a(n) a. current asset on the balance sheet. b. administrative expense on the income statement. c. component in the calculation of cost of goods sold on the income statement. d. component of the raw materials inventory on the balance sheet.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 16 Test Bank for Accounting Principles, Tenth Edition 94.
The subtotal, "Cost of goods manufactured" appears on a. a merchandising company's income statement. b. a manufacturing company's income statement. c. both a manufacturing and a merchandising company's income statement. d. neither a merchandising nor a manufacturing company's income statement.
Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
95.
Cost of goods manufactured in a manufacturing company is analogous to a. Ending inventory in a merchandising company. b. Beginning inventory in a merchandising company. c. Cost of goods available for sale in a merchandising company. d. Cost of goods purchased in a merchandising company.
Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
96.
Cost of goods sold a. only appears on merchandising companies' income statements. b. only appears on manufacturing companies' income statements. c. appears on both manufacturing and merchandising companies' income statements. d. is calculated exactly the same for merchandising and manufacturing companies.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
Kushman Combines, Inc. has $40,000 of ending finished goods inventory as of December 31, 2012. If beginning finished goods inventory was $20,000 and cost of goods sold was $80,000, how much would Kushman report for cost of goods manufactured? a. $90,000 b. $20,000 c. $100,000 d. $60,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
98.
Cost of goods manufactured is calculated as follows: a. Beginning WIP + direct materials used + direct labor + manufacturing overhead + ending WIP. b. Direct materials used + direct labor + manufacturing overhead – beginning WIP + ending WIP. c. Beginning WIP + direct materials used + direct labor + manufacturing overhead – ending WIP. d. Direct materials used + direct labor + manufacturing overhead – ending WIP – beginning WIP.
Ans: c, SO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
If the amount of "Cost of goods manufactured" during a period exceeds the amount of "Total manufacturing costs" for the period, then a. ending work in process inventory is greater than or equal to the amount of the beginning work in process inventory. b. ending work in process is greater than the amount of the beginning work in process inventory. c. ending work in process is equal to the cost of goods manufactured. d. ending work in process is less than the amount of the beginning work in process inventory.
Ans: d, SO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting 100.
19 - 17
On the costs of goods manufactured schedule, depreciation on factory equipment a. is not listed because it is included with Depreciation Expense on the income statement. b. appears in the manufacturing overhead section. c. is not listed because it is not a product cost. d. is not an inventoriable cost.
Ans: b, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
101.
On the costs of goods manufactured schedule, the item raw materials inventory (ending) appears as a(n) a. addition to raw materials purchases. b. addition to raw materials available for use. c. subtraction from raw materials available for use. d. subtraction from raw materials purchases.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
102.
Dolan Manufacturing Company's accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2011 Raw materials inventory $620,000 $520,000 Work in process inventory 600,000 320,000 Finished goods inventory 380,000 300,000 During 2012, $800,000 of raw materials were purchased, direct labor costs amounted to $1,000,000, and manufacturing overhead incurred was $960,000. The total raw materials available for use during 2012 for Dolan Manufacturing Company is a. $1,420,000. b. $520,000. c. $700,000. d. $1,320,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
103.
Dolan Manufacturing Company's accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2011 Raw materials inventory $620,000 $520,000 Work in process inventory 600,000 320,000 Finished goods inventory 380,000 300,000 During 2012, $800,000 of raw materials were purchased, direct labor costs amounted to $1,000,000, and manufacturing overhead incurred was $960,000. Dolan Manufacturing Company's total manufacturing costs incurred in 2012 amounted to a. $2,660,000. b. $2,580,000. c. $2,380,000. d. $2,760,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
104.
Dolan Manufacturing Company's accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2011 Raw materials inventory $620,000 $520,000 Work in process inventory 600,000 320,000 Finished goods inventory 380,000 300,000 During 2012, $800,000 of raw materials were purchased, direct labor costs amounted to $1,000,000, and manufacturing overhead incurred was $960,000. FOR INSTRUCTOR USE ONLY
19 - 18 Test Bank for Accounting Principles, Tenth Edition MC 104. (Cont.) If Dolan Manufacturing Company's cost of goods manufactured for 2012 amounted to $2,380,000, its cost of goods sold for the year is a. $2,600,000. b. $2,100,000. c. $2,300,000. d. $2,460,000. Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
105.
What is work in process inventory generally described as? a. Costs applicable to units that have been started in production but are only partially completed b. Costs associated with the end stage of manufacturing that are almost always complete and ready for customers c. Costs strictly associated with direct labor d. Beginning stage production costs associated with labor costs dealing with bringing in raw materials from the shipping docks
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
106.
Worth Manufacturing Company reported the following year-end information: beginning work in process inventory, $270,000; cost of goods manufactured, $1,074,000; beginning finished goods inventory, $378,000; ending work in process inventory, $330,000; and ending finished goods inventory, $396,000. Worth Manufacturing Company's cost of goods sold for the year is a. $1,056,000. b. $1,092,000. c. $1,014,000. d. $678,000.
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
107.
Laflin Manufacturing Company reported the following year-end information: Beginning work in process inventory $1,440,000 Beginning raw materials inventory 400,000 Ending work in process inventory 1,200,000 Ending raw materials inventory 640,000 Raw materials purchased 1,280,000 Direct labor 1,200,000 Manufacturing overhead 960,000 Laflin Manufacturing Company's cost of goods manufactured for the year is a. $3,200,000. b. $3,440,000. c. $2,960,000. d. $3,680,000.
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting 108.
19 - 19
Benson Manufacturing Inc.'s accounting records reflect the following inventories: Dec. 31, 2011 Dec. 31, 2012 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2012, Benson purchased $1,440,000 of raw materials, incurred direct labor costs of $300,000, and incurred manufacturing overhead totaling $192,000. How much is raw materials transferred to production during 2012 for Benson Manufacturing? a. $1,788,000 b. $1,464,000 c. $1,440,000 d. $1,416,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
Benson Manufacturing Inc.'s accounting records reflect the following inventories: Dec. 31, 2011 Dec. 31, 2012 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2012, Benson purchased $1,440,000 of raw materials, incurred direct labor costs of $300,000, and incurred manufacturing overhead totaling $192,000. How much is total manufacturing costs incurred during 2012 for Benson? a. $1,914,000 b. $1,956,000 c. $1,932,000 d. $1,938,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
110.
Benson Manufacturing Inc.'s accounting records reflect the following inventories: Dec. 31, 2011 Dec. 31, 2012 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2012, Benson purchased $1,440,000 of raw materials, incurred direct labor costs of $300,000, and incurred manufacturing overhead totaling $192,000. Assume Benson Manufacturing’s cost of goods manufactured for 2012 amounted to $1,740,000. How much would it report as cost of goods sold for the year? a. $1,752,000 b. $1,800,000 c. $1,890,000 d. $1,728,000
Ans: a, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 20 Test Bank for Accounting Principles, Tenth Edition 111.
Walker Manufacturing Company reported the following year-end information: Beginning work in process inventory $ 46,000 Beginning raw materials inventory 24,000 Ending work in process inventory 50,000 Ending raw materials inventory 20,000 Raw materials purchased 630,000 Direct labor 240,000 Manufacturing overhead 100,000 How much is Walker Manufacturing’s cost of goods manufactured for the year? a. $634,000 b. $974,000 c. $970,000 d. $978,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
Ogleby Manufacturing Inc.'s accounting records reflect the following inventories: Dec. 31, 2011 Dec. 31, 2012 Raw materials inventory $180,000 $144,000 Work in process inventory 234,000 261,000 Finished goods inventory 225,000 207,000 During 2012, Ogleby purchased $1,410,000 of raw materials, incurred direct labor costs of $225,000, and incurred manufacturing overhead totaling $288,000. How much is total manufacturing costs incurred during 2012 for Ogleby? a. $1,932,000 b. $1,959,000 c. $1,923,000 d. $1,950,000
Ans: b, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
113.
Ogleby Manufacturing Inc.'s accounting records reflect the following inventories: Dec. 31, 2011 Dec. 31, 2012 Raw materials inventory $180,000 $144,000 Work in process inventory 234,000 261,000 Finished goods inventory 225,000 207,000 During 2012, Ogleby purchased $1,410,000 of raw materials, incurred direct labor costs of $225,000, and incurred manufacturing overhead totaling $288,000. How much would Ogleby Manufacturing report as cost of goods manufactured for 2012? a. $1,896,000 b. $1,986,000 c. $1,977,000 d. $1,932,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting 114.
19 - 21
Wasson Manufacturing Company reported the following year-end information: Beginning work in process inventory Beginning raw materials inventory Ending work in process inventory Ending raw materials inventory Raw materials purchased Direct labor Manufacturing overhead
$ 35,000 18,000 38,000 15,000 560,000 180,000 120,000
How much is Wasson Manufacturing’s total cost of work in process for the year? a. $608,000 b. $863,000 c. $860,000 d. $898,000 Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
Edmiston Manufacturing Company reported the following year-end information: beginning work in process inventory, $80,000; cost of goods manufactured, $780,000; beginning finished goods inventory, $50,000; ending work in process inventory, $70,000; and ending finished goods inventory, $40,000. How much is Edmiston’s cost of goods sold for the year? a. $780,000 b. $790,000 c. $770,000 d. $800,000
Ans: b, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116. Using the following information, compute the direct materials used. Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses a. b. c. d.
$
20,000 40,000 18,000 12,000 40,000 32,000 1,200,000 560,000 150,000 50,000 400,000 420,000
$1,260,000. $1,220,000. $1,200,000. $1,180,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
19 - 22 Test Bank for Accounting Principles, Tenth Edition 117.
Assuming that the direct materials used is $1,200,000, compute the total manufacturing costs using the following information.
a. b. c. d.
Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses $2,360,000. $2,354,000. $2,160,000. $2,780,000.
$
20,000 40,000 18,000 12,000 40,000 32,000 1,200,000 560,000 150,000 50,000 400,000 420,000
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
118.
Using $2,300,000 as the total manufacturing costs, compute the cost of goods manufactured using the following information.
a. b. c. d.
Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses $2,292,000. $2,294,000. $2,306,000. $2,308,000.
$
20,000 40,000 18,000 12,000 40,000 32,000 1,200,000 560,000 150,000 50,000 400,000 420,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Managerial Accounting 119.
19 - 23
Using $2,340,000 as the cost of goods manufactured, compute the cost of goods sold using the following information.
a. b. c. d.
Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses $2,346,000. $2,308,000. $2,332,000. $2,348,000.
$
20,000 40,000 18,000 12,000 40,000 32,000 1,200,000 560,000 150,000 50,000 400,000 420,000
Ans: d, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
120.
Using the following information, compute the cost of direct materials used.
a. b. c. d.
Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses $1,190,000. $1,130,000. $1,100,000. $1,070,000.
$
30,000 60,000 27,000 18,000 60,000 48,000 1,100,000 690,000 225,000 75,000 500,000 630,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
19 - 24 Test Bank for Accounting Principles, Tenth Edition 121.
Assuming the cost of direct materials used is $1,100,000, compute the total manufacturing costs using the information below.
a. b. c. d.
Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses $2,590,000. $2,581,000. $2,290,000. $3,220,000.
$
30,000 60,000 27,000 18,000 60,000 48,000 1,100,000 690,000 225,000 75,000 500,000 630,000
Ans: a, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
122. Assuming that the total manufacturing costs are $2,500,000, compute the cost of goods manufactured using the information below. Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses a. b. c. d.
$
30,000 60,000 27,000 18,000 60,000 48,000 1,100,000 690,000 225,000 75,000 500,000 630,000
$2,488,000. $2,491,000. $2,509,000. $2,512,000.
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Managerial Accounting 123.
19 - 25
Assuming that the cost of goods manufactured is $2,560,000 compute the cost of goods sold using the following information. Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses a. b. c. d.
$
30,000 60,000 27,000 18,000 60,000 48,000 1,100,000 690,000 225,000 75,000 500,000 630,000
$2,569,000. $2,512,000. $2,548,000. $2,572,000.
Ans: d, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
124.
Samson Company reported total manufacturing costs of $300,000, manufacturing overhead totaling $52,000, and direct materials totaling $64,000. How much is direct labor cost? a. Cannot be determined from the information provided. b. $416,000 c. $116,000 d. $184,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
125.
Given the following data for Mehring Company, compute (A) total manufacturing costs and (B) cost of goods manufactured: Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.
(A) $590,000 $605,000 $605,000 $620,000
$230,000 150,000 225,000 263,000
Beginning work in process Ending work in process Beginning finished goods Ending finished goods
$30,000 15,000 38,000 23,000
(B) $620,000 $590,000 $620,000 $635,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
19 - 26 Test Bank for Accounting Principles, Tenth Edition 126.
Penner Company reported total manufacturing costs of $410,000, manufacturing overhead totaling $78,000, and direct materials totaling $96,000. How much is direct labor cost? a. Cannot be determined from the information provided. b. $584,000 c. $174,000 d. $236,000
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
127.
Given the following data for Glennon Company, compute (A) total manufacturing costs and (B) costs of goods manufactured: Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.
(A) $1,080,000 $1,110,000 $1,110,000 $1,140,000
$360,000 300,000 450,000 525,000
Beginning work in process Ending work in process Beginning finished goods Ending finished goods
$60,000 30,000 75,000 45,000
(B) $1,140,000 $1,080,000 $1,140,000 $1,170,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
Barton Company has beginning work in process inventory of $216,000 and total manufacturing costs of $954,000. If cost of goods manufactured is $960,000, what is the cost of the ending work in process inventory? a. $180,000. b. $222,000. c. $240,000. d. $210,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
129.
Gammil Company has beginning and ending raw materials inventories of $128,000 and $160,000, respectively. If direct materials used were $520,000, what was the cost of raw materials purchased? a. $520,000. b. $560,000. c. $488,000. d. $552,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
Molina Company has beginning and ending work in process inventories of $260,000 and $290,000 respectively. If total manufacturing costs are $1,240,000, what is the total cost of goods manufactured? a. $1,500,000. b. $1,530,000. c. $1,210,000. d. $1,270,000.
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting 131.
19 - 27
Costas Company has beginning and ending raw materials inventories of $192,000 and $240,000, respectively. If direct materials used were $780,000, what was the cost of raw materials purchased? a. $780,000. b. $840,000. c. $732,000. d. $828,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
132.
Wood Company has beginning work in process inventory of $216,000 and total manufacturing costs of $954,000. If cost of goods manufactured is $960,000, what is the cost of the ending work in process inventory? a. $180,000. b. $222,000. c. $240,000. d. $210,000.
Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
133.
Given the following data for Harder Company, compute cost of goods manufactured: Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.
$120,000 200,000 150,000 175,000
Beginning work in process Ending work in process Beginning finished goods Ending finished goods
$20,000 10,000 25,000 15,000
$460,000 $470,000 $480,000 $490,000
Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
134.
Which one of the following does not appear on the balance sheet of a manufacturing company? a. Finished goods inventory b. Work in process inventory c. Cost of goods manufactured d. Raw materials inventory
Ans: c, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
The equivalent of finished goods inventory for a merchandising firm is referred to as a. purchases. b. cost of goods purchased. c. merchandise inventory. d. raw materials inventory.
Ans: c, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 28 Test Bank for Accounting Principles, Tenth Edition 136.
How have many companies significantly lowered inventory levels and costs? a. They use activity-based costing. b. They utilize a balanced scorecard system. c. They have a just-in-time method. d. They focus on a total quality management system.
Ans: c, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
What term describes all activities associated with providing a product or service? a. The manufacturing chain b. The product chain c. The supply chain d. The value chain
Ans: d, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
138.
Which one of the following managerial accounting approaches attempts to allocate manufacturing overhead in a more meaningful fashion? a. Balanced scorecard b. Just-in-time inventory c. Activity-based costing d. Total-quality management
Ans: c, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Performance Measurement
139.
What is “balanced” in the balanced scorecard approach? a. The number of products produced b. The emphasis on financial and non-financial performance measurements c. The amount of costs allocated to products d. The number of defects found on each product
Ans: b, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Performance Measurement
140.
Which one of the following characteristics would likely be associated with a just-in-time inventory method? a. Ending inventory of work in process that would allow several production runs b. A backlog of inventory orders not yet shipped c. Minimal finished goods inventory on hand d. An understanding with customers that they may come to the showroom and select from inventory on hand
Ans: c, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
141.
Some companies implement systems to reduce defects in finished products with the goal of achieving zero defects. What are these systems called? a. Activity-based costing systems b. Balanced scorecard systems c. Value chain systems d. Total quality management systems
Ans: d, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting 142.
19 - 29
Financial and managerial accounting are similar in that both a. have the same primary users. b. produce general-purpose reports. c. have reports that are prepared quarterly and annually. d. deal with the economic events of an enterprise.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
143.
The function that pertains to keeping the activities of the enterprise on track is a. planning. b. directing. c. controlling. d. accounting.
Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Performance Measurement
144.
Property taxes on a manufacturing plant are an element of a a. b. c. d.
Product Cost Yes Yes No No
Period Cost No Yes Yes No
Ans: a, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
145.
For a manufacturing company, which of the following is an example of a period cost rather than a product cost? a. Depreciation on factory equipment b. Wages of salespersons c. Wages of machine operators d. Insurance on factory equipment
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
For a manufacturing firm, cost of goods available for sale is computed by adding the beginning finished goods inventory to a. cost of goods purchased. b. cost of goods manufactured. c. net purchases. d. total manufacturing costs.
Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
147.
If the cost of goods manufactured is less than the cost of goods sold, which of the following is correct? a. Finished Goods Inventory has increased. b. Work in Process Inventory has increased. c. Finished Goods Inventory has decreased. d. Work in Process Inventory has decreased.
Ans: c, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
19 - 30 Test Bank for Accounting Principles, Tenth Edition 148.
The principle difference between a merchandising and a manufacturing income statement is the a. cost of goods sold section. b. extraordinary item section. c. operating expense section. d. revenue section.
Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
149.
If the total manufacturing costs are greater than the cost of goods manufactured, which of the following is correct? a. Work in Process Inventory has increased. b. Finished Goods Inventory has increased. c. Work in Process Inventory has decreased. d. Finished Goods Inventory has decreased.
Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
150.
The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred is the a. cost of goods manufactured. b. total manufacturing overhead. c. total manufacturing costs. d. total cost of work in process.
Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
151.
The inventory accounts that show the cost of completed goods on hand and the costs applicable to production that is only partially completed are, respectively a. Work in Process Inventory and Raw Materials Inventory. b. Finished Goods Inventory and Raw Materials Inventory. c. Finished Goods Inventory and Work in Process Inventory. d. Raw Materials Inventory and Work in Process Inventory.
Ans: c, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 31
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
d c b a a a b d b d b c c d c b c
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.
b c d a c c d c c a d b d d c b c
72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
a a b c c c b a c d d a d d b b a
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.
c c c d c b d c c c d b c d a c a
106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.
a b b b a c b d d b d a c d d a c
123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139.
d d c d c d d c d d c c c c d c b
140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151.
c d d c a b b c a a c c
BRIEF EXERCISES BE 152 Presented below are Truck Company’s monthly manufacturing cost data related to its personal computer products. (a) (b) (c) (d)
Taxes on factory building Raw materials Depreciation on manufacturing equip. Wages for assembly line workers
$820,000 66,000 210,000 340,000
Instructions Enter each cost item in the following table, placing an “X” under the appropriate headings. Direct Materials
Product Costs Direct Labor
Manufacturing Overhead
(a) (b) (c) (d) Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
19 - 32 Test Bank for Accounting Principles, Tenth Edition Solution 152
(3 min.) Product Costs Direct Labor
Direct Materials (a) (b) (c) (d)
Manufacturing Overhead X
X X X
BE 153 Determine whether each of the following costs should be classified as direct materials (DM), direct labor (DL), or manufacturing overhead (MO). a. ____ Depreciation on factory equipment b. ____ Table legs used in manufacturing tables c. ____ Wages paid to assembly line workers d. ____ Factory rent Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 153 a. b. c. d.
(2 min.)
MO DM DL MO
BE 154 Indicate whether each of the following costs of a pencil manufacturer would be classified as direct materials (DM), direct labor (DL), or manufacturing overhead (MO). a. ____ Depreciation of pencil painting machinery b. ____ Lead inserted into pencils c. ____ Factory utilities d. ____ Wages of assembly line worker e. ____ Salary of supervisor f.
____ Factory machinery maintenance
g. ____ Wood h. ____ Eraser compound Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting Solution 154 a. b. c. d. e. f. g. h.
19 - 33
(4 min.)
MO DM MO DL MO MO DM DM
BE 155 Presented below are Cricket Company’s monthly manufacturing cost data related to its personal computer products. a. Hard drives and memory sticks $30,000 b. Wages to assemble equipment $65,000 c. Insurance on manufacturing building $41,000 d. Wages for factory supervisors $64,000 Instructions Enter each cost item in the following table, placing an ‘X’ under the appropriate headings. Direct Materials
Product Costs Direct Labor
Manufacturing Overhead
a. b. c. d. Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 155
(2 min.)
Direct Materials
a. b. c. d.
Product Costs Direct Labor
Manufacturing Overhead
X X X X
FOR INSTRUCTOR USE ONLY
19 - 34 Test Bank for Accounting Principles, Tenth Edition BE 156 Identify whether each of the following is classified as a product cost or a period cost. ______________ 1. Direct labor ______________ 2. Direct materials ______________ 3. Factory utilities ______________ 4. Repairs to office equipment ______________ 5. Property taxes on factory building ______________ 6. Sales salaries Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 156
(5 min.)
1. Product cost 2. Product cost 3. Product cost
4. Period cost 5. Product cost 6. Period cost
BE 157 Criba Manufacturing Company has the following data: direct labor $430,000, direct materials used $421,000, total manufacturing overhead $206,000, and beginning work in process $47,000. Instructions Compute (a) total manufacturing costs and (b) total cost of work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 157
(5 min.)
(a) Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs
$ 430,000 421,000 206,000 $1,057,000
(b) Beginning work in process Total manufacturing costs Total cost of work in process
$
47,000 1,057,000 $1,104,000
BE 158 Presented below are incomplete 2012 manufacturing cost data for Swartnez Corporation. Direct Materials Used
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs
(a)
$ 17,000
$42,000
?
$ 88,000
(b)
$148,000
?
$112,000
$460,000
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 35
BE 158. (Cont.) Instructions Determine the missing amounts. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 158
(3 min.)
(a) Total manufacturing costs Less: Direct materials used Less: Direct labor Equals: Manufacturing overhead
$88,000 (17,000) (42,000) $29,000
(b) Total manufacturing costs Less: Direct materials Less: Factory overhead Equals: Direct labor
$460,000 (148,000) (112,000) $200,000
BE 159 Presented below are incomplete 2012 manufacturing cost data for Supreme Corporation. Direct Materials Used
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs
(a)
$48,000
$72,000
?
$184,000
(b)
$95,000
?
$80,000
$305,000
(c)
?
$80,000
$120,000
$290,000
Instructions Determine the missing amounts. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 159
(4 min.)
Direct Materials Used
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs
(a)
$48,000
$72,000
$64,000
$184,000
(b)
$95,000
$130,000
$80,000
$305,000
(c)
$90,000
$80,000
$120,000
$290,000
BE 160 Raynor Manufacturing Company has the following data: Direct labor $76,000 Direct materials used 84,000 Total manufacturing overhead 60,000 Ending work in process 30,000 Beginning work in process 45,000 FOR INSTRUCTOR USE ONLY
19 - 36 Test Bank for Accounting Principles, Tenth Edition BE 160. (Cont.) Instructions Compute (a) total manufacturing costs and (b) cost of goods manufactured. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 160
(5 min.)
(a) Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs
$ 76,000 84,000 60,000 $220,000
(b) Beginning work in process Total manufacturing costs Less ending work in process Cost of goods manufactured
$ 45,000 220,000 (30,000) $235,000
BE 161 In alphabetical order below are current asset items for Sudler Company as of December 31, 2012. Prepare the current assets section of the company’s balance sheet as of the same date. Accounts receivable Cash Finished goods Prepaid expenses Raw materials Work in process
$41,000 61,000 26,000 3,000 17,000 32,000
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 161
(4 min.)
Current Assets Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets
$ 61,000 41,000 $17,000 32,000 26,000
75,000 3,000 $180,000
EXERCISES Ex. 162 Financial accounting information and managerial accounting information have a number of distinguishing characteristics. For each of the characteristics listed below, indicate which characteristics are more closely related to financial accounting by placing the letter "F" in the space to the left of the item and indicate those characteristics which are more closely associated with managerial accounting by placing the letter "M" to the left of the item.
FOR INSTRUCTOR USE ONLY
Managerial Accounting Ex. 162.
19 - 37
(Cont.)
____
1.
General-purpose reports
____
2.
Reports are used internally
____
3.
Prepared in accordance with generally accepted accounting principles
____
4.
Special purpose reports
____
5.
Limited to historical cost data
____
6.
Reporting standard is relevance to the decision to be made
____
7.
Financial statements
____
8.
Reports generally pertain to the business as a whole
____
9.
Reports generally pertain to subunits
____ 10.
Reports issued quarterly or annually
Ans: N/A, SO: 1, Bloom: C, Difficulty: Easy, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 162 1. 2. 3. 4. 5.
(7–11 min.)
F M F M F
6. 7. 8. 9. 10.
M F F M F
Ex. 163 Determine whether each of the following is classified as: DM: Direct materials DL: Direct labor MO: Manufacturing overhead _____ 1. Assembly line workers' wages. _____ 2. Factory supervisors' salaries. _____ 3. Steel used in manufacturing product. _____ 4. Insurance on factory building. _____ 5. Rivets and screws used in production. _____ 6. Tires used in manufacturing vehicles. Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 163 1. DL 2. MO 3. DM
(5 min.) 4. MO 5. MO 6. DM
FOR INSTRUCTOR USE ONLY
19 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 164 Presented below is a list of costs and expenses incurred in the factory by Nu-Way Corporation, a manufacturer of recreational vehicles. ____
1.
Property taxes on the factory land
____
2.
Nails and glue used in production
____
3.
Cabinet maker's wages
____
4.
Factory supervisors’ salaries
____
5.
Metal used in manufacturing
____
6.
Depreciation on factory machines
____
7.
Factory utilities
____
8.
Carpeting for the recreational vehicles
____
9.
Property taxes on the factory building
____ 10.
Insurance on factory equipment
Instructions Classify the above items into the following categories: DM — Direct Materials DL — Direct Labor MO — Manufacturing Overhead Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 164 1. 2. 3. 4. 5.
(8–10 min.)
MO MO DL MO DM
6. 7. 8. 9. 10.
MO MO DM MO MO
Ex. 165 For each item, identify all applicable cost labels. Use the following code in your answer: 1 — Product Cost 2 — Period Cost a.
Advertising
________
b.
Direct materials used
________
c.
Sales salaries
________
d.
Indirect factory labor
________
e.
Repairs to office equipment
________
f.
Factory manager's salary
________
g.
Direct labor
________
h.
Indirect materials
________
Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Managerial Accounting Solution 165 (6–9 min.) a. Advertising
2
b.
Direct materials used
1
c.
Sales salaries
2
d.
Indirect factory labor
1
e.
Repairs to office equipment
2
f.
Factory manager's salary
1
g.
Direct labor
1
h.
Indirect materials
1
19 - 39
Ex. 166 Kennedy Company reports the following costs and expenses in May. Factory utilities $ 13,500 Depreciation on factory equipment 12,650 Depreciation on delivery trucks 3,800 Indirect factory labor 48,900 Indirect materials 70,800 Direct materials used 157,600 Factory manager's salary 8,000
Direct labor Sales salaries Property taxes on factory building Repairs to office equipment Factory repairs Advertising Office supplies used
$79,100 48,400 2,500 1,300 2,000 23,000 2,640
Instructions From the information, determine the total amount of: (a) Manufacturing overhead. (b) Product costs. (c) Period costs. Ans: N/A, SO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 166
(10–12 min.)
(a)
Factory utilities ...................................................................... Depreciation on factory equipment ........................................ Indirect factory labor .............................................................. Indirect materials ................................................................... Factory manager's salary ...................................................... Property taxes on factory building ......................................... Factory repairs ...................................................................... Manufacturing overhead ........................................................
$ 13,500 12,650 48,900 70,800 8,000 2,500 2,000 $158,350
(b)
Direct materials ..................................................................... Direct labor ............................................................................ Manufacturing overhead ........................................................ Product costs ........................................................................
$157,600 79,100 158,350 $395,050
FOR INSTRUCTOR USE ONLY
19 - 40 Test Bank for Accounting Principles, Tenth Edition Solution 166 (Cont.) (c) Depreciation on delivery trucks ................................................ Sales salaries .......................................................................... Repairs to office equipment ..................................................... Advertising ............................................................................... Office supplies used ................................................................ Period costs .............................................................................
$ 3,800 48,400 1,300 23,000 2,640 $ 79,140
Ex. 167 Kwik Delivery Service reports the following costs and expenses in June 2012. Indirect materials Depreciation on delivery equipment Dispatcher's salary Property taxes on office building CEO's salary Gas and oil for delivery trucks
$ 8,400 11,200 5,000 870 12,000 3,200
Driver's salaries Advertising Delivery equipment repairs Office supplies Office utilities Repairs on office equipment
$14,000 5,100 300 650 1,490 180
Instructions Determine the total amount of (a) delivery service (product) costs and (b) period costs. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 167 (a)
(b)
(10–12 min.)
Delivery service (product) costs: Indirect materials Depreciation on delivery equipment Dispatcher's salary Gas and oil for delivery trucks Drivers' salaries Delivery equipment repairs Total Period costs: Property taxes on office building CEO's salary Advertising Office supplies Office utilities Repairs on office equipment Total
$ 8,400 11,200 5,000 3,200 14,000 300 $ 42,100
$
870 12,000 5,100 650 1,490 180 $20,290
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 41
Ex. 168 For each item listed below, indicate in the space to the left whether the item would be considered a product cost or a period cost for a manufacturing company. Use the following code: Pr = Product cost Pe = Period cost ____
1. Factory supervisory salaries
____
2. Sales commissions
____
3. Income tax expense
____
4. Indirect materials used
____
5. Indirect labor
____
6. Office salaries expense
____
7. Property taxes on factory building
____
8. Sales manager's salary
____
9. Factory wages expense
____ 10. Direct materials used Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 7, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 168 1. 2. 3. 4. 5.
Pr Pe Pe Pr Pr
(7–10 min.) 6. 7. 8. 9. 10.
Pe Pr Pe Pr Pr
Ex. 169 Yates Manufacturing Company incurs the following manufacturing costs and expenses during the month of May. 1. Assembly line wages 2. Raw materials used directly in product 3. Depreciation on office equipment 4. Property taxes on factory building 5. Rent on factory building 6. Sales commissions 7. Depreciation on factory equipment 8. Factory utilities 9. Wages for factory maintenance workers 10. Advertising 11. Indirect materials used in production 12. Factory manager's salary FOR INSTRUCTOR USE ONLY
19 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 169. (Cont.) Instructions Complete the following matrix by placing an X mark under the appropriate headings. Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Direct Materials
Direct Labor
Manufacturing Overhead
Period Costs
Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 169 Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
(10–15 min.) Direct Materials
Direct Labor X
Manufacturing Overhead
Period Costs
X X X X X X X X X X X
Ex. 170 Presented below are incomplete 2012 manufacturing cost data for Tardy Corporation.
Direct Materials Used
Direct Labor
Manufacturing Overhead
Total Manufacturing Costs
Work in Process (1/1)
Work in Process (12/31)
Cost of Goods Manufactured
(a) $38,000 (b) $149,000 (c) $53,000
$80,000 $53,000 $116,000
$48,000 $90,000 $121,000
? $292,000 $290,000
$120,000 ? $403,000
$96,000 $98,000 ?
? $311,000 $515,000
Instructions Determine the missing amounts. Ans: N/A, SO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting Solution 170
19 - 43
(6 min.)
Direct Materials Used
Direct Labor
(a) $38,000 $80,000 (b) $149,000 $53,000 (c) $53,000 $116,000
Manufacturing Overhead
Total Manufacturing Costs
$48,000 $90,000 $121,000
$166,000 $292,000 $290,000
Work in Process (1/1)
Work in Process (12/31)
$120,000 $96,000 $117,000 $98,000 $403,000 $178,000
Cost of Goods Manufactured
$190,000 $311,000 $515,000
Ex. 171 Among the items that Howard Print Shop accounts for are the following: 1. Direct labor
________
2. Office supplies used
________
3. Depreciation on printing machines
________
4. Finished goods inventory, 12/31
________
5. Raw materials inventory, 1/1
________
6. Cost of goods manufactured
________
7. Work in process, 1/1
________
8. Office supplies inventory, 12/31
________
9. Indirect labor
________
10. Heat and electricity for the print shop
________
Howard Print Shop prepares the following schedule and financial statements on a yearly basis: (a) Cost of goods manufactured schedule. (b) Income statement. (c) Balance sheet. Instructions For each item, indicate by using the appropriate letter(s) the schedule and/or financial statements in which the item will appear. Ans: N/A, SO: 5, 6, 7, Bloom: C, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 171 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
(8–12 min.)
Direct labor Office supplies used Depreciation on printing machines Finished goods inventory, 12/31 Raw materials inventory, 1/1 Cost of goods manufactured Work in process, 1/1 Office supplies inventory, 12/31 Indirect labor Heat and electricity for the print shop
(a) (b) (a) (b), (c) (a) (a), (b) (a) (c) (a) (a)
FOR INSTRUCTOR USE ONLY
19 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 172 Klein Company manufactures boats. During September, 2012, the company purchased 100 cellular phones at a cost of $130 each. Klein withdrew 70 phones from the warehouse during the month. Twenty of these phones were installed in salespersons’ cars and the remaining 50 phones were put in boats manufactured during the month. Of the boats put into production during September, 2012, 80% were completed and transferred to the company's storage lot. Fifty percent of the boats completed during the month were sold by September 30. Instructions Determine the cost of cellular phones that would appear in each of the following accounts at September 30, 2012: Raw materials inventory Work in process inventory Finished goods inventory Cost of goods sold Selling expenses Ans: N/A, SO: 5, 6, 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 172
(12–17 min.)
Raw materials: Work in process: Finished goods: Cost of goods sold: Selling expenses:
(100 – 70) × $130 = $3,900 (50 × 20%) × $130 = $1,300 (50 × 80% × 50%) × $130 = $2,600 (50 × 80% × 50%) × $130 = $2,600 20 × $130 = $2,600
Costs to account for: 100 × $130 = $13,000 Raw materials inventory Work in process inventory Finished goods inventory Cost of goods sold Selling expenses Total
$ 3,900 1,300 2,600 2,600 2,600 $13,000
Ex. 173 Peters Manufacturing Company has the following data at June 30, 2012: Raw materials inventory, June 1 Work in process inventory, June 1 Finished goods inventory, June 1 Total manufacturing costs Sales Work in process inventory, June 30 Finished goods inventory, June 30 Raw materials inventory, June 30
$ 13,800 18,100 43,500 430,000 590,000 30,400 65,200 18,000
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 45
Ex. 173. (Cont.) Instructions (a) Prepare an income statement through gross profit for the month of June. (b) Indicate the balance sheet presentation of the June 30 inventories. Ans: N/A, SO: 5, 6, 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 173
(10–15 min.)
(a)
PETERS MANUFACTURING COMPANY (Partial) Income Statement For the Month Ended June 30, 2012 —————————————————————————————————————————— Sales .................................................................................................... $590,000 Cost of goods sold Finished goods inventory, June 1 ................................................ $ 43,500 Cost of goods manufactured........................................................ 417,700* Cost of goods available for sale................................................... 461,200 Finished goods inventory, June 30 .............................................. 65,200 Cost of goods sold....................................................................... 396,000 Gross profit .......................................................................................... $ 194,000 *$18,100 + $430,000 – $30,400 = $417,700 (b)
PETERS MANUFACTURING COMPANY Current assets Cash ...................................................................................... Accounts receivable .............................................................. Inventories: Finished goods ................................................................ Work in process ............................................................... Raw materials ..................................................................
$ XXXX XXXX $65,200 30,400 18,000
113,600
Ex. 174 Glavine Corporation incurred the following costs while manufacturing its product. Materials used in product $120,000 Depreciation on plant 60,000 Property taxes on store 7,500 Labor costs of assembly-line workers 110,000 Factory supplies used 23,000
Advertising expense Property taxes on plant Delivery expense Sales commissions Salaries paid to sales clerks
$45,000 19,000 21,000 35,000 50,000
Work-in-process inventory was $22,000 at January 1 and $15,500 at December 31. Finished goods inventory was $65,000 at January 1 and $50,600 at December 31. Instructions (a) Compute cost of goods manufactured. (b) Compute cost of goods sold. Ans: N/A, SO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
19 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 174
(10–12 min.)
(a) Work-in-process, 1/1 .................................................. Direct materials used .................................................. Direct labor ................................................................. Manufacturing overhead Depreciation on plant ............................................ Factory supplies used ........................................... Property taxes on plant ......................................... Total manufacturing overhead .................................... Total manufacturing costs........................................... Total cost of work in process ...................................... Less: ending work in process...................................... Cost of goods manufactured .......................................
$ 22,000 $120,000 110,000 $60,000 23,000 19,000 102,000 332,000 354,000 15,500 $338,500
(b) Finished goods, 1/1 .................................................... Cost of goods manufactured ....................................... Cost of goods available for sale .................................. Finished goods, 12/31 ................................................ Cost of goods sold ......................................................
$ 65,000 338,500 403,500 50,600 $352,900
Ex. 175 The following information is available for Elliot Company. Raw materials inventory Work in process inventory Finished goods inventory Materials purchased Direct labor Manufacturing overhead Sales
January 1, 2012 $ 26,000 13,500 30,000
2012
December 31, 2012 $30,000 22,200 21,000
$170,000 220,000 180,000 800,000
Instructions (a) Compute cost of goods manufactured. (b) Prepare an income statement through gross profit. Ans: N/A, SO: 5, 6, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 175
(12–16 min.)
(a) Work in process, 1/1 .................................................. Direct materials Materials inventory, 1/1 ........................................ Materials purchased ............................................ Materials available for use ................................... Less: Materials inventory, 12/31 .......................... Direct materials used ................................................. Direct labor ................................................................ Manufacturing overhead ............................................ Total manufacturing costs.......................................... Total cost of work in process ..................................... Less: Work in process, 12/31.................................... Cost of goods manufactured ......................................
$ 13,500 $ 26,000 170,000 196,000 30,000
FOR INSTRUCTOR USE ONLY
$166,000 220,000 180,000 566,000 579,500 22,200 $557,300
Managerial Accounting Solution 175 (Cont.) (b) Sales ......................................................................... Cost of goods sold Finished goods, 1/1 ............................................. Cost of goods manufactured................................ Cost of goods available for sale ........................... Finished goods, 12/31 ......................................... Cost of goods sold ......................................... Gross profit ...............................................................
19 - 47
$800,000 $ 30,000 557,300 587,300 21,000 566,300 $233,700
Ex. 176 Manufacturing cost data for Morton Company are presented below. Case A (a) $ 57,000 46,500 185,650 (b) 221,500 (c) 180,275
Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Work-in-process, 1/1/12 Total cost of work in process Work-in-process, 12/31/12 Cost of goods manufactured
Case B $65,400 76,000 81,600 (d) 16,500 (e) 9,000 (f)
Case C $130,000 (g) 102,000 263,700 (h) 327,000 80,000 (i)
Instructions Indicate the missing amount for each letter (a) through (i). Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 176
(12–16 min.)
A + $57,000 + $46,500 = $185,650 A = $82,150
$239,500 – $9,000 = F F = $230,500
$185,650 + B = $221,500 B = $35,850
$130,000 + G + $102,000 = $263,700 G = $31,700
$221,500 – C = $180,275 C = $41,225
$263,700 + H = $327,000 H = $63,300
$65,400 + $76,000 + $81,600 = D D = $223,000
$327,000 – $80,000 = I I = $247,000
$223,000 + $16,500 = E E = $239,500
FOR INSTRUCTOR USE ONLY
19 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 177 From the account balances listed below, prepare a schedule of cost of goods manufactured for Sampson Manufacturing Company for the month ended December 31, 2012.
Finished Goods Inventory, December 31 Factory Supervisory Salaries Income Tax Expense Raw Materials Inventory, December 1 Work In Process Inventory, December 31 Sales Salaries Expense Factory Depreciation Expense Finished Goods Inventory, December 1 Raw Materials Purchases Work In Process Inventory, December 1 Factory Utilities Expense Direct Labor Raw Materials Inventory, December 31 Sales Returns and Allowances Indirect Labor
Account Balances $42,000 12,000 18,000 12,000 15,000 14,000 8,000 35,000 95,000 20,000 6,000 70,000 19,000 5,000 21,000
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(12–16 min.) SAMPSON MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2012
Work in process, December 1 Direct materials Raw materials inventory, December 1 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, December 31 Direct materials used Direct labor Manufacturing overhead Indirect labor Factory supervisory salaries Factory depreciation expense Factory utilities expense Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, December 31 Cost of goods manufactured
$ 20,000 $12,000 95,000 107,000 19,000 88,000 70,000 $21,000 12,000 8,000 6,000
FOR INSTRUCTOR USE ONLY
47,000 205,000 225,000 15,000 $210,000
Managerial Accounting
19 - 49
Ex. 178 Rabid Manufacturing Company has the following data: Direct labor Direct materials used Total manufacturing overhead Beginning work in process
$140,000 151,000 208,000 26,000
Instructions Compute (a) total manufacturing costs and (b) total cost of work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 178
(6 min.)
(a)
Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs
$140,000 151,000 208,000 $499,000
(b)
Beginning work in process Total manufacturing costs Total cost of work in process
$ 26,000 499,000 $525,000
Ex. 179 The following costs and inventory data were taken from the accounts of Simon Company for 2012: Inventories: Raw materials Work in process Finished goods
January 1, 2012
December 31, 2012
$ 8,000 15,000 16,000
$ 7,000 13,000 12,000
Costs incurred: Raw materials purchases Direct labor Factory rent Factory utilities Indirect materials Indirect labor Operating expenses
$93,000 42,000 8,000 10,000 4,000 9,000 17,000
Instructions a. Prepare a schedule showing the amount of direct materials used in production during the year. b. Compute the amount of manufacturing overhead incurred during the year. c. Prepare a schedule of Cost of Goods Manufactured for Simon Company for the year ended December 31, 2012 in good form.
FOR INSTRUCTOR USE ONLY
19 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 179. (Cont.) d. Prepare the Cost of Goods Sold section of the Income Statement for Simon Company for the year ended December 31, 2012 in good form. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 179
(18–20 min.)
a. Raw materials inventory, beginning Raw materials purchases Raw materials available for use Less: Raw materials inventory, ending Direct materials used
$
8,000 93,000 101,000 7,000 $ 94,000
b. Manufacturing overhead: Factory rent Factory utilities Indirect materials Indirect labor Total manufacturing overhead c.
SIMON COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2012 Work in processing, beginning Direct materials Raw materials inventory, beginning Raw materials purchases Raw materials available for use Less: Raw materials inventory, ending Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, ending Cost of goods manufactured
d.
$ 8,000 10,000 4,000 9,000 $31,000
$ 15,000 $
8,000 93,000 101,000 7,000 $94,000 42,000 31,000 167,000 182,000 13,000 $169,000
SIMON COMPANY (Partial) Income Statement For the Year Ended December 31, 2012 Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods inventory, December 31 Cost of goods sold
FOR INSTRUCTOR USE ONLY
$ 16,000 169,000 185,000 12,000 $173,000
Managerial Accounting
19 - 51
Ex. 180 Manufacturing costs for Carson Company for selected months are as follows: April $ 80,000 280,000 195,000 (a) 890,000 (b) 75,000 (c) (d) 960,000 (e) 820,000
Beginning work in process Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Total cost of work in process Ending work in process Cost of goods manufactured Beginning finished goods Cost of goods available for sale Ending finished goods Cost of goods sold
July (f) $190,000 170,000 150,000 510,000 640,000 (g) 525,000 38,000 (h) 75,000 (i)
October $ 98,000 155,000 (j) 90,000 450,000 (k) (l) 385,000 (m) 480,000 (n) 355,000
Instructions Indicate the missing amounts. (Show computations.) Ans: N/A, SO: 6, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 180
(12–17 min.)
(a)
$415,000 ($890,000 – $280,000 – $195,000).
(b)
$970,000 ($890,000 + $80,000).
(c)
$895,000 ($970,000 – $75,000).
(d)
$65,000
(e)
$140,000 ($960,000 – $820,000).
(f)
$130,000 ($640,000 – $510,000).
(g)
$115,000 ($640,000 – $525,000).
(h)
$563,000 ($525,000 + $38,000).
(i)
$488,000 ($563,000 – $75,000).
(j)
$205,000 ($450,000 – $90,000 – $155,000).
(k)
$548,000 ($98,000 + $450,000).
(l)
$163,000 ($548,000 – $385,000).
(m) $95,000 (n)
($960,000 – $895,000).
($480,000 – $385,000).
$125,000 ($480,000 – $355,000).
FOR INSTRUCTOR USE ONLY
19 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 181 Fill in the missing information on the cost of goods manufactured schedule of Noland Manufacturing Company: NOLAND MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012 Work in process (1/1) Direct materials Raw materials inventory (1/1) Raw materials purchases Raw materials available for use Raw materials inventory (12/31) Direct materials used Direct labor Manufacturing overhead Indirect labor Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in process (12/31) Cost of goods manufactured
$320,000 $
? 246,000 ? 37,000 $255,000 ? 19,000 38,000 39,000 ? ? ? 322,000 $440,000
Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 181
(6–9 min.) NOLAND MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012
Work in process (1/1) Direct materials Raw materials inventory (1/1) Raw materials purchases Raw materials available for use Raw materials inventory (12/31) Direct materials used Direct labor Manufacturing overhead Indirect labor Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in process (12/31) Cost of goods manufactured
$320,000 $ 46,000 246,000 292,000 37,000 $255,000 91,000 19,000 38,000 39,000
FOR INSTRUCTOR USE ONLY
96,000 442,000 762,000 322,000 $440,000
Managerial Accounting
19 - 53
Ex. 182 Data for the cost of direct materials for the month ended March 31, 2012, are as follows: Materials inventory, March 1, 2012 $76,000 Materials inventory, March 31, 2012 70,000 During March, the company purchased $240,000 of raw materials on account from Reed Company and $92,000 of raw materials for cash from Frye Company. In addition, $50,000 was paid on the Reed account balance. Instructions Compute the cost of direct materials used during March. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 182
(5–7 min.)
Raw materials inventory, March 1 Raw materials purchases ($240,000 + $92,000) Total raw materials available for use Less: Raw materials inventory, March 31 Direct materials used during March
$ 76,000 332,000 408,000 70,000 $338,000
Note: Payment on account to Reed is irrelevant to the direct materials used calculation. Ex. 183 Presented below are incomplete 2012 manufacturing cost data for Tardy Corporation.
(a) (b) (c)
Direct Materials Used $56,000 ? $53,000
Direct Labor $72,000 $53,000 ?
Manufacturing Overhead $54,000 $90,000 $96,000
Total Manufacturing Costs ? $252,000 $300,000
Instructions Determine the missing amounts. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 183
(a) (b) (c)
(5 min.) Direct Materials Used $56,000 $109,000 $53,000
Direct Labor $72,000 $53,000 $151,000
Manufacturing Overhead $54,000 $90,000 $96,000
FOR INSTRUCTOR USE ONLY
Total Manufacturing Costs $182,000 $252,000 $300,000
19 - 54 Test Bank for Accounting Principles, Tenth Edition Ex. 184 Indicate whether each of the following would appear on the: A—Cost of goods manufactured schedule B—Income statement C—Balance sheet Note: If it would appear in more than just one, indicate which ones. ______ 1. Cost of goods sold ______ 2. Finished goods inventory, 12/31 ______ 3. Direct materials used ______ 4. Raw materials inventory, 1/1 ______ 5. Insurance on factory equipment ______ 6. Work in process, 12/31 ______ 7. Indirect labor ______ 8. Property taxes on office building Ans: N/A, SO: 6, 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 184 1. 2. 3. 4.
(5 min.)
B B, C A A
5. 6. 7. 8.
A A, C A B
Ex. 185 Listed below are current asset items for Lester Company at December 31, 2012. Finished goods inventory Cash Prepaid expenses Accounts receivable
$35,000 20,000 2,000 4,000
Short-term investments Raw materials inventory Work in process inventory Supplies
$25,000 17,000 18,000 500
Instructions Prepare the current assets section of the balance sheet. (Include a complete heading.) Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Managerial Accounting Solution 185
19 - 55
(6–9 min.) LESTER COMPANY (Partial) Balance Sheet December 31, 2012
Current assets Cash Short-term investments Accounts receivable Inventories: Finished goods Work in process Raw materials Prepaid expenses Supplies Total current assets
$20,000 25,000 4,000 $35,000 18,000 17,000
70,000 2,000 500 $121,500
COMPLETION STATEMENTS 186. Financial accounting information is prepared mainly for ______________ users, while managerial accounting information is prepared primarily for ______________ users. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
187. The types of reports prepared in managerial accounting are often ______________purpose reports prepared for a specific decision. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
188. Managerial accounting reports generally pertain to ______________ of a business and may be very detailed. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
189. Three broad managerial functions are: (1)______________, (2)______________, and (3)______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
190. The ______________ function is concerned with setting goals and objectives for the entity. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
19 - 56 Test Bank for Accounting Principles, Tenth Edition 191. Exercising good judgment in performing the managerial functions and choosing among alternative courses of action is called ______________. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
192. The three cost elements in manufacturing a product are (1)______________, (2)______________, and (3)______________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
193. The work of factory employees that can be physically and directly associated with converting raw materials into products is classified as ______________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
194. Indirect materials and indirect labor are classified as ______________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
195. Each of the manufacturing cost components is a ______________ cost. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
196. A major difference between the income statements of a merchandising company and a manufacturing company is that the cost of goods sold section of a merchandising company shows cost of goods______________, whereas a manufacturing company shows cost of goods ______________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
197. ___________________ is added to direct labor and manufacturing overhead to get total manufacturing costs for the current period. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
198. The ending work in process inventory is subtracted from the total cost of work in process to calculate ______________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
199. A manufacturing company computes cost of goods sold by adding cost of goods manufactured to the ___________________ and subtracting the __________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting 200. A
manufacturing
company
usually
has
three
inventory
accounts
19 - 57
which
are
(1)___________________, (2)___________________, and (3)___________________. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200.
external, internal special subunits planning, directing, controlling planning decision making direct materials, direct labor, manufacturing overhead direct labor manufacturing overhead product purchased, manufactured Direct materials used cost of goods manufactured beginning finished goods inventory, ending finished goods inventory Finished Goods Inventory, Work in Process Inventory, Raw Materials Inventory
MATCHING 201. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Managerial accounting Financial accounting Planning Directing Controlling
F. G. H. I. J.
Work in process inventory Direct materials Manufacturing overhead Period costs Value chain
_____ 1.
The cost of products that are partially complete.
_____ 2.
The function of keeping activities in accordance with plans.
_____ 3.
Primarily concerned with internal users and reports pertain to subunits of the entity.
_____ 4.
Materials that can be physically and directly associated with manufacturing a product.
_____ 5.
The function of setting goals and objectives.
_____ 6.
Indirect costs of manufacturing a product.
_____ 7.
Primarily concerned with external users and reports pertain to the entity as a whole.
_____ 8.
Costs that are noninventoriable.
_____ 9.
All activities associated with providing a product or service. FOR INSTRUCTOR USE ONLY
19 - 58 Test Bank for Accounting Principles, Tenth Edition
Matching 201 _____ 10.
(Cont.)
The function of coordinating diverse activities to produce a smooth-running operation.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
F E A G C
6. 7. 8. 9. 10.
H B I J D
SHORT-ANSWER ESSAY QUESTIONS S-A E 202 Financial and managerial accounting are both concerned with the economic events of an enterprise. Similarities between financial and managerial accounting do exist, but they do have different focus. Briefly distinguish between financial and managerial accounting as they relate to (1) the primary users, (2) the type and frequency of reports, (3) the purpose of reports, and (4) the content of reports. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 202 Financial accounting is primarily concerned with external users such as stockholders and creditors, while the primary users of managerial accounting are those within the company (internal users) such as officers, managers, supervisors, etc. Quarterly and annual classified financial statements are the end product of financial accounting. Internal reports, prepared as often as needed are the result of managerial accounting. The financial statements produced by financial accounting are general-purpose reports which are highly aggregated, pertain to the enterprise as a whole, and are constrained by generally accepted accounting principles. The internal reports prepared by management accountants are special purpose reports which are detailed, pertain to subunits of the enterprise, and may contain any information relevant to the decision at hand. S-A E 203 Julie Mills is studying for her accounting mid-term examination. Summarize for Julie what she should know about management functions. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 59
Solution 203 Julie should know that the management of an organization performs three broad functions: (1) Planning requires management to look ahead and to establish objectives. (2) Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. (3) Controlling is the process of keeping the company's activities on track. S-A E 204 A manufacturing company makes the products that it sells. Briefly identify and define the cost elements that are incurred in making a product. After product cost elements are identified, how is the cost of goods manufactured for a period determined? Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 204 Costs incurred to manufacture a product include direct materials which can be physically and directly associated with the finished product; direct labor, which is the work of factory employees which can be physically and directly associated with the finished product; and manufacturing overhead, those manufacturing costs which are indirectly associated with production of the finished product. Cost of goods manufactured is computed by adding the cost of direct materials used, direct labor, and manufacturing overhead to the beginning work in process, and subtracting the ending work in process. S-A E 205 Kevin Scott is confused about the differences between a product cost and a period cost. Explain the differences to Kevin. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 205 Product costs, or inventoriable costs, are costs that are a necessary and integral part of producing the finished product. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs. S-A E 206 Assume you have just taken a position as controller for a new company that manufactures and sells wrought iron wall hangings. Although the founder of the company, who is the president and CEO, is a great artisan, she has very limited knowledge of accounting. Instructions To help your new boss better understand accounting for a manufacturing organization, prepare a response to her in which you: (1) identify, (2) describe, and (3) provide examples of the three manufacturing costs and the three inventory accounts used in accounting for a manufacturing company. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
19 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 206 The three manufacturing costs are: direct materials, direct labor, and manufacturing overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The iron used in making the wall hangings is an example of direct materials. The work of factory employees that can be physically and directly associated with converting raw materials to finished goods is considered direct labor. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor. Manufacturing overhead includes indirect materials, indirect labor, and depreciation on factory buildings, and machinery, utilities, insurance, taxes and maintenance on factory facilities. The three inventory accounts are: raw materials, work in process, and finished goods. Raw materials inventory represents the cost of the materials and parts that are to be used in the manufacturing process. The iron purchased to make the wall hangings would be considered raw materials until the time it was put into production. Work in process is the cost applicable to units that have been started into production but are only partially complete. Wall hangings on the assembly line that are in various stages of completion would be work in process. The finished goods inventory represents the cost of completed goods that have not been sold. The cost of wall hangings that are completed but have not been sold would be finished goods. S-A E 207 (Ethics) Million Dollar Mills is a textile manufacturing firm located in the southern United States. The company carefully prepares all financial statements in accordance with GAAP, and gives a copy of all financial statements to each department. In addition, the company keeps records on quality control, safety, and environmental pollution by the company. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of information was added, and the information has been used in the evaluation of employees for merit pay and promotions. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said there was no guarantee that the second set of information was fair, since there were no generally accepted principles for this kind of information. He also said that it was kind of like keeping two sets of books—one following all legal requirements, and the other one actually used by the company. Required: 1. Is it ethical to evaluate managers in the way described? Explain briefly. 2. Name at least two safeguards the company could build into its system to ensure the ethical treatment of employees. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Decision Analysis
Solution 207 1. It is ethical for a company to use all available data in order to evaluate managers, and even to collect data not routinely available. In fact, such a method seems preferable to one in which the company may only use specified financial data in its evaluation of a manager's performance. It does not imply a departure from GAAP, nor that the company does not actually use the information prepared according to GAAP. It supplements the standard reports, it does not replace them.
FOR INSTRUCTOR USE ONLY
Managerial Accounting
19 - 61
Solution 207 (Cont.) 2. The company should make certain that the appropriate information is calculated in the same way each period. All the relevant data should be collected and reported each period. New data should be limited. The qualitative information should be complemented, not replaced, by the regular financial information. S-A E 208 (Communication) Volumetrica, a producer of audio equipment for large computer systems, is reviewing its policies as part of a biannual self-examination of the company. As part of this process, all managers have been asked to carefully examine costs and determine as closely as possible which costs are direct and which are indirect. Linda Bedard and Sam Hilton, managers of different manufacturing departments in the same building, have been working together. They found the following four costs that could be economically traced to the products, but have historically been a part of overhead: •
Cost of setting up the machinery for a different production run.
•
Cost of minor assembly components such as knobs and switches.
•
Cost of packaging, which is quite different for each model.
•
Cost of inspecting and testing each model.
None of the costs is significant by itself, but together these four costs make up between 10 and 15% of the total cost of the product. Linda favors "leaving well enough alone," as she puts it, and leaving these costs in overhead. She is afraid that her volunteering to trace these costs will result in her having to trace many more costs in the future. Sam, on the other hand, prefers to have the product cost as accurate as possible. He points out that these costs are already known, and the process would require little extra work. Required: You have been called on in your function as accounting manager to resolve the dispute. Write a memo to Linda and Sam, supporting one or the other position. Be sure to adequately defend your position, but be brief. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Decision Analysis
FOR INSTRUCTOR USE ONLY
19 - 62 Test Bank for Accounting Principles, Tenth Edition Solution 208 TO:
Linda Bedard and Sam Hilton
FROM: Nancy West, Accounting Manager RE:
Tracing overhead
I strongly support the tracing of as much of what is now overhead directly to the products as possible (sorry, Linda). Besides giving more accurate product costs now, as Sam says, it will help us considerably in the future. We can evaluate products better, the more we know about which costs they generate. Otherwise, we just assign them some amount of overhead, which may be either more or less than they actually cost. Thank you both for your hard work. It is true, as Linda says, that our reviews will (temporarily) cause us more work (sorry, Sam). However, I think you'll both agree that the benefits of knowing the costs of our products better will make the effort well worthwhile. So, let's start tracing the four costs you mentioned now. Once we have the glitches ironed out, we'll share the results with the other departments. (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 20 JOB ORDER COSTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
4 4 4 5 5 5 5
C K C C K K K
29. 30. sg 31. sg 32. sg 33. sg 34. sg 35.
6 6 1 2 3 4 6
C C C K K K K
105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127.
5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6
C AP C C C C AP AP AP C C AP AP AP AP AP AP AP AP AP AP AP C
128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. st 141. sg 142. st 143. sg 144. st 145. sg 146. st 147. sg 148. st 149. sg 150.
6 6 6 6 6 6 6 6 6 6 6 6 6 1 2 2 3 3 4 4 6 6 6
C C K C AP C C C C C C C C K K K K K AP K C K K
157. 158.
5 6
AP AP
159. 160.
6 6
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7.
1 1 1 1 1 1 1
K C C C C K C
8. 9. 10. 11. 12. 13. 14.
2 2 2 2 2 2 2
K C C C C K C
15. 16. 17. 18. 19. 20. 21.
2 2 3 3 3 3 3
K K K K C C K
22. 23. 24. 25. 26. 27. 28.
Multiple Choice Questions 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.
1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K K C C C C C AP K K C K C C C K C K K AP K K
59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.
2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4
C C K K AP K C K K K C C K K C C K AP AP AP AP AP AP
82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5
AP AP AP AP AP AP AP C K C C K AP C K AP AP AP AP AP AP C C
Brief Exercises 151. 152. sg st
2 2
AP AP
153. 154.
3 3
AP AP
155. 156.
4 4
AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
20 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 161. 162. 163. 164. 165. 166.
2 2–4 2–4 2–4 2,3 2–5
AP C AP C AP AP
167. 168. 169. 170. 171. 172.
2–5 2–5 2–5 2,3 2–5 2,5
AP AN AP AP AP AP
173. 2–6 AP 174. 2,3,6 AP 175. 2–6 AP 176. 3 AP 177. 3–5 AN 178. 3,5 AP
179. 3,5 180. 3,4,6 181. 4,6 182. 4,6 183. 4 184. 4,6
AP AP AP AP AP AP
185. 186. 187. 188.
4,6 4,6 5 5
AP AP AP AP
K K
197. 198.
6 6
K K
Item
Type
Completion Statements 189. 190.
1 1
K K
191. 192.
1 2
K K
193. 194.
2 3
K AP
195. 196.
3 4
Matching Statements 199.
1
K
Short-Answer Essay 200. 201.
1 2
S S
202. 203.
4 4
S S
204. 205.
3 4
S S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4.
TF TF TF TF
5. 6. 7. 31.
TF TF TF TF
36. 37. 38. 39.
8. 9. 10. 11. 12. 13. 14.
TF TF TF TF TF TF TF
15. 16. 32. 44. 45. 46. 47.
TF TF TF MC MC MC MC
48. 49. 50. 51. 52. 53. 54.
17. 18. 19. 20. 21. 33. 61. 62.
TF TF TF TF TF TF MC MC
63. 64. 65. 66. 67. 68. 69. 70.
MC MC MC MC MC MC MC MC
71. 72. 73. 74. 75. 76. 77. 78.
Type
Item
Type
Item
Study Objective 1 MC 40. MC 141. MC 41. MC 189. MC 42. MC 190. MC 43. MC 191. Study Objective 2 MC 55. MC 143. MC 56. MC 151. MC 57. MC 152. MC 58. MC 161. MC 59. MC 162. MC 60. MC 163. MC 142. MC 164. Study Objective 3 MC 79. MC 164. MC 80. MC 165. MC 144. MC 166. MC 145. MC 167. MC 153. BE 168. MC 154. BE 169. MC 162. Ex 170. MC 163. Ex 171.
Type
Item
Type
MC C C C
199. 200.
MA SA
MC BE BE Ex Ex Ex Ex
165. 166. 167. 168. 169. 170. 171.
Ex Ex Ex Ex Ex Ex Ex
172. 173. 175. 192. 193. 201.
Ex Ex Ex C C SA
Ex Ex Ex Ex Ex Ex Ex Ex
173. 174. 175. 176. 177. 178. 179. 180.
Ex Ex Ex Ex Ex Ex Ex Ex
194. 195. 204.
C C SA
FOR INSTRUCTOR USE ONLY
Job Order Costing
22. 23. 24. 34. 81. 82. 83. 84.
TF TF TF TF MC MC MC MC
85. 86. 87. 88. 89. 90. 91. 92.
MC MC MC MC MC MC MC MC
93. 94. 95. 96. 97. 98. 99. 100.
25. 26. 27. 28. 102. 103.
TF TF TF TF MC MC
104. 105. 106. 107. 108. 109.
MC MC MC MC MC MC
110. 111. 112. 113. 114. 115.
29. TF 30. TF 35. TF 124. MC 125. MC 126. MC
127. 128. 129. 130. 131. 132.
MC MC MC MC MC MC
133. 134. 135. 136. 137. 138.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 4 MC 101. MC 166. MC 146. MC 167. MC 147. MC 168. MC 155. BE 169. MC 156. BE 171. MC 162. Ex 173. MC 163. Ex 175. MC 164. Ex 177. Study Objective 5 MC 116. MC 122. MC 117. MC 123. MC 118. MC 157. MC 119. MC 166. MC 120. MC 167. MC 121. MC 168. Study Objective 6 MC 139. MC 159. MC 140. MC 160. MC 148. MC 173. MC 149. MC 175. MC 150. MC 180. MC 158. BE 181.
20 - 3
Ex Ex Ex Ex Ex Ex Ex Ex
180. 181. 182. 183. 184. 185. 186. 196.
Ex Ex Ex Ex Ex Ex Ex C
202. 203. 205.
SA SA SA
MC MC BE Ex Ex Ex
169. 171. 172. 173. 175. 177.
Ex Ex Ex Ex Ex Ex
178. 179. 187. 188.
Ex Ex Ex Ex
BE BE Ex Ex Ex Ex
182. 184. 185. 186. 197. 198.
Ex Ex Ex Ex C C
BE = Brief Exercise Ex = Exercise
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Explain the characteristics and purposes of cost accounting. Cost accounting involves the procedures for measuring, recording, and reporting product costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are job order cost and process cost. 2. Describe the flow of costs in a job order cost accounting system. In job order cost accounting, manufacturing costs are first accumulated in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. The accumulated costs are then assigned to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold. 3. Explain the nature and importance of a job cost sheet. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account. 4. Indicate how the predetermined overhead rate is determined and used. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost. The rate is used in assigning overhead costs to work in process and to specific jobs. FOR INSTRUCTOR USE ONLY
20 - 4
Test Bank for Accounting Principles, Tenth Edition
5. Prepare entries for jobs completed and sold. When jobs are completed, the cost is debited to Finished Goods Inventory and credited to Work in Process Inventory. When a job is sold the entries are: (a) Debit Cash or Accounts Receivable and credit Sales for the selling price, and (b) Debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods. 6. Distinguish between under- and overapplied manufacturing overhead. Underapplied manufacturing overhead means that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead means that the overhead assigned to work in process is greater than the overhead incurred.
TRUE-FALSE STATEMENTS 1.
Cost accounting is primarily concerned with accumulating information about product costs.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
A job order cost system is most appropriate when a large volume of uniform products are produced.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting
3.
A process cost accounting system is appropriate for similar products that are continuously mass produced.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting
4.
The perpetual inventory method cannot be used in a job order cost system.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting
5.
A job order cost system and a process cost system are two alternative methods for valuing inventories.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
A job order cost system identifies costs with a particular job rather than with a set time period.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
A company may use either a job order cost system or a process cost system, but not both.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Raw Materials Inventory, Factory Labor, and Manufacturing Overhead are all control accounts in the general ledger when a job order cost accounting system is used.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Accumulating and assigning manufacturing costs are two important activities in a job order cost system.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing 10.
20 - 5
Recording the acquisition of raw materials is a part of accumulating manufacturing costs.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
11.
Manufacturing costs are generally incurred in one period and recorded in a subsequent period.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
12.
The Purchases account is credited for all raw materials purchase returns and allowances.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13.
When raw materials are received, there no effort at this point to associate the cost of materials with specific jobs.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
14.
When raw materials are purchased, the Work in Process Inventory account is debited.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
15.
Factory labor should be assigned to selling and administrative expenses on a proportionate basis.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
Fringe benefits and payroll taxes associated with factory workers should be accumulated as a part of Factory Labor.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
Job order cost sheets constitute the subsidiary ledger of the control account Work In Process Inventory.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
18.
In a job order cost system, each entry to the Work In Process Inventory account should be accompanied by a posting to one or more job cost sheets.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
19.
Direct materials requisitioned from the storeroom should be charged to the Work In Process Inventory account and the job cost sheets for the individual jobs on which the materials were used.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
20.
Manufacturing overhead is the only product cost that can be assigned to jobs as soon as the costs are incurred.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
There should be a separate job cost sheet for each job.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 6 22.
Test Bank for Accounting Principles, Tenth Edition Actual manufacturing overhead costs are assigned to each job by tracing each overhead cost to a specific job.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
23.
The formula for the predetermined overhead rate is estimated annual overhead costs divided by an expected annual operating activity.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
Actual manufacturing overhead costs should be charged to the Work in Process Inventory account as they are incurred.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
A good system of internal control requires that the job order cost sheet be destroyed as soon as the job is complete.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
26.
Finished Goods Inventory is charged for the cost of jobs completed during a period.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
27.
When goods are sold, the Cost of Goods Sold account is debited and Work in Process Inventory account is credited.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
28.
Total manufacturing costs for a period consists of the costs of direct materials used, the cost of direct labor incurred, and the manufacturing overhead applied during the period.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Overapplied overhead means that actual manufacturing overhead costs were greater than the manufacturing overhead costs applied to jobs.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
30.
At the end of the year, the accountant credits the amount of the overapplied overhead to Cost of Goods Sold.
Ans: T, SO: 6, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
32.
The cost of raw materials purchased is credited to Raw Materials Inventory when materials are received.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
33.
Requisitions for direct materials are posted daily to the individual job cost sheets.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing 34.
20 - 7
The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity expressed in terms of a common activity base.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
35.
At the end of the year, underapplied overhead is usually credited to Cost of Goods Sold.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5.
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Item
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Item
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Item
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Item
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Item
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Item
Ans.
T F T F T
6. 7. 8. 9. 10.
T F F T T
11. 12. 13. 14. 15.
F F T F F
16. 17. 18. 19. 20.
T T T T F
21. 22. 23. 24. 25.
T F T F F
26. 27. 28. 29. 30.
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31. 32. 33. 34. 35.
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MULTIPLE CHOICE QUESTIONS 36.
Which of the following is one of the components of cost accounting? a. It involves measuring product costs. b. It involves the determination of company profits. c. It requires GAAP to be applied. d. It requires cost minimizing principles.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
37.
A major purpose of cost accounting is to a. classify all costs as operating or nonoperating. b. measure, record, and report period costs. c. provide information to stockholders for investment decisions. d. measure, record, and report product costs.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The two basic types of cost accounting systems are a. job order and job accumulation systems. b. job order and process cost systems. c. process cost and batch systems. d. job order and batch systems.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
39.
A process cost system would most likely be used by a company that makes a. motion pictures. b. repairs to automobiles. c. breakfast cereal. d. college graduation announcements. Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 8 40.
Test Bank for Accounting Principles, Tenth Edition Which of the following would be accounted for using a job order cost system? a. The production of personal computers. b. The production of automobiles. c. The refining of petroleum. d. The construction of a new campus building.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
Process costing is used when a. the production process is continuous. b. production is aimed at filling a specific customer order. c. dissimilar products are involved. d. costs are to be assigned to specific jobs.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Process costing is not used when a. similar goods are being produced. b. large volumes are produced. c. jobs have distinguishing characteristics. d. a series of connected manufacturing processes is necessary.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
An important feature of a job order cost system is that each job a. must be similar to previous jobs completed. b. has its own distinguishing characteristics. c. must be completed before a new job is accepted. d. consists of one unit of output.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
As of December 31, 2012, Stand Still Industries had $2,500 of raw materials inventory. At the beginning of 2012, there was $2,000 of materials on hand. During the year, the company purchased $325,000 of materials; however, it paid for only $312,500. How much inventory was requisitioned for use on jobs during 2012? a. $312,000 b. $324,500 c. $325,500 d. $313,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
45.
The flow of costs in a job order cost system a. involves accumulating manufacturing costs incurred and assigning the accumulated costs to work done. b. cannot be measured until all jobs are complete. c. measures product costs for a set time period. d. generally follows a LIFO cost flow assumption.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing 46.
20 - 9
In a job order cost accounting system, the Raw Materials Inventory account is a. an expense. b. a control account. c. not used. d. a period cost.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
When a job is completed and all costs have been accumulated on a job cost sheet, the journal entry that should be made is a. Finished Goods Inventory Direct Materials Direct Labor Manufacturing Overhead b. Work In Process Inventory Direct Materials Direct Labor Manufacturing Overhead c. Raw Materials Inventory Work In Process Inventory d. Finished Goods Inventory Work In Process Inventory
Ans: D, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
48.
The two major steps in the flow of costs are a. allocating and assigning. b. acquiring and accumulating. c. accumulating and assigning. d. accumulating and amortizing.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
49.
The Raw Materials Inventory account is a. a subsidiary account. b. debited for invoice costs and freight costs chargeable to the purchaser. c. debited for purchase discounts taken. d. debited for purchase returns and allowances.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
Records of individual items of raw materials would not be maintained a. electronically. b. manually. c. on stores ledger cards. d. in the Raw Materials Inventory account.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
20 - 10 Test Bank for Accounting Principles, Tenth Edition 51.
Cost of raw materials is debited to Raw Materials Inventory when the a. materials are ordered. b. materials are received. c. materials are put into production. d. bill for the materials is paid.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Which of the following is not included in factory labor costs? a. Gross earnings. b. Net earnings. c. Fringe benefits. d. Employer payroll taxes.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
All of the following would be entries in assigning accumulated costs to the Work In Process Inventory except: a. the purchase of raw materials. b. raw materials are used. c. overhead is applied. d. factory labor is used.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
Factory labor costs a. are accumulated in a control account. b. do not include pension costs. c. include vacation pay. d. are based on workers’ net pay.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55.
Factory Labor is a(n) a. expense account. b. control account. c. subsidiary account. d. manufacturing cost clearing account.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
56.
Kline Manufacturing has the following labor costs: Factory—Gross wages Factory—Net wages Employer Payroll Taxes Payable
$490,000 420,000 50,000
The entry to record the cost of factory labor and the associated payroll tax expense will include a debit to Factory Labor for a. $540,000. b. $490,000. c. $470,000. d. $440,000. Ans: A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing 57.
20 - 11
Factory labor costs a. accumulate in advance of utilization. b. accumulate in a control account. c. include sick pay earned by factory workers. d. accumulate in the Factory Labor Expense account.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58.
Which of the following is not a control account? a. Manufacturing Overhead b. Factory Labor c. Accounts Receivable d. Raw Materials Inventory
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
Manufacturing Overhead would not have a subsidiary account for a. utilities. b. property taxes. c. insurance. d. raw materials inventory.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
60.
The entry to record the acquisition of raw materials on account is a. Work in Process Inventory Accounts Payable b. Manufacturing Overhead Raw Materials Inventory Accounts Payable c. Accounts Payable Raw Materials Inventory d. Raw Materials Inventory Accounts Payable
Ans: D, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
Which one of the following best describes a job cost sheet? a. It is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. b. It is used to track manufacturing overhead costs to specific jobs. c. It is used by management to understand how direct costs affect profitability. d. It is a daily form that management uses for tracking worker productivity on which employee raises are based.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
62.
Job cost sheets constitute the subsidiary ledger for the a. Finished Goods Inventory account. b. Cost of Goods Sold account. c. Work In Process Inventory account. d. Cost of Goods Manufactured account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 12 Test Bank for Accounting Principles, Tenth Edition 63.
A materials requisition slip showed that direct materials requested were $63,000 and indirect materials requested were $9,000. The entry to record the transfer of materials from the storeroom is a. Work In Process Inventory .................................................. 63,000 Raw Materials Inventory ............................................. 63,000 b. Direct Materials ................................................................... 63,000 Indirect Materials................................................................. 9,000 Work in Process Inventory.......................................... 72,000 c. Manufacturing Overhead..................................................... 72,000 Raw Materials Inventory ............................................. 72,000 d. Work In Process Inventory .................................................. 63,000 Manufacturing Overhead..................................................... 9,000 Raw Materials Inventory ............................................. 72,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
64.
The job cost sheet does not show a. costs chargeable to a specific job. b. the total costs of a completed job. c. the unit cost of a completed job. d. the cost of goods sold.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
65.
Under an effective system of internal control, the authorization for issuing materials is made a. orally. b. on a prenumbered materials requisition slip. c. by the accounting department. d. by anyone on the production line.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls
66.
A copy of the materials requisition slip would not include the: a. quantity. b. stock number. c. cost per unit. d. name of the supplier.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls
67.
Materials requisition slips are costed a. by production supervisors. b. by factory personnel who work on the production line. c. after the goods have been sold. d. using any of the inventory costing methods.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing 68.
20 - 13
Posting to control accounts in a costing system are made a. monthly. b. daily. c. annually. d. semi-annually.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
69.
Which one of the following should be equal to the balance of the Work In Process Inventory account at the end of the period? a. The total of the amounts transferred from raw materials for the current period b. The sum of the costs shown on the job cost sheets of unfinished jobs c. The total of manufacturing overhead applied to work in process for the period d. The total manufacturing costs for the period
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
Which of the following shows entries only to control accounts? a. Factory Labor Factory Wages Payable b. Work in Process Factory Labor Raw Materials Inventory Wages Payable c. Work in Process Manufacturing Overhead Raw Materials Inventory d. Factory Labor Raw Materials Inventory Accounts Payable Wages Payable
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
A time ticket does not indicate the a. employee's name. b. account to be charged. c. number of personal exemptions claimed by the employee. d. job number.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
72.
Which one of the following is a source document that impacts the job cost sheet? a. Raw materials receiving slips. b. Materials purchase orders. c. Labor time tickets. d. Finished goods shipping documents.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls
FOR INSTRUCTOR USE ONLY
20 - 14 Test Bank for Accounting Principles, Tenth Edition 73.
Time tickets should be approved by a. the audit committee. b. co-workers. c. the employee's supervisor. d. the payroll department.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls
74.
If the entry to assign factory labor showed only a debit to Work In Process Inventory, then all labor costs were a. direct labor. b. indirect labor. c. overtime related. d. regular hours.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
75.
The principal accounting record used in assigning costs to jobs is a. a job cost sheet. b. the cost of goods manufactured schedule. c. the Manufacturing Overhead control account. d. the stores ledger cards.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
76.
The following information is available for completed Job No. 402: Direct materials, $80,000; direct labor, $120,000; manufacturing overhead applied, $60,000; units produced, 5,000 units; units sold, 4,000 units. The cost of the finished goods on hand from this job is a. $40,000. b. $260,000. c. $52,000. d. $208,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
77.
Sportly, Inc. completed Job No. B14 during 2012. The job cost sheet listed the following: Direct materials Direct labor Manufacturing overhead applied Units produced Units sold
$55,000 $30,000 $20,000 3,000 units 1,800 units
How much is the cost of the finished goods on hand from this job? a. $105,000 b. $63,000 c. $42,000 d. $51,000 Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing 78.
20 - 15
Madison Inc. uses job order costing for its brand new line of sewing machines. The cost incurred for production during 2012 totaled $18,000 of materials, $9,000 of direct labor costs, and $6,000 of manufacturing overhead applied. The company ships all goods as soon as they are completed which results in no finished goods inventory on hand at the end of any year. Beginning work in process totaled $15,000, and the ending balance is $9,000. During the year, the company completed 20 machines. How much is the cost per machine? a. b. c. d.
$1,350 $1,950 $1,650 $2,400
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
79.
As of December 31, 2012, Nilsen Industries had $2,000 of raw materials inventory. At the beginning of 2012, there was $1,600 of materials on hand. During the year, the company purchased $324,000 of materials; however it paid for only $314,000. How much inventory was requisitioned for use on jobs during 2012? a. $324,400 b. $314,400 c. $313,600 d. $323,600
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
80.
Cost of goods manufactured equals $65,000 for 2012. Finished goods inventory is $2,000 at the beginning of the year and $5,500 at the end of the year. Beginning and ending work in process for 2012 are $4,000 and $5,000, respectively. How much is cost of goods sold for the year? a. $67,500 b. $63,000 c. $61,500 d. $68,500
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
81.
A company expected its annual overhead costs to be $1,800,000 and direct labor costs to be $1,000,000. Actual overhead was $1,740,000, and actual labor costs totaled $1,100,000. How much is the company’s predetermined overhead rate to the nearest cent? a. $1.74 b. $1.57 c. $1.80 d. $1.64
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 16 Test Bank for Accounting Principles, Tenth Edition 82.
Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $1,025,000. The company used 1,000 hours of processing on Job No. B12 during the period and incurred overhead costs totaling $1,050,000. The budgeted machine hours for the year totaled 20,000. How much overhead should be applied to Job No. B12? a. $1,050 b. $51,250 c. $52,500 d. $1,025
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83.
Barr Mfg. provided the following information from its accounting records for 2012: Expected production Actual production Budgeted overhead Actual overhead
30,000 labor hours 28,000 labor hours $900,000 $870,000
How much is the overhead application rate if Barr bases the rate on direct labor hours? a. $32.14 per hour b. $30.00 per hour c. $29.00 per hour d. $31.07 per hour Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84.
Kinney Company applies overhead on the basis of 150% of direct labor cost. Job No. 176 is charged with $100,000 of direct materials costs and $120,000 of manufacturing overhead. The total manufacturing costs for Job No. 176 is a. $220,000. b. $400,000. c. $300,000. d. $270,000.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
Redman Company manufactures customized desks. The following pertains to Job No. 978: Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Applied factory overhead rate per machine hour
$11,450 360 $15.00 300 $22.00
What is the total manufacturing cost for Job No. 978? a. $21,650 b. $23,450 c. $24,950 d. $26,750 Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing 86.
20 - 17
Henson Company applies overhead on the basis of 120% of direct labor cost. Job No. 190 is charged with $120,000 of direct materials costs and $180,000 of manufacturing overhead. The total manufacturing costs for Job No. 190 is a. $300,000. b. $516,000. c. $324,000. d. $450,000.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
87.
Norman Company manufactures customized desks. The following pertains to Job No. 953: Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Applied factory overhead rate per machine hour
$14,800 600 $16.00 400 $30.00
What is the total manufacturing cost for Job No. 953? a. $33,200 b. $36,400 c. $39,200 d. $42,400 Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
88.
Minton Company provided the following information from its accounting records for 2012: Expected production Actual production Budgeted overhead Actual overhead
60,000 labor hours 56,000 labor hours $1,500,000 $1,450,000
How much is the overhead application rate if Minton Company bases it on direct labor hours? a. $25.00 per hour b. $26.79 per hour c. $25.89 per hour d. $24.17 per hour Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
89.
The labor costs that have been identified as indirect labor should be charged to a. manufacturing overhead. b. direct labor. c. the individual jobs worked on. d. salary expense.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 18 Test Bank for Accounting Principles, Tenth Edition 90.
Manufacturing overhead is applied to each job a. at the time when the overhead cost is incurred. b. by means of a predetermined overhead rate. c. at the end of the year when actual costs are known. d. only if the overhead costs can be directly traced to that job.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
91.
The predetermined overhead rate is based on the relationship between a. estimated annual costs and actual activity. b. estimated annual costs and expected annual activity. c. actual monthly costs and actual annual activity. d. estimated monthly costs and actual monthly activity.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
92.
The predetermined overhead rate is a. determined on a moving average basis throughout the year. b. not calculated until actual overhead costs are incurred. c. determined at the beginning of the year. d. determined at the end of the current year.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
93.
In calculating a predetermined overhead rate, a recent trend in automated manufacturing operations is to choose an activity base related to a. direct labor hours. b. indirect labor dollars. c. machine hours. d. raw materials dollars.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
94.
If annual overhead costs are expected to be $800,000 and direct labor costs are expected to be $1,000,000, then if the activity base is direct labor costs: a. $1.25 is the predetermined overhead rate. b. for every dollar of manufacturing overhead, 80 cents of direct labor will be assigned. c. for every dollar of direct labor, 80 cents of manufacturing overhead will be assigned. d. a predetermined overhead rate cannot be determined.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
95.
Overhead application is recorded with a a. credit to Work in Process Inventory. b. credit to Manufacturing Overhead. c. debit to Manufacturing Overhead. d. credit to job cost sheets.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing 96.
20 - 19
Manufacturing overhead applied is added to direct labor incurred and to what other item to equal total manufacturing costs for the period? a. Goods available for sale. b. Raw materials purchased. c. Work in process. d. Direct materials used.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97.
Simmons Inc. applies overhead to production at a predetermined rate of 90% based on direct labor cost. Job No. 250, the only job still in process at the end of August, has been charged with manufacturing overhead of $7,200. What was the amount of direct materials charged to Job 250 assuming the balance in Work in Process inventory is $30,000? a. $7,500. b. $8,000. c. $14,800. d. $30,000.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
98.
Spencer Inc. applies overhead to production at a predetermined rate of 80% based on direct labor cost. Job No. 130, the only job still in process at the end of August, has been charged with manufacturing overhead of $5,000. What was the amount of direct materials charged to Job 130 assuming the balance in Work in Process inventory is $20,000? a. $5,000. b. $6,250. c. $8,750. d. $20,000.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
99.
For Jacobs Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $450,000 of factory labor costs are incurred of which $120,000 is indirect labor. Actual overhead incurred was $240,000. The amount of overhead debited to Work in Process Inventory should be: a. $231,000 b. $240,000 c. $210,000 d. $330,000
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
100.
Simpson Company applies overhead on the basis of 200% of direct labor cost. Job No. 305 is charged with $150,000 of direct materials costs and $200,000 of manufacturing overhead. The total manufacturing costs for Job No. 305 is: a. $350,000 b. $450,000 c. $500,000 d. $550,000
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 20 Test Bank for Accounting Principles, Tenth Edition 101.
For Wilton Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $700,000 of factory labor costs are incurred of which $200,000 is indirect labor. Actual overhead incurred was $360,000. The amount of overhead debited to Work in Process Inventory should be: a. $350,000 b. $360,000 c. $490,000 d. $500,000
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
102.
At the beginning of the year, Monroe Company estimates annual overhead costs to be $1,600,000 and that 300,000 machine hours will be operated. Using machine hours as a base, the amount of overhead applied during the year if actual machine hours for the year was 315,000 hours is a. $1,600,000. b. $1,523,809. c. $1,120,000. d. $1,680,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
Cost of goods sold is obtained from a. analysis of all the control accounts in the cost system. b. the finished goods inventory records. c. the work in process inventory records. d. the Raw Materials Inventory control account.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
When determining costs of jobs, how does a company account for indirect materials? a. It is added to work in process as used. b. It remains part of raw materials inventory. c. It is transferred out of raw materials into manufacturing overhead when used. d. It is transferred out of raw materials into work in process as used.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
In a job order cost system, a credit to Manufacturing Overhead will be accompanied by a debit to a. Cost of Goods Manufactured. b. Finished Goods Inventory. c. Work in Process Inventory. d. Raw Materials Inventory.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing 106.
20 - 21
During 2012, Tanner Manufacturing expected Job No. 26 to cost $450,000 of overhead, $500,000 of materials, and $300,000 in labor. Tanner applied overhead based on direct labor cost. Actual production required an overhead cost of $840,000, $825,000 in materials used, and $330,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods? a. $1,500,000 b. $1,575,000 c. $1,605,000 d. $1,650,000
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
107.
Debits to Work in Process Inventory are accompanied by a credit to all but which one of the following accounts? a. Raw Materials Inventory b. Factory Labor c. Manufacturing Overhead d. Cost of Goods Sold
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
108.
Which of the following is not viewed as part of accumulating manufacturing costs in a job order cost system? a. Cost of goods sold is recognized b. Raw materials are purchased c. Factory labor is incurred d. Manufacturing overhead is incurred
Ans: A, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
109.
Which of the following is not viewed as part of assigning manufacturing costs in a job order cost system? a. Manufacturing overhead is applied b. Raw materials are used c. Manufacturing overhead is incurred d. Completed goods are recognized
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
110.
In determining total manufacturing costs on the cost of goods manufactured schedule, a. beginning work in process inventory should have a zero balance. b. actual manufacturing overhead costs appear as a deduction. c. manufacturing overhead applied is added to direct materials and direct labor. d. ending work in process inventory is deducted from beginning work in process inventory.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 22 Test Bank for Accounting Principles, Tenth Edition 111.
Gulick Company developed the following data for the current year: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs
$160,000 96,000 192,000 144,000 176,000 480,000
Gulick Company's direct labor cost for the year is a. $48,000. b. $240,000. c. $144,000. d. $192,000. Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
Gulick Company developed the following data for the current year: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs
$160,000 96,000 192,000 144,000 176,000 480,000
Gulick Company's ending work in process inventory is a. $464,000. b. $320,000. c. $304,000. d. $144,000. Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Hayward Manufacturing Company developed the following data: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Ending work in process
$450,000 350,000 550,000 400,000 600,000 750,000
Hayward Manufacturing Company's total manufacturing costs for the period is a. $950,000. b. $900,000. c. $650,000. d. cannot be determined from the data provided. Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing 114.
20 - 23
Which of the following is not used in assigning manufacturing costs to work in process inventory? a. Actual manufacturing overhead b. Time tickets c. Materials requisitions d. Predetermined overhead rate
Ans: A, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
115.
On the cost of goods manufactured schedule, the cost of goods manufactured agrees with the a. balance of Finished Goods Inventory at the end of the period. b. total debits to Work in Process Inventory during the period. c. amount transferred from Work in Process Inventory to Finished Goods during the period. d. debits to Cost of Goods Sold during the period.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
Gannon Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31
$ 50,000 150,000
If the cost of goods manufactured during the year amounted to $2,100,000 and annual sales were $2,750,000, the amount of gross profit for the year is a. $650,000. b. $2,000,000. c. $750,000. d. $550,000. Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
Haight Company incurred direct materials costs of $1,500,000 during the year. Manufacturing overhead applied was $270,000 and is applied at the rate of 60% of direct labor costs. Haight Company’s total manufacturing costs for the year was a. $2,220,000. b. $1,932,000. c. $1,770,000. d. $2,832,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 24 Test Bank for Accounting Principles, Tenth Edition 118.
Greer Company developed the following data for the current year: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs
$102,000 156,000 132,000 138,000 675,000 642,000
How much is Greer Company's direct labor cost for the year? a. $381,000 b. $450,000 c. $348,000 d. $246,000 Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
119.
Greer Company developed the following data for the current year: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs
$102,000 156,000 132,000 138,000 675,000 642,000
How much is Greer Company's ending work in process inventory for the year? a. $69,000 b. $363,000 c. $63,000 d. $279,000 Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120.
Chmelar Manufacturing Company developed the following data: Beginning work in process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Ending work in process
$ 80,000 480,000 560,000 540,000 1,280,000 60,000
How much are total manufacturing costs for the period? a. $1,580,000 b. $1,260,000 c. $1,100,000 d. $1,220,000 Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing 121.
20 - 25
Barger Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31
$90,000 126,000
If the cost of goods manufactured during the year amounted to $1,995,000 and annual sales were $2,994,000, how much is the amount of gross profit for the year? a. $999,000 b. $909,000 c. $1,959,000 d. $1,035,000 Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
Emley Company incurred direct materials costs of $600,000 during the year. Manufacturing overhead applied was $560,000 and is applied based on direct labor costs. The predetermined overhead rate is 70%. How much are Emley Company’s total manufacturing costs for the year? a. $1,552,000 b. $1,400,000 c. $1,160,000 d. $1,960,000
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
123.
During 2012, Durham Manufacturing expected Job No. 51 to cost $600,000 of overhead, $1,000,000 of materials, and $400,000 in labor. Durham applied overhead based on direct labor cost. Actual production required an overhead cost of $560,000, $1,100,000 in materials used, and $440,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods? a. $2,140,000 b. $2,200,000 c. $2,000,000 d. $2,100,000
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
124.
During 2012, Cotte Manufacturing expected Job No. 59 to cost $600,000 of overhead, $1,000,000 of materials, and $400,000 in labor. Cotte applied overhead based on direct labor cost. Actual production required an overhead cost of $560,000, $1,100,000 in materials used, and $440,000 in labor. All of the goods were completed. How much is the amount of over- or underapplied overhead? a. $40,000 underapplied b. $40,000 overapplied c. $100,000 underapplied d. $100,000 overapplied
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 26 Test Bank for Accounting Principles, Tenth Edition 125.
Kimble Company applies overhead on the basis of machine hours. Given the following data, compute overhead applied and the under- or overapplication of overhead for the period: Estimated annual overhead cost $1,600,000 Actual annual overhead cost $1,540,000 Estimated machine hours 400,000 Actual machine hours 380,000 a. $1,520,000 applied and $20,000 overapplied b. $1,600,000 applied and $20,000 overapplied c. $1,520,000 applied and $20,000 underapplied d. $1,463,000 applied and neither under- nor overapplied
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
126.
Barnes Company applies overhead on the basis of machine hours. Given the following data, compute overhead applied and the under- or overapplication of overhead for the period: Estimated annual overhead cost Actual annual overhead cost Estimated machine hours Actual machine hours a. b. c. d.
$3,000,000 $2,940,000 300,000 290,000
$2,900,000 applied and $40,000 overapplied $3,000,000 applied and $40,000 overapplied $2,900,000 applied and $40,000 underapplied $2,940,000 applied and neither under- nor overapplied
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
127.
A company assigned overhead to work in process. At year end, what does the amount of overapplied overhead mean? a. The overhead assigned to work in process is greater than the estimated overhead costs. b. The overhead assigned to work in process is less than the estimated overhead costs. c. The overhead assigned to work in process is less than the actual overhead. d. The overhead assigned to work in process is greater than the overhead incurred.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
128.
If the Manufacturing Overhead account has a debit balance at the end of a period, it means that a. actual overhead costs were less than overhead costs applied to jobs. b. actual overhead costs were greater than overhead costs applied to jobs. c. actual overhead costs were equal to overhead costs applied to jobs. d. no jobs have been completed.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing 129.
20 - 27
If the manufacturing overhead costs applied to jobs worked on were greater than the actual manufacturing costs incurred during a period, overhead is said to be a. underapplied. b. overapplied. c. in error. d. prepaid.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
130.
At the end of the year, any balance in the Manufacturing Overhead account is generally eliminated by adjusting a. Work In Process Inventory. b. Finished Goods Inventory. c. Cost of Goods Sold. d. Raw Materials Inventory.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
131.
If Manufacturing Overhead has a credit balance at the end of the period, then a. overhead has been underapplied. b. the overhead assigned to Work in Process Inventory is less than the overhead incurred. c. overhead has been overapplied. d. management must take corrective action.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
132.
The Manufacturing Overhead account shows debits of $30,000, $24,000, and $28,000 and one credit for $86,000. Based on this information, manufacturing overhead a. has been overapplied. b. has been underapplied. c. has not been applied. d. shows a zero balance.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
133. If Manufacturing Overhead has a debit balance at the end of the period, then a. overhead has been underapplied. b. the overhead assigned to Work in Process Inventory is more than the overhead incurred. c. overhead has been overapplied. d. management must take corrective action . Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
134.
If actual overhead is greater than applied manufacturing overhead, then manufacturing overhead is: a. underapplied. b. overapplied. c. a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 28 Test Bank for Accounting Principles, Tenth Edition 135. If actual overhead is less than applied manufacturing overhead, then manufacturing overhead is: a. underapplied. b. overapplied. c. a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
136.
If manufacturing overhead has been underapplied during the year, the adjusting entry at the end of the year will show a a. debit to Manufacturing Overhead. b. credit to Cost of Goods Sold. c. debit to Work in Process Inventory. d. debit to Cost of Goods Sold.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
137.
If manufacturing overhead has been overapplied during the year, the adjusting entry at the end of the year will show a a. debit to Manufacturing Overhead. b. credit to Finished Goods Inventory c. debit to Cost of Goods Sold. d. credit to Work in Process Inventory.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
138.
The existence of under- or overapplied overhead at the end of the year: a. requires an adjustment to Cost of Goods Sold. b. indicates that an error has been made. c. requires a retroactive adjustment to the cost of all jobs completed. d. is written off as a bad estimate expense.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
139.
Conceptually, any under- or overapplied overhead at the end of the year should be allocated among all of the following except a. cost of goods sold. b. ending work in process inventory. c. ending raw materials inventory. d. ending finished goods inventory.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
140.
If, at the end of the year, Manufacturing Overhead has been overapplied, it means that a. actual overhead costs were greater than the overhead assigned to jobs. b. actual overhead costs were less than the overhead assigned to jobs. c. overhead has not been applied to jobs still in process. d. cost of goods will have to be increased by the amount of the overapplied overhead.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing 141.
20 - 29
A process cost system would be used for all of the following except the a. manufacture of cereal. b. refining of petroleum. c. printing of wedding invitations. d. production of automobiles.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
142.
In a job order cost system, it would be correct in recording the purchase of raw materials to debit a. Work in Process Inventory. b. Work in Process and Manufacturing Overhead. c. Raw Materials Inventory. d. Finished Goods Inventory.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
143.
In a manufacturing company, the cost of factory labor consists of all of the following except a. employer payroll taxes. b. fringe benefits incurred by the employer. c. net earnings of factory workers. d. gross earnings of factory workers.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
144.
Which of the following is not a control account? a. Raw Materials Inventory b. Factory Labor c. Manufacturing Overhead d. All of these are control accounts.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
145.
When the company assigns factory labor costs to jobs, the direct labor cost is debited to a. Direct Labor. b. Factory Labor. c. Manufacturing Overhead. d. Work in Process Inventory.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
146.
Jinnah Company applies overhead on the basis of 200% of direct labor cost. Job No. 501 is charged with $180,000 of direct materials costs and $240,000 of manufacturing overhead. The total manufacturing costs for Job No. 501 is a. $420,000. b. $660,000. c. $540,000. d. $600,000.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 30 Test Bank for Accounting Principles, Tenth Edition 147.
Companies assign manufacturing overhead to work in process on an estimated basis through the use of a(n) a. actual overhead rate. b. estimated overhead rate. c. assigned overhead rate. d. predetermined overhead rate.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
148.
Overapplied manufacturing overhead exists when overhead assigned to work in process is a. more than overhead incurred and there is a debit balance in Manufacturing Overhead at the end of a period. b. less than overhead incurred and there is a debit balance in Manufacturing Overhead at the end of a period. c. more than overhead incurred and there is a credit balance in Manufacturing Overhead at the end of a period. d. less than overhead incurred and there is a credit balance in Manufacturing Overhead at the end of a period.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
149.
Usually, under- or overapplied overhead is considered to be an adjustment to a. work in process. b. finished goods. c. finished goods and cost of goods sold. d. cost of goods sold.
Ans: D, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
150.
Which of the following statements about under- or overapplied manufacturing overhead is correct? a. After the entry to transfer over- or underapplied overhead to Cost of Goods Sold is posted, Manufacturing Overhead will have a zero balance. b. When Manufacturing Overhead has a credit balance, overhead is said to be underapplied. c. At the end of the year, under- or overapplied overhead is eliminated by a closing entry. d. When annual financial statements are prepared, overapplied overhead is reported in current liabilities.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 31
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52.
a d b c d a c b b a b d c b d b b
53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.
a c d a c b d d a c d d b d d a b
70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
c c c c a a c c b d c c b b c b d
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103.
b a a b b c c c b d c c a b a d b
104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
c c d d a c c b a b a c c a c a b
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
d d b d c c d b b c c a a a b d a
138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.
a c b c c c b d c d c d a
BRIEF EXERCISES BE 151 During the first year of operations, Shapiro Tool accumulated the following manufacturing costs: Raw materials purchased on account Factory labor accrued Incurred manufacturing overhead on account
$10,000 6,000 4,000
Instructions Prepare separate journal entries for each manufacturing cost. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 151
(4 min.)
Raw Materials Inventory .................................................................... Accounts Payable.....................................................................
10,000
Factory Labor .................................................................................... Factory Wages Payable ...........................................................
6,000
Manufacturing Overhead................................................................... Accounts Payable.....................................................................
4,000
FOR INSTRUCTOR USE ONLY
10,000
6,000
4,000
20 - 32 Test Bank for Accounting Principles, Tenth Edition BE 152 In January, Harlan, Inc. production supervisor requisitioned raw materials for production as follows: Job 1 $600, Job 2 $900, Job 3 $400, and general factory use, $520. Instructions Prepare a summary journal entry to record raw materials used. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 152
(2 min.)
Work in Process Inventory................................................................. Manufacturing Overhead ................................................................... Raw Materials Inventory ...........................................................
1,900 520 2,420
BE 153 Lando Company reported the following amounts for 2012: Raw materials purchased Beginning raw materials inventory Ending raw materials inventory
$88,000 5,200 4,500
Ending work in process inventory $ 6,300 Manufacturing overhead costs applied 36,000 Beginning work in process inventory 6,100
Instructions Calculate the cost of materials used in production Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 153
(2 min.)
$5,200 + $88,000 – $4,500 = $88,700 BE 154 Builder Bug Company allocates overhead at $9 per direct labor hour. Job A45 required 4 boxes of direct materials at a cost of $30 per box and took employees 15 hours to complete. Employees earn $15 per hour. Instructions Compute the total cost of Job A45. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 154
(4 min.)
Direct materials (4 × $30) Direct labor (15 hours × $15) Overhead (15 hours × $9) Total job cost
$120 225 135 $480
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 33
BE 155 Colby Company estimates that annual manufacturing overhead costs will be $600,000. Estimated annual operating activity bases are: direct labor cost $460,000, direct labor hours 40,000 and machine hours 80,000. The actual manufacturing overhead cost for the year was $601,000 and the actual direct labor cost for the year was $456,000. Actual direct labor hours totaled 40,200 and machine hours totaled 79,000. Colby applies overhead based on direct labor hours. Instructions Compute the predetermined overhead rate and determine the amount of manufacturing overhead applied. Determine if overhead is over- or underapplied and the amount. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 155
(5 min.)
Rate = $600,000 ÷ 40,000 = $15 per direct labor hour Applied = $15 40,200 = $603,000 Overapplied = $603,000 - $601,000 = $2,000 BE 156 Martin Company applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for the year follows: Actual manufacturing overhead $150,000 Estimated manufacturing overhead $140,000 Direct labor hours incurred 4,800 Direct labor hours estimated 5,000 Instructions Compute the predetermined overhead rate. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 156
(2 min.)
$140,000 ÷ 5,000 = $28.00 per direct labor hour BE 157 The manufacturing operations of Bryant, Inc. had the following balances for the month of January: Inventories Raw materials Work in process Finished goods
January 1 $12,000 21,000 14,000
January 31 $13,000 23,000 16,000
Bryant transferred $270,000 of completed goods out of work in process during January. Instructions Compute the cost of goods sold. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 34 Test Bank for Accounting Principles, Tenth Edition Solution 157 (2 min.) $14,000 + $270,000 – $16,000 = $268,000 BE 158 The following amounts were reported by Burke Company before adjusting its immaterial overapplied manufacturing overhead of $8,000. Raw Materials Inventory Finished Goods Inventory Work in Process Inventory Cost of Goods Sold
$ 40,000 60,000 100,000 770,000
Instructions Compute what amount Burke will report as cost of goods sold after it disposes of its overapplied overhead. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 158
(2 min.)
$770,000 – $8,000 = $762,000 BE 159 During 2012, Arb Company incurred the following direct labor costs: January $20,000 and February $30,000. Arb uses a predetermined overhead rate of 120% of direct labor cost. Estimated overhead for the 2 months, respectively, totaled $19,500 and $35,700. Actual overhead for the 2 months, respectively, totaled $24,500 and $32,500. Instructions Determine if overhead is over- or underapplied for each of the two months and the respective amounts. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 159
(4 min.)
Overhead applied: January: 120% × $20,000 = $24,000 February: 120% × $30,000 = $36,000 Over- or underapplied: January: $24,000 – $24,500 = $500 underapplied February: $36,000 – $32,500 = $3,500 overapplied
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 35
BE 160 At December 31, Ding Company reported the following balances in its accounts: Cost of Goods Sold Finished Goods Inventory
$210,000 30,000
The company’s balance in its Manufacturing Overhead account at the same date was a debit of $2,400. Instructions Prepare the entry to adjust the over- or underapplied overhead amount at December 31. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160
(2 min.)
Cost of Goods Sold .............................................................................. Manufacturing Overhead ..............................................................
2,400 2,400
EXERCISES Ex. 161 The manufacturing operations of Beatly, Inc. had the following balances for the month of January: January 1 $12,000 21,000 14,000
Raw materials Work in process Finished goods
January 31 $13,000 23,000 12,000
Beatly transferred $240,000 of completed goods out of work in process during January. Instructions Compute the cost of goods sold for January. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 161
(3 min.)
$14,000 + $240,000 - $12,000 = $242,000 Ex. 162 A selected list of accounts used by Cline Manufacturing Company follows: Code A Cash B Accounts Receivable C Raw Materials Inventory D Work In Process Inventory E Finished Goods Inventory
Code F Accounts Payable G Factory Labor H Manufacturing Overhead I Cost of Goods Sold J Sales Revenue
Cline Manufacturing Company uses a job order system and maintains perpetual inventory records.
FOR INSTRUCTOR USE ONLY
20 - 36 Test Bank for Accounting Principles, Tenth Edition Ex. 162
(Cont.)
Instructions Place the appropriate code letter in the columns indicating the appropriate account(s) to be debited and credited for the transactions listed below. ——————————————————————————————————————————— Account(s) Account(s) Transactions Debited Credited ——————————————————————————————————————————— 1. Raw materials were purchased on account. ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280. ——————————————————————————————————————————— 4. Factory labor was paid as incurred. ——————————————————————————————————————————— 5. Recognized direct labor and indirect labor used. ——————————————————————————————————————————— 6. The production department requisitioned indirect materials for use in the factory. ——————————————————————————————————————————— 7. Overhead was applied to production based on a predetermined overhead rate of $8 per labor hour. ——————————————————————————————————————————— 8. Goods that were completed were transferred to finished goods. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold for $105,000 on account. ——————————————————————————————————————————— 10. Paid for raw materials purchased previously on account. ——————————————————————————————————————————— Ans: N/A, SO: 2, 3, 4, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 162
20 - 37
(10–15 min.)
——————————————————————————————————————————— Account(s) Account(s) Transactions Debited Credited ——————————————————————————————————————————— 1. Raw materials were purchased on account. C F ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for H A repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280 D C ——————————————————————————————————————————— 4. Factory labor was paid as incurred. G A ——————————————————————————————————————————— 5. Recognized direct labor and indirect labor used D, H G ——————————————————————————————————————————— 6. The production department requisitioned indirect H C materials for use in the factory. ——————————————————————————————————————————— 7. Overhead was applied to production based on a on a predetermined overhead rate of $8 per labor hour D H ——————————————————————————————————————————— 8. Goods that were completed were transferred to E D finished goods. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold for $105,000 B, I J, E on account. ——————————————————————————————————————————— 10. Paid for raw materials purchased previously F A on account. Ex. 163 Finn Manufacturing Company uses a job order cost accounting system and keeps perpetual inventory records. Prepare journal entries to record the following transactions during the month of June. June 1
Purchased raw materials for $20,000 on account.
8
Raw materials requisitioned by production: Direct materials $8,000 Indirect materials 1,000
15
Paid factory utilities, $2,100 and repairs for factory equipment, $8,000.
25
Incurred $96,000 of factory labor.
25
Time tickets indicated the following: Direct Labor (6,000 hrs × $12 per hr) = Indirect Labor (3,000 hrs × $8 per hr) =
$72,000 24,000 $96,000
FOR INSTRUCTOR USE ONLY
20 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 163 25
(Cont.) Applied manufacturing overhead to production based on a predetermined overhead rate of $7 per direct labor hour worked.
28
Goods costing $18,000 were completed in the factory and were transferred to finished goods.
30
Goods costing $15,000 were sold for $20,000 on account.
Ans: N/A, SO: 2, 3, 4, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 163 June 1
8
15
25
25
25
28
30
(16–23 min.)
Raw Materials Inventory ..................................................... Accounts Payable ...................................................... (Purchase of raw materials on account)
20,000
Work In Process Inventory ................................................. Manufacturing Overhead .................................................... Raw Materials Inventory ............................................ (To assign materials to jobs and overhead)
8,000 1,000
Manufacturing Overhead .................................................... Cash .......................................................................... (To record payment of factory utilities and repairs)
10,100
Factory Labor ..................................................................... Factory Wages Payable ............................................ (To record factory labor costs)
96,000
Work In Process Inventory ................................................. Manufacturing Overhead .................................................... Factory Labor ............................................................ (To assign factory labor to jobs and overhead)
72,000 24,000
Work In Process Inventory ................................................. Manufacturing Overhead ........................................... (To apply overhead to jobs)
42,000
Finished Goods Inventory .................................................. Work In Process Inventory ........................................ (To record completion of production)
18,000
Accounts Receivable .......................................................... Cost of Goods Sold ............................................................ Sales Revenue ........................................................... Finished Goods Inventory .......................................... (To record sales of finished goods and its cost)
20,000 15,000
FOR INSTRUCTOR USE ONLY
20,000
9,000
10,100
96,000
96,000
42,000
18,000
20,000 15,000
Job Order Costing
20 - 39
Ex. 164 Selected accounts of Kosar Manufacturing Company at year end appear below: RAW MATERIALS INVENTORY (a)
40,000
(d)
25,000
WORK IN PROCESS INVENTORY (d) (e) (f)
FINISHED GOODS INVENTORY (g)
140,000
(h)
120,000
110,000
(e)
(g)
140,000
COST OF GOODS SOLD (h)
FACTORY LABOR (b)
25,000 80,000 100,000
120,000 MANUFACTURING OVERHEAD
110,000
(c) (e)
75,000 30,000
(f)
100,000
Instructions Explain the probable transaction that took place for each of the items identified by letters in the accounts. For example: (a) Raw materials costing $40,000 were purchased. Ans: N/A, SO: 2, 3, 4, Bloom: C, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 164 (a) (b) (c) (d) (e)
(f) (g) (h)
(9–14 min.)
Raw materials costing $40,000 were purchased. Factory labor costs incurred amounted to $110,000. Actual manufacturing overhead costs incurred were $75,000. Direct materials requisitioned for production amounted to $25,000. Factory labor used consisted of: Direct labor $80,000 Indirect labor 30,000 Manufacturing overhead applied to production was $100,000. Completed goods costing $140,000 were transferred to finished goods inventory. Finished goods costing $120,000 were sold.
Ex. 165 Sardin Company begins the month of March with $17,000 of work in process costs from Job 324. Information from job cost sheets shows the following additional costs assigned during March, April, and May of 2012: Manufacturing Costs Assigned Job No. March April May 324 $26,000 325 20,000 $28,000 $15,000 326 41,000 11,000 327 16,000 34,000 328 29,000 51,000 Job 324 was completed in March. Jobs 325 and 327 were completed in May, and Job 326 was completed in April. Jobs are sold during the month after completion. Total revenue for jobs sold during the 3-month period is $145,000. FOR INSTRUCTOR USE ONLY
20 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 165
(Cont.)
Instructions Calculate the balances of the work in process and finished goods inventory accounts at the end of May. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 165
(5–6 min.)
Work in process Job 328 $29,000 + $51,000 = $80,000 Finished goods Job 325 $20,000 + $28,000 + $15,000 = $ 63,000 Job 327 $16,000 + $34,000 = 50,000 $113,000 Ex. 166 The gross earnings of factory workers for Dinkel Company during the month of January are $400,000. The employer's payroll taxes for the factory payroll are $48,000. Of the total accumulated cost of factory labor, 75% is related to direct labor and 25% is attributable to indirect labor. Instructions (a) Prepare the entry to record the factory labor costs for the month of January. (b) Prepare the entry to assign factory labor to production. (c) Prepare the entry to assign manufacturing overhead to production, assuming the predetermined overhead rate is 125% of direct labor cost. Ans: N/A, SO: 2, 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 166 (a)
(b)
(c)
(8–12 min.)
Factory Labor .............................................................................. Factory Wages Payable ...................................................... Employer Payroll Taxes Payable.........................................
448,000
Work in Process Inventory ........................................................... Manufacturing Overhead ............................................................. Factory Labor ...................................................................... ($448,000 × 75% = $336,000)
336,000 112,000
Work in Process Inventory ........................................................... Manufacturing Overhead..................................................... ($336,000 × 125% = $420,000)
420,000
FOR INSTRUCTOR USE ONLY
400,000 48,000
448,000
420,000
Job Order Costing
20 - 41
Ex. 167 Foster Manufacturing uses a job order cost accounting system. On April 1, the company has Work in Process Inventory of $7,600 and two jobs in process: Job No. 221, $3,600, and Job No. 222, $4,000. During April, a summary of source documents reveals the following: For Job No. 221 222 223 224 General use Totals
Materials Requisition Slips $1,200 1,700 2,400 2,600 600 $8,500
Labor Time Tickets $ 1,600 2,200 2,900 2,800 400 $9,900
Foster applies manufacturing overhead to jobs at an overhead rate of 60% of direct labor cost. Job No. 221 is completed during the month. Instructions (a) Prepare summary journal entries to record the raw materials requisitioned, factory labor used, the assignment of manufacturing overhead to jobs, and the completion of Job No. 221. (b) Calculate the balance of the Work in Process Inventory account at April 30. Ans: N/A, SO: 2, 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 167 (a) April 30
(10–15 min.) Work in Process Inventory ............................................ Manufacturing Overhead............................................... Raw Materials Inventory .......................................
7,900 600
Work in Process Inventory ............................................ Manufacturing Overhead............................................... Factory Labor .......................................................
9,500 400
Work in Process Inventory ............................................ Manufacturing Overhead ...................................... ($9,500 × 60% = $5,700)
5,700
Finished Goods Inventory ............................................. Work in Process Inventory.................................... ($3,600 + $1,200 + $1,600 + $960 = $7,360)
7,360
(b) Work in Process Inventory, April 30 = $23,340 Job No. 222 Job No. 223 Job No. 224
$9,220 7,040 7,080 $23,340
($4,000 + $1,700 + $2,200 + $1,320) ($2,400 + $2,900 + $1,740) ($2,600 + $2,800 + $1,680)
FOR INSTRUCTOR USE ONLY
8,500
9,900 5,700
7,360
20 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 168 Manufacturing cost data for Dolan Company, which uses a job order cost system, are presented below: Case A Case B Direct Materials Used (a) $103,000 Direct Labor $ 70,000 160,000 Manufacturing Overhead Applied 63,000 (d) Total Manufacturing Costs 220,000 (e) Work in Process, 1/1/12 (b) 45,000 Total Cost of Work in Process 300,000 (f) Work in Process, 12/31/12 (c) 40,000 Cost of Goods Manufactured 205,000 (g) Instructions Indicate the missing amount for each letter. Assume that overhead is applied on the basis of direct labor cost and that the rate is the same for both cases. Ans: N/A, SO: 2, 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 168
(9–12 min.)
Case A (a) + $70,000 + $63,000 = $220,000 (a) = $87,000
$300,000 – (c) = $205,000 (c) = $95,000
$220,000 + (b) = $300,000 (b) = $80,000 Case B [Note that the overhead rate from Case A is 90% ($63,000 ÷ $70,000)] $160,000 × 90% = (d) (d) = $144,000
$407,000 + $45,000 = (f) (f) = $452,000
$103,000 + $160,000 + $144,000 = (e) (e) = $407,000
$452,000 – $40,000 = (g) (g) = $412,000
Ex. 169 Fort Corporation had the following transactions during its first month of operations: 1. Purchased raw materials on account, $85,000. 2. Raw Materials of $30,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,000 was classified as indirect materials. 3. Factory labor costs incurred were $150,000 of which $120,000 pertained to factory wages payable and $30,000 pertained to employer payroll taxes payable. 4. Time tickets indicated that $126,000 was direct labor and $24,000 was indirect labor. 5. Overhead costs incurred on account were $168,000. 6. Manufacturing overhead was applied at the rate of 150% of direct labor cost. 7. Goods costing $115,000 are still incomplete at the end of the month; the other goods were completed and transferred to finished goods. 8. Finished goods costing $100,000 to manufacture were sold on account for $130,000.
FOR INSTRUCTOR USE ONLY
Job Order Costing Ex. 169
20 - 43
(Cont.)
Instructions Journalize the above transactions for Fort Corporation. Ans: N/A, SO: 2, 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 169
(12–17 min.)
1. Raw Materials Inventory ................................................................. Accounts Payable ..................................................................
85,000
2. Work in Process Inventory.............................................................. Manufacturing Overhead ................................................................ Raw Materials Inventory ........................................................
24,000 6,000
3. Factory Labor ................................................................................. Factory Wages Payable......................................................... Employer Payroll Taxes Payable ...........................................
150,000
4. Work in Process Inventory.............................................................. Manufacturing Overhead ................................................................ Factory Labor ........................................................................
126,000 24,000
5. Manufacturing Overhead ................................................................ Accounts Payable ..................................................................
168,000
6. Work in Process Inventory.............................................................. Manufacturing Overhead ....................................................... ($126,000 × 150% = $189,000)
189,000
7. Finished Goods Inventory .............................................................. Work in Process Inventory ..................................................... ($24,000 + $126,000 + $189,000 = $339,000) ($339,000 – $115,000 = $224,000)
224,000
8. Accounts Receivable ...................................................................... Sales ..................................................................................... Cost of Goods Sold ........................................................................ Finished Goods Inventory ......................................................
130,000
Ex. 170 Lando Company reported the following amounts for 2012: Raw materials purchased Beginning raw materials inventory Ending raw materials inventory Beginning finished goods inventory Ending finished goods inventory Direct labor used Manufacturing overhead costs applied Beginning work in process inventory Ending work in process inventory
$88,000 5,200 4,500 7,600 8,000 25,000 30,000 6,100 6,300
FOR INSTRUCTOR USE ONLY
85,000
30,000 120,000 30,000
150,000 168,000 189,000
224,000
130,000 100,000 100,000
20 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 170
(Cont.)
Instructions Calculate (a) the cost of materials used in production and (b) total manufacturing costs. Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 170
(4 min.)
(a) Cost of materials used in production: $5,200 + $88,000 – $4,500 = $88,700 (b) Total manufacturing costs: $88,700 + $25,000 + $30,000 = $143,700 Ex. 171 A job cost sheet of Fugate Company is given below. Job Cost Sheet JOB NO. 172
Quantity
FOR James Company Date 5/10 12 15 22 24 27 31
Direct Materials 1,030 1,120
1,500
Date Completed 5/31 Direct Labor
Manufacturing Overhead
550 480
825 720
670
1,005
1,000 1,870
Cost of completed job: Direct materials Direct labor Manufacturing Overhead Total cost Unit cost
________ ________ ________ ________ ________
Instructions (a) Answer the following questions. (1) What is the predetermined manufacturing overhead rate? (2) What are the total cost and the unit cost of the completed job? (b) Prepare the entry to record the completion of the job. Ans: N/A, SO: 2, 3, 4, 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 171
20 - 45
(8 min.)
(a) (1) The predetermined overhead rate is 150% of direct labor cost. For example, on May 15, the computation is $825 ÷ $550 = 150%. The same result is obtained on May 22 and 31. (2) The total cost is: Direct materials..................................................... Direct labor ........................................................... Manufacturing overhead .......................................
$5,020 1,700 2,550 9,270
The unit cost is $6.18 ($9,270 ÷ 1,500) (b) May 31
Finished Goods Inventory ........................ Work in Process Inventory ....................
9,270 9,270
Ex. 172 At May 31, 2012, the accounts of Kuhlmann Manufacturing Company show the following. 1. May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200. 2. May 31 inventories—finished goods $8,500, work in process $22,900, and raw materials $7,100. 3. Debit postings to work in process were: direct materials $67,400, direct labor $50,000, and manufacturing overhead applied $45,000. 4. Sales totaled $220,000. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for May through gross profit. Ans: N/A, SO: 2,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 172
(10 min.)
(a)
KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2012 _____________________________________________________________________________ Work in process, May 1............................................. $ 14,700 Direct materials used ................................................. $67,400 Direct labor ................................................................ 50,000 Manufacturing overhead applied ................................ 45,000 Total manufacturing costs .................................. 162,400 Total cost of work in process ...................................... 177,100 Less: Work in process, May 31 .................................. 22,900 Cost of goods manufactured ...................................... $154,200
FOR INSTRUCTOR USE ONLY
20 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 172
(Cont.)
(b)
KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2012 _____________________________________________________________________________ Sales ............................................................................ Cost of goods sold Finished goods, May 1.......................................... Cost of Goods manufactured ................................ Cost of goods available for sale ............................ Finished goods, May 31........................................ Cost of goods sold ..................................... Gross profit....................................................................
$220,000 $ 12,600 154,200 166,800 8,500 158,300 $61,700
Ex. 173 Watson Manufacturing Company employs a job order cost accounting system and keeps perpetual inventory records. The following transactions occurred in the first month of operations: 1. Direct materials requisitioned during the month: Job 101 $20,000 Job 102 16,000 Job 103 24,000 $60,000 2. Direct labor incurred and charged to jobs during the month was: Job 101 $30,000 Job 102 28,000 Job 103 20,000 $78,000 3. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 75% of direct labor costs. 4. Actual manufacturing overhead costs incurred during the month amounted to $66,000. 5. Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the month. Instructions (a) Prepare journal entries to record the above transactions. (b) Answer the following questions: 1. How much manufacturing overhead was applied to Job 103 during the month? 2. Compute the unit cost of Jobs 101 and 103. 3. What is the balance in Work In Process Inventory at the end of the month? 4. Determine if manufacturing overhead was under- or overapplied during the month. How much? Ans: N/A, SO: 2, 3, 4, 5, 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 47
Solution 173 (15–20 min.) (a) 1. Work in Process Inventory ...................................................... Raw Materials Inventory .................................................
60,000
2. Work in Process Inventory ...................................................... Factory Labor ................................................................
78,000
3. Work in Process Inventory ...................................................... Manufacturing Overhead ................................................
58,500
4. Manufacturing Overhead......................................................... Cash, Accounts Payable, etc. .........................................
66,000
5. Finished Goods Inventory ....................................................... Work in Process Inventory.............................................. [Job 101 $72,500; Job 103 $59,000—see (b) 2]
131,500
60,000 78,000 58,500 66,000 131,500
(b) 1. $15,000 ($20,000 × 75%). 2. Unit cost: Job 101, $72.50; Job 103, $295. Direct materials Direct labor Overhead applied Total cost Units Unit cost
Job 101 $20,000 30,000 22,500 72,500 ÷ 1,000 $ 72.50
Job 103 $24,000 20,000 15,000 59,000 ÷ 200 $295
3. Work In Process Inventory is $65,000 and consists of work performed on Job 102. Job 102 Direct materials $16,000 Direct labor 28,000 Overhead applied 21,000 Total cost $65,000 4. Manufacturing overhead costs were underapplied by $7,500 during the month. Actual manufacturing overhead $66,000 Manufacturing overhead applied 58,500 Underapplied overhead $ 7,500 Ex. 174 Graham Manufacturing is a small manufacturer that uses machine-hours as its activity base for assigned overhead costs to jobs. The company estimated the following amounts for 2012 for the company and for Job 62: Company Job 62 Direct materials $60,000 $4,500 Direct labor $25,000 $2,500 Manufacturing overhead costs $72,000 Machine hours 80,000 1,350 During 2012, the actual machine-hours totaled 84,000, and actual overhead costs were $71,000.
FOR INSTRUCTOR USE ONLY
20 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 174
(Cont.)
Instructions (a) Compute the predetermined overhead rate. (b) Compute the total manufacturing costs for Job 62. (c) How much overhead is over or underapplied for the year for the company? State amount and whether it is over- or underapplied. (d) If Graham Manufacturing sells Job 62 for $14,000, compute the gross profit. Ans: N/A, SO: 2,3,6, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 174
(7–9 min.)
(a) $72,000 80,000 = $0.90 per machine hour (b) $4,500 + $2,500 + ($0.90 × 1,350) = $8,215 (c) Actual – Applied = Over/Underapplied $71,000 – ($0.90 × 84,000) = $4,600 overapplied (d) $14,000 – $8,215 (from (b) above) = $5,785 Ex. 175 The following inventory information is available for Ricci Manufacturing Corporation for the year ended December 31, 2012: Beginning Ending Inventories: Raw materials $17,000 $19,000 Work in process 9,000 14,000 Finished goods 11,000 8,000 Total $37,000 $41,000 In addition, the following transactions occurred in 2012: 1. Raw materials purchased on account, $70,000. 2. Incurred factory labor, $80,000, all is direct labor. (Credit Factory Wages Payable). 3. Incurred the following overhead costs during the year: Utilities $6,800, Depreciation on manufacturing machinery $8,000, Manufacturing machinery repairs $9,200, Factory insurance $9,000 (Credit Accounts Payable and Accumulated Depreciation). 4. Assigned $80,000 of factory labor to jobs. 5. Applied $35,000 of overhead to jobs. Instructions (a) Journalize the above transactions. (b) Reproduce the manufacturing cost and inventory accounts. Use T-accounts. (c) From an analysis of the accounts, compute the following: 1. Raw materials used. 2. Completed jobs transferred to finished goods. 3. Cost of goods sold. 4. Under- or overapplied overhead. Ans: N/A, SO: 2, 3, 4, 5, 6, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 175
20 - 49
(16–22 min.)
(a) 1. Raw Materials Inventory .......................................................... Accounts Payable...........................................................
70,000
2. Factory Labor .......................................................................... Factory Wages Payable .................................................
80,000
3. Manufacturing Overhead......................................................... Accounts Payable........................................................... Accumulated Depreciation ..............................................
33,000
4. Work in Process Inventory ...................................................... Factory Labor .................................................................
80,000
5. Work in Process Inventory ...................................................... Manufacturing Overhead ................................................
35,000
70,000 80,000 25,000 8,000 80,000 35,000
(b) Raw Materials Inventory
Work in Process Inventory
Bal.
17,000
Bal.
9,000
(1) Bal.
70,000 19,000
(4) (5) Bal.
? 80,000 35,000 14,000
Finished Goods Inventory Bal.
Factory Labor
11,000
(2)
80,000
(4)
80,000
8,000 Manufacturing Overhead (3)
33,000
(5)
Cost of Goods Sold 35,000
(c) 1. Raw materials used = $17,000 + $70,000 – $19,000 = $68,000. 2. Completed jobs transferred to finished goods = W/P debits $9,000 + $68,000 + $115,000 – $14,000 = $178,000. 3. Cost of goods sold = $11,000 + $178,000 – $8,000 = $181,000. 4. Overhead overapplied = $2,000 (credit balance in Manufacturing Overhead). Ex. 176 Builder Bug Company allocates manufacturing overhead at $9 per direct labor hour. Job A45 required 5 boxes of direct materials at a cost of $30 per box and took employees 16 hours to complete. Employees earn $15 per hour. Instructions Compute the total cost of Job A45. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 176
(5 min.)
Direct materials (5 boxes × $30) Direct labor (16 hours × $15) Manufacturing overhead (16 hours × $9) Total job cost of Job A45
$150 240 144 $534
Ex. 177 Job cost sheets for Howard Manufacturing are as follows: Job No 210
Date July 1 8 10 15 25
Quantity
Direct Materials 7,000 8,500
Direct Labor 8,000
Manufacturing Overhead 12,000
10,000 5,500 15,000
Job No 211
Date July 1 10 15 20 27
1,500
Quantity
Direct Materials 4,000 9,000
Direct Labor 6,000
1,200
Manufacturing Overhead 9,000
8,000 7,000 12,000
Instructions (a) Answer the following questions. 1. What was the balance in Work in Process Inventory on July 1 if these were the only unfinished jobs? 2. What was the predetermined overhead rate in June if overhead was applied on the basis of direct labor cost? 3. If July is the start of a new fiscal year and the overhead rate is 20% higher than in the preceding year, how much overhead should be applied to Job 210 in July? 4. Assuming Job 210 is complete, what is the total and unit cost of the job? 5. Assuming Job 211 is the only unfinished job at July 31, what is the balance in Work in Process Inventory on this date? (b) Journalize the summary entries to record the assignment of costs to the jobs in July. (Note: Make one entry in total for each manufacturing cost element.) Ans: N/A, SO: 3, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 177
20 - 51
(15–20 min.)
(a) 1. Job 210 — $7,000 + $8,000 + $12,000 = $27,000 Job 211 — $4,000 + $6,000 + $9,000 = 19,000 $46,000 2. Manufacturing overhead rate = 150% of direct labor cost ($12,000 ÷ $8,000 or $9,000 ÷ $6,000) 3. July overhead rate = 150% × 120% = 180% Overhead applied in July = $25,000 × 180% = $45,000 4. Direct materials Direct labor Manufacturing overhead ($12,000 + $45,000) Total cost Unit cost ($111,000 ÷ 1,500) 5. Direct materials Direct labor Manufacturing overhead ($9,000 + $36,000) Total cost of work in process
$ 21,000 33,000 57,000 $111,000 $ 74 $20,000 26,000 45,000 $91,000
(b) Work in Process Inventory ............................................................ Raw Materials Inventory .......................................................
30,000
Work in Process Inventory ............................................................ Factory Labor .......................................................................
45,000
Work in Process Inventory ............................................................ Manufacturing Overhead ......................................................
81,000
30,000 45,000 81,000
Ex. 178 Garner Company begins operations on July 1, 2012. Information from job cost sheets shows the following: Manufacturing Costs Assigned Job No. July August September 100 $12,000 $8,800 101 8,800 9,700 $12,000 102 5,000 103 11,800 6,000 104 5,800 7,000 Job 102 was completed in July. Job 100 was completed in August, and Jobs 101 and 103 were completed in September. Each job was sold for 80% above its cost in the month following completion.
FOR INSTRUCTOR USE ONLY
20 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 178
(Cont.)
Instructions (a) Compute the balance in Work in Process Inventory at the end of July. (b) Compute the balance in Finished Goods Inventory at the end of September. (c) Compute the gross profit for August. Ans: N/A, SO: 3,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178 (a)
(b)
(c)
(10–13 min.)
Work in Process Inventory July Job 100 Job 101 Balance, July 31
$12,000 8,800 $20,800
Finished Goods Inventory Job 101 Job 103 Balance, Sept. 30
$30,500 17,800 $48,300
Gross Profit Month Job Number August 102
Sales $9,000
COGS $5,000
Gross Profit $4,000
Ex. 179 The accounting records of Roland Manufacturing Company include the following information: Dec. 31 Jan. 1 Work in process inventory $ 20,000 $ 50,000 Finished goods inventory 120,000 140,000 Direct materials used 350,000 Direct labor 180,000 Selling expenses 125,000 Manufacturing overhead is applied at a rate of 150% of direct labor cost. Instructions Answer the following questions: 1. What is the total of the debits to Work in Process Inventory during the year? 2. What is the amount transferred to Finished Goods Inventory during the year? 3. What is the cost of goods sold? Ans: N/A, SO: 3,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 179
20 - 53
(10–14 min.)
1. Direct Materials Direct Labor Manufacturing Overhead Applied ($180,000 × 150%) Total debits 2.
$ 350,000 180,000 270,000 $800,000
WORK IN PROCESS INVENTORY Balance From (1) Balance
50,000 800,000 20,000
3.
Transferred to Finished Goods
830,000
FINISHED GOODS INVENTORY Balance From WIP (see 2) Balance
140,000 830,000 120,000
Cost of Goods Sold
850,000
Ex. 180 Grant Marwick and Associates, a C. P. A. firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.
Direct materials Auditor labor costs Auditor hours
Rondelli $900 $5,900 72
Preston $600 $6,600 88
Lopez $300 $3,700 45
Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $50 per auditor hour. The Rondelli job is the only incomplete job at the end of November. Actual overhead for the month was $10,700 Instructions (a) Determine the cost of each job. (b) Indicate the balance of the Work in Process account at the end of November. (c) Calculate the ending balance of the Manufacturing Overhead account for November. Ans: N/A, SO: 3, 4, 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(8 min.)
(a) Direct materials Auditor labor costs Applied overhead Total cost
Rondelli $ 900 5,900 3,600 $10,400
Preston $ 600 6,600 4,400 $11,600
(b) The Rondelli job is the only incomplete job, therefore, $10,400 (c)
Actual overhead Applied overhead Balance
$10,700 (DR) 10,250 (CR) $ 450 (DR) FOR INSTRUCTOR USE ONLY
Lopez $ 300 3,700 2,250 $6,250
20 - 54 Test Bank for Accounting Principles, Tenth Edition Ex. 181 Gallagher Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $450,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $475,000 of overhead costs are incurred and 130,000 hours are used. Instructions (a) Compute the manufacturing overhead rate for the year. (b) What is the amount of under - or overapplied overhead at December 31? (c) Assuming the under - or overapplied overhead for the year is not allocated to inventory accounts, prepare the adjusting entry to assign the amount to cost of goods sold Ans: N/A, SO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 181
(6 min.)
(a)
$3.60 per machine hour ($450,000 ÷ 125,000).
(b)
($475,000) – ($3.60 130,000 Machine Hours) $475,000 – $468,000 = $7,000 underapplied
(c)
Cost of Goods Sold ............................... Manufacturing Overhead ..........................
7,000 7,000
Ex. 182 Fancy Decorating uses a job order costing system to collect the costs of its interior decorating business. Each client's consultation is treated as a separate job. Overhead is applied to each job based on the number of decorator hours incurred. Listed below are data for the current year. Budgeted overhead Actual overhead Budgeted decorator hours Actual decorator hours
$840,000 $870,000 40,000 41,000
The company uses Operating Overhead in place of Manufacturing Overhead. Instructions (a) Compute the predetermined overhead rate. (b) Prepare the entry to apply the overhead for the year. (c) Determine whether the overhead was under - or overapplied and by how much. Ans: N/A, SO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 182
(6 min.)
(a)
Predetermined overhead rate = Budgeted overhead ÷ Budgeted decorator hours = $840,000 ÷ 40,000 decorator hours = $21 per decorator hour
(b)
Applied Overhead Work in Process (41,000 hrs $21) ............. Operating Overhead .............................
(c)
20 - 55
Actual overhead Applied overhead Balances
$870,000 861,000 $ 9,000
861,000 861,000
underapplied
Ex. 183 Martin Company applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for the year follows: Actual manufacturing overhead Estimated manufacturing overhead Direct labor hours incurred Direct labor hours estimated
$86,000 $80,000 4,800 5,000
Instructions Compute (a) the predetermined overhead rate and (b) the amount of applied manufacturing overhead. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 183
(4 min.)
(a)
Predetermined overhead rate: $80,000 5,000 = $16 per direct labor hour
(b)
Applied manufacturing overhead: 4,800 × $16 = $76,800
Ex. 184 Landis Company uses a job order cost system in each of its two manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department A and machine hours in Department B. In establishing the predetermined overhead rates for 2012, the following estimates were made for the year: Department A B Manufacturing overhead $2,100,000 $1,600,000 Direct labor cost 1,400,000 1,200,000 Direct labor hours 100,000 100,000 Machine hours 200,000 400,000
FOR INSTRUCTOR USE ONLY
20 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 184
(Cont.)
During January, the job cost sheet showed the following costs and production data: Department A B Direct materials used $195,000 $128,000 Direct labor cost 100,000 110,000 Manufacturing overhead incurred 155,000 135,000 Direct labor hours 8,000 8,400 Machine hours 16,000 34,000 Instructions (a) Compute the predetermined overhead rate for each department. (b) Compute the total manufacturing cost assigned to jobs in January in each department. (c) Compute the balance in the Manufacturing Overhead account at the end of January and indicate whether overhead is over- or underapplied. Ans: N/A, SO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 184
(15–20 min.)
(a) Predetermined overhead rates: Department A (using direct labor cost): $2,100,000 ÷ $1,400,000 = 150% Department B (using machine hours): $1,600,000 ÷ 400,000 = $4 per machine hour (b) Total manufacturing costs by department: Department A: Direct materials Direct labor cost Manufacturing overhead applied ($100,000 × 150%) Total manufacturing costs
$195,000 100,000 150,000 $445,000
Department B: Direct materials Direct labor cost Manufacturing overhead applied (34,000 hrs. × $4) Total manufacturing costs
$128,000 110,000 136,000 $374,000
(c)
MANUFACTURING OVERHEAD Dept. A Dept. B Bal. Underapplied
155,000 135,000 290,000 4,000
Dept. A Dept. B
FOR INSTRUCTOR USE ONLY
150,000 136,000 286,000
Job Order Costing
20 - 57
Ex. 185 Edwards Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $1,600,000 for the year, and machine usage is estimated at 200,000 hours. In January, $166,000 of overhead costs are incurred and 22,000 machine hours are used. For the remainder of the year, $1,730,000 of additional overhead costs are incurred and 214,000 additional machine hours are worked. Instructions (a) Compute the manufacturing overhead rate for the year. (b) What is the amount of over- or underapplied overhead at January 31? (c) What is the amount of over- or underapplied overhead at December 31? Ans: N/A, SO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 11, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 185
(11–14 min.)
(a)
$8 per machine hour ($1,600,000 ÷ 200,000)
(b)
Incurred Applied ($8 × 22,000) Overapplied overhead
$166,000 176,000 $ 10,000
(c)
Incurred ($166,000 + $1,730,000) Applied ($8 × 236,000) Underapplied overhead
$1,896,000 1,888,000 $ 8,000
Ex. 186 Klinger Company estimates that annual manufacturing overhead costs will be $4,200,000 for 2012. The actual overhead costs at the end of 2012 are $4,360,000. Activity base information for 2012 follows: Activity Base Estimated Actual Direct Labor Cost $3,000,000 $3,150,000 Direct Labor Hours 200,000 212,000 Machine Hours 150,000 152,000 Instructions (a) Compute the predetermined overhead rate for each activity base. (b) Compute the amount of overhead applied in 2012 for each activity base. (c) Compute the amount of under- or overapplied overhead for 2012 for each activity base. Ans: N/A, SO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 58 Test Bank for Accounting Principles, Tenth Edition Solution 186
(12–16 min.)
(a) Predetermined overhead rate as a % of direct labor cost: $4,200,000 ÷ $3,000,000 = 140% Predetermined overhead rate per hour of direct labor: $4,200,000 ÷ 200,000 = $21 per hour Predetermined overhead rate per machine hour used: $4,200,000 ÷ 150,000 = $28 per machine hour (b) Overhead applied as a % of direct labor cost: $3,150,000 × 1.40 = $4,410,000
(c) Over- or Underapplied Overhead ($4,410,000 – $4,360,000 = $50,000 Overapplied)
Overhead applied per hour of direct labor: 212,000 × $21 = $4,452,000
($4,452,000 – $4,360,000 = $92,000 Overapplied)
Overhead applied per machine hour used: 152,000 × $28 = $4,256,000
($4,256,000 – $4,360,000 = $104,000 Underapplied)
Ex. 187 Jensen Manufacturing Company makes specialty tools. In January, Jensen incurs manufacturing costs of $12,000,000 for direct materials, direct labor, and overhead. 20% of the total costs represents overhead applied. The overhead rate is $1 for every $2 of direct labor costs incurred. Inventory balances were:
Raw materials Work in process Finished goods
January 1 $300,000 600,000 400,000
January 31 $500,000 400,000 200,000
At the end of January, there was $1,000 of overapplied overhead. Instructions (a) Determine the cost of raw materials purchased in January. (b) Prepare a cost of goods manufactured schedule for January 2012. (c) Compute the cost of goods sold for January. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187 (a)
(15–20 min.)
Overhead applied ($12,000,000 × 20%) Direct labor used ($2 × $2,400,000) Direct materials used ($12,000,000 – $7,200,000)
= = =
$2,400,000 $4,800,000 $4,800,000
FOR INSTRUCTOR USE ONLY
Job Order Costing Solution 187
20 - 59
(Cont.)
Ending raw materials inventory Direct materials used Less: Beginning raw materials inventory Raw materials purchases
$ 500,000 4,800,000 5,300,000 300,000 $5,000,000
(b)
JENSEN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended January 31, 2012 ——————————————————————————————————————————— Work in process, January 1 .............................................. $ 600,000 Direct materials used ........................................................ $4,800,000 Direct labor ....................................................................... 4,800,000 Manufacturing overhead applied ...................................... 2,400,000 Total manufacturing costs ........................................... 12,000,000 Total cost of work in process ............................................ 12,600,000 Less: Work in process, January 31 .................................. 400,000 Cost of goods manufactured............................................. $ 12,200,000 (c)
Finished goods, January 1 ...................................................................... Cost of goods manufactured.................................................................... Cost of goods available for sale............................................................... Finished goods, January 31 .................................................................... Cost of goods sold ..................................................................................
$
400,000 12,200,000 12,600,000 200,000 $12,400,000
Ex. 188 The following information is available for Marks Company at December 31, 2012: 1. Inventory balance Finished Goods Work in Process Raw Materials
Beginning of Year $14,000 6,000 10,300
End of Year $10,000 12,000 6,500
2. Debit postings to Work in Process Inventory during the year were: Direct materials $90,000 Direct labor 50,000 Manufacturing overhead applied 75,000 3. Sales totaled $315,000 for the year. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for the year through gross profit. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
20 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 188 (a)
(14–18 min.) MARKS COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012
Work in process, January 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process Less: Work in process, December 31 Cost of goods manufactured (b)
$
6,000
$90,000 50,000 75,000 215,000 221,000 12,000 $209,000
MARKS COMPANY (Partial) Income Statement For the Year Ended December 31, 2012 Sales Cost of goods sold Finished goods, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods, December 31 Cost of goods sold Gross profit
$315,000 $ 14,000 209,000 223,000 10,000 213,000 $102,000
COMPLETION STATEMENTS 189. Cost accounting involves the measuring, recording, and reporting of ______________ costs. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
190. There are two basic types of cost accounting systems: (1)__________________ system, and (2)__________________ system. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
191. A ______________ cost system is appropriate when similar products are continuously produced, whereas a ______________ cost system would be more appropriate if the product is custom-made. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
192. In a job order system, raw materials purchased are charged to the ______________ account. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 61
193. Of these three accounts; Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, ______________ is not a control account. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
194. If $20,000 direct materials are requisitioned for a job and $7,000 of indirect materials are requisitioned for general use, the debit to Work In Process Inventory should be for $______________. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
195. The cost of producing a particular job under a job cost system is accumulated on a record called a ___________________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
196. Manufacturing overhead is applied to jobs by means of a ___________________ rate. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
197. If actual manufacturing overhead was greater than the amount of manufacturing overhead applied to jobs, the Manufacturing Overhead account will have a ___________ balance and overhead is said to be ______________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
198. At the end of the year, any balance in the Manufacturing Overhead account should be eliminated as an adjustment to ___________________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.
product job order cost, process cost process, job order Raw Materials Inventory Factory Labor 20,000 job cost sheet predetermined overhead debit, underapplied cost of goods sold
FOR INSTRUCTOR USE ONLY
20 - 62 Test Bank for Accounting Principles, Tenth Edition
MATCHING 199. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Cost accounting Materials requisition slip Time ticket Cost accounting system Job order cost system
F. G. H. I. J.
Process cost system Job cost sheets Predetermined overhead rate Overapplied overhead Underapplied overhead
_____ 1. Used to apply manufacturing overhead to jobs. _____ 2. Measures, records, and reports product costs. _____ 3. When actual manufacturing overhead costs are greater than the overhead applied to products. _____ 4. Manufacturing cost accounts are fully integrated into the general ledger. _____ 5. Source document which authorizes issuance of raw materials to production. _____ 6. Appropriate when products have distinguishing and heterogeneous characteristics. _____ 7. Constitute a subsidiary ledger for Work in Process Inventory. _____ 8. Indicates number of hours that employees work and the account to be charged. _____ 9. Appropriate when products are similar and are produced continuously. _____ 10. When actual manufacturing overhead costs are less than the overhead applied to products. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching 1. 2. 3. 4. 5.
H A J D B
6. 7. 8. 9. 10.
E G C F I
FOR INSTRUCTOR USE ONLY
Job Order Costing
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SHORT-ANSWER ESSAY QUESTIONS S-A E 200 (a) Distinguish between the two types of cost accounting systems. (b) May a company use both types of cost accounting systems? Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Applications
Solution 200 (a)
(b)
The two principal types of cost accounting systems are; (1) job order costing and (2) process costing. Under a job order cost system, costs are assigned to each job or batch of goods; at all times each job or batch of goods can be separately identified. A job order cost system measures costs for each completed job, rather than for set time periods. Under a process cost system, product-related costs are accumulated by or assigned to departments or processes for a set period of time. Job order costing lends itself to specific, special-order manufacturing or servicing while process costing is better suited to similar, large-volume products and continuous process manufacturing. A company may use both types of systems. For example, General Motors uses process costing for standard model cars and job order costing for custom-made vehicles.
S-A E 201 A job order cost accounting system is fully integrated into the general ledger of a company. Identify the major general ledger accounts used in a job order cost system. Explain how manufacturing costs flow through these accounts so that inventories may be costed and income determined when goods are sold. Ans: N/A, SO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 201 When a job order cost accounting system is fully integrated into the general ledger of a company, the major general ledger accounts used are Raw Materials Inventory, Factory Labor, Manufacturing Overhead, Work in Process Inventory, and Finished Goods Inventory. As manufacturing costs are incurred, they are debited to the Raw Materials Inventory, Factory Labor, and Manufacturing Overhead accounts. As materials are used, labor is assigned, or overhead is applied, the costs are taken out of these accounts and debited to Work in Process Inventory. When jobs are finished, the costs flow from the Work in Process Inventory account to the Finished Goods Inventory account, and when jobs are sold, the costs are transferred to Cost of Goods Sold from Finished Goods Inventory. S-A E 202 Manufacturing overhead items are indirect product costs that cannot be traced to individual products. Explain how manufacturing overhead costs are accumulated and how they are assigned to products in a job order cost system. Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 64 Test Bank for Accounting Principles, Tenth Edition Solution 202 As manufacturing overhead costs are incurred, they are debited to the Manufacturing Overhead account. As jobs move through the factory, manufacturing overhead costs are applied to specific jobs using the predetermined overhead rate. This rate is computed prior to the beginning of the year by dividing estimated annual overhead costs by expected annual operating activity (generally expressed as direct labor hours, direct labor cost, or machine hours). The overhead is applied by determining how much activity was expended on a particular job (for example, direct labor hours), and applying the rate to that activity. S-A E 203 Mike Hilyer is confused about under and overapplied manufacturing overhead. Define the terms for Mike and indicate the balance in the manufacturing overhead account applicable to each term. Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 203 Underapplied overhead means that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead means than the overhead assigned to work in process is greater than the overhead incurred. Manufacturing overhead will have a debit balance when overhead is underapplied and a credit balance when overhead is overapplied. S-A E 204 (Ethics) People Carrier Systems, Inc. (PCS) modifies vans that seat 15–20 people by adding additional safety features or wheelchair ramps. Most of its customers are cities and counties, who use the vans to transport school children, the elderly, or the handicapped. The company has specialized in a no-frills approach, emphasizing safety, high quality, and low cost. The company's president was quoted as saying, "Let the other guys make a van pretty. We get people where they need to go—faster, better, and cheaper than anybody else." The company obtains jobs by being the lowest bidder in a sealed bidding process. Recently, the company was solicited by a top-10 college to submit a bid for a van to be used by its athletic team. Some specialized items were required, such as the school's logo on the outside of the van, and the vinyl seats had to be covered in school colors. The company submitted a bid, and was very surprised to obtain it. When the job was being prepared, the job manager pointed out that several extra costs could result in this job showing a loss. The boss, an ardent supporter of sports in general and this team in particular, told the manager to just record the standard labor and overhead cost for this job. He says that they could use the preset rate for specialized jobs, and increase the overhead application rate (used in submitting bids) by 5% for future routine jobs. "After all," he says, "nobody else comes close to our price anyway. This could start a whole new line of business for us." Required: 1. Who are the stakeholders in the decision to increase overhead for routine jobs? 2. Is the decision to subsidize special jobs by increasing the overhead rate on routine jobs ethical? Briefly explain. Ans: N/A, SO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Job Order Costing
20 - 65
Solution 204 1. The stakeholders include: • The employees and managers of PCS • Customers who purchase standard vans • Customers who purchase sports vans • Shareholders of PCS 2. The decision could be considered ethical, if the company clearly understands that it is allowing the customers of the standard vans to cover some of the costs of the specialty ones. This might not be a bad decision, especially if the specialty business is only a small fraction of the total business. The company might be compromising its own best interests, however, if it arbitrarily damages relationships with existing customers in order to gain others. It seems undeniable that established customers are preferable to untested ones. While probably ethical, the decision may not be a good one. S-A E 205 (Communication) Bridal Treasures, Inc. makes customized wedding gowns. The customer selects a pattern for the basic gown, and then selects fabric and trim. Once the design and the materials have been agreed upon, a Statement of Estimated Cost is signed by the company and by the customer. Overhead is applied based on the number of days a gown is in process. Usually, five gowns are being worked on at a time. Therefore, each gown is charged 1/5 of a daily estimated overhead amount. Customer Mary Landon's wedding dress took four days to complete. However, after the first three days had elapsed, Hanna Hunt, a movie personality, suddenly decided to get married, and ordered a very lavish gown. All other work was suspended, and the work on Ms. Landon's dress was delayed six days. The final day of its construction was on the tenth day after it had been begun. Required: You are the accounting manager for Bridal Treasures. Write a memo to the billing department. Instruct them as to the appropriate number of overhead days to charge to Ms. Landon's account. Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
20 - 66 Test Bank for Accounting Principles, Tenth Edition Solution 205 TO:
Billing Department
FROM: M. Long, Accounting Manager RE:
Overhead billing, Landon account
As you know, our standard procedure in billing overhead is to simply multiply our daily overhead rate by the number of days the gown was in our possession. However, for the Landon gown, and any other jobs we suspended for the Hanna Hunt gown, we should not charge for the days the gowns were in our possession but not being worked on. We should adjust the billing for the Hanna Hunt gown, so that it absorbs the full daily cost of overhead, since it actually was the only job worked on during those six days. The Landon job should be charged only four days of overhead. Other suspended jobs should be treated similarly. Please call if you have questions. (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 21 PROCESS COSTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
7 8 8 8 9 10 1 2
K K K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
3 4 5 6 9
C K K K K
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129.
6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 8 8 8
AP AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP K K K C C K
130. 131. 132. 133. 134. 135. 136. 137. a 138. a 139. st 140. sg 141. st 142. sg 143. sg 144. st 145. sg 146. st 147. sg 148. sg 149. st 150. sg 151. sg 152.
8 8 9 9 9 9 9 9 10 10 1 2 2 5 5 5 6 6 6 6 6 7 8
C C C C C C K K K K K K K K K K AP K C AP K K K
159. 160.
6 6
AP AP
161. 162.
6 6
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 2 2 2 2 4
K K C C K K K C
9. 10. 11. 12. 13. 14. 15. 16.
4 4 4 5 5 5 5 5
K K K C K K K AP
17. 18. 19. 20. 21. 22. 23. 24.
6 6 6 6 6 6 7 7
K C K K C K K K
25. 26. 27. 28. 29. a 30. sg 31. sg 32.
sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.
1 1 1 1 1 2 2 2 2 2 2 2 4 4 4 4 4 4 5 5 5 5 5
C C K K K C K C K K C K C C C C K C AP AP AP AP AP
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.
5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6
K AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C AP K AP AP AP
Brief Exercises 153. 154. sg st a
5 5
AP AP
155. 156.
5 6
AP AP
157. 158.
6 6
AP AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This topic is dealt with in an Appendix to the chapter.
21 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 163. 164. 165. 166. 167. 168.
4 4 4 4 4 5
AP AP AP AP AP AP
169. 170. 171. 172. 173. 174.
5 5,6 5,6 5,6 5,6 5,6
AP AP AN AP AP AP
175. 176. 177. 178. 179. 180.
5,6 5,6 5,6 5,6 5,6 5,6
AP AP AP AP AP AP
181. 182. 183. 184. 185. 186.
5,6 6 6 6 7 7
AP AP AP AP AP AP
8 9 9
K K K
187. 188.
7 7
AP AP
201.
10
K
Completion Statements 189. 190. 191.
1 2 2
K K K
192. 193. 194.
4 5 6
K K K
195. 196. 197.
6 6 7
AP K K
198. 199. 200.
a
Matching Statements 202.
2
K
Short-Answer Essay 203. 204.
1 6
S S
205. 206.
1 6
S S
207. 208.
1 8
S S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2.
TF TF
3. 31.
TF TF
38. 39.
4. 5. 6.
TF TF TF
7. 32. 43.
TF TF MC
44. 45. 46.
33.
TF
8. 9. 10.
TF TF TF
11. 34. 50.
TF TF MC
51. 52. 53.
12. 13. 14. 15. 16. 35. 56. 57.
TF TF TF TF TF TF MC MC
58. 59. 60. 61. 62. 63. 64. 65.
MC MC MC MC MC MC MC MC
66. 67. 68. 69. 70. 71. 72. 73.
Type
Item
Type
Item
Study Objective 1 MC 40. MC 42. MC 41. MC 140. Study Objective 2 MC 47. MC 141. MC 48. MC 142. MC 49. MC 190. Study Objective 3 Study Objective 4 MC 54. MC 163. MC 55. MC 164. MC 143. MC 165. Study Objective 5 MC 74. MC 153. MC 75. MC 154. MC 76. MC 155. MC 77. MC 168. MC 78. MC 169. MC 79. MC 170. MC 144. MC 171. MC 145. MC 172.
Type
Item
Type
Item
Type
MC MC
189. 203.
C SA
205. 207.
SA SA
MC MC C
191. 202.
C MA
Ex Ex Ex
166. 167. 192.
Ex Ex C
BE BE BE Ex Ex Ex Ex Ex
173. 174. 175. 176. 177. 178. 179. 180.
Ex Ex Ex Ex Ex Ex Ex Ex
181. 193.
Ex C
FOR INSTRUCTOR USE ONLY
17. 18. 19. 20. 21. 22. 36. 80. 81. 82. 83. 84.
TF TF TF TF TF TF TF MC MC MC MC MC
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.
MC MC MC MC MC MC MC MC MC MC MC MC
97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
23. 24.
TF TF
25. 124.
TF MC
125. 126.
26. 27.
TF TF
28. 127.
TF MC
128. 129.
29. 37.
TF TF
132. 133.
MC MC
134. 135.
a
30. TF a138. MC a139. Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 6 MC 109. MC 121. MC 110. MC 122. MC 111. MC 123. MC 112. MC 146. MC 113. MC 147. MC 114. MC 148. MC 115. MC 149. MC 116. MC 150. MC 117. MC 156. MC 118. MC 157. MC 119. MC 158. MC 120. MC 159. Study Objective 7 MC 151. MC 186. MC 185. Ex 187. Study Objective 8 MC 130. MC 152. MC 131. MC 198. Study Objective 9 MC 136. MC 199. MC 137. MC 200. a Study Objective 10 MC a201. C BE = Brief Exercise Ex = Exercise
Process Costing
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MC MC MC MC MC MC MC MC BE BE BE BE
160. 161. 162. 170. 171. 172. 173. 174. 175. 176. 177. 178.
BE BE BE Ex Ex Ex Ex Ex Ex Ex Ex Ex
Ex Ex Ex Ex Ex Ex C C C SA SA
Ex Ex
188. 197.
Ex C
MC C
208.
SA
179. 180. 181. 182. 183. 184. 194. 195. 196. 204. 206.
C C
C = Completion MA = Matching
The chapter also contains one set of ten Matching questions and six Short-Answer Essay questions.
CHAPTER STUDY OBJECTIVES 1. Understand who uses process cost systems. Companies that mass-produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit. 2. Explain the similarities and differences between job order cost and process cost systems. Job order cost systems are similar to process cost systems in three ways: (1) Both systems track the same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Costs are accumulated in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Accumulated costs are assigned to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. However, the method of assigning costs differs significantly.
FOR INSTRUCTOR USE ONLY
21 - 4
Test Bank for Accounting Principles, Tenth Edition
There are four main differences between the two cost systems: (1) A process cost system uses separate accounts for each production process department or manufacturing process, rather than only one work in process account used in a job order cost system. (2) Process cost system summarizes costs in a production cost report for each department. A job cost system, costs are charged to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost system, but at the completion of a job in a job cost system. (4) A process cost system, calculates unit cost as: Total manufacturing costs for the period ÷ Units produced during the period. A job cost system, unit cost is: Total cost per job ÷ Units produced. 3. Explain the flow of costs in a process cost system. A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in process accounts for various departments or manufacturing processes. It transfers the costs of units completed from one department to another as those units move through the manufacturing process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when inventory is sold, the system transfers costs to Cost of Goods Sold. 4. Make the journal entries to assign manufacturing costs in a process cost system. Entries to assign the costs of raw materials, labor, and overhead consist of a credit to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, and a debit to Work in Process for each department. Entries to record the cost of good transferred to another department are a credit to Work in Process for the department whose work is finished and a debit to the department to which the goods are transferred. The entry to record units completed and transferred to the warehouse is a credit for the department whose work is finished and a debit to Finished Goods Inventory. The entry to record the sale of goods is a credit to Finished Goods Inventory and a debit to Cost of Goods Sold. 5. Compute equivalent units. Equivalent units of production measure work done during a period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product. Equivalent units are the sum of units completed and transferred out plus equivalent units of ending work in process. 6. Explain the four steps necessary to prepare a production cost report. The four steps to complete a production cost report are: (1) Compute the physical unit flow—that is, the total units to be accounted for. (2) Compute the equivalent units of production. (3) Compute the unit production costs, expressed in terms of equivalent units of production. (4) Prepare a cost reconciliation schedule, which shows that the total costs accounted for equal the total costs to be accounted for. 7. Prepare a production cost report. The production cost report contains both quantity and cost data for a production department. There are four sections in the report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule. 8. Explain just-in-time (JIT) processing. JIT is a manufacturing technique dedicated to producing the right products at the right time as needed. One of the principal accounting effects is that a Raw and In-Process Inventory account replaces both the raw materials and work in process inventory accounts.
FOR INSTRUCTOR USE ONLY
Process Costing
21 - 5
9. Explain activity-based costing (ABC). ABC is a method of product costing that focuses on the activities performed to produce products. It assigns the cost of the activities to products by using cost drivers that measure the activities performed. The primary objective of ABC is accurate and meaningful product costs. a
10. Apply activity-based costing to specific company data. In applying ABC, it is necessary to compute the overhead rate for each activity by dividing total expected overhead by the total expected usage of the cost driver. The overhead cost for each activity is then assigned to products on the basis of each product’s use of the cost driver.
TRUE-FALSE STATEMENTS 1.
Process cost accounting focuses on the process involved in mass-producing products that are very similar in nature.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
2.
Process cost systems are used to apply costs to a specific job, such as the manufacturing of a specialized machine.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
3.
A company that produces motion pictures would likely use a process cost system.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
4.
In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
5.
In a process cost system, total costs are determined at the end of a month or year.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
6.
Separate work in process accounts are maintained for each production department or manufacturing process in a process cost system.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
7.
In a process cost system, materials, labor and overhead are only added in the first production department.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
8.
The assignment of the three manufacturing cost elements to Work in Process in a process cost system is the same as in a job order cost system.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
9.
Fewer materials requisitions are generally required in a process cost system than in a job order cost system.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 6 10.
Test Bank for Accounting Principles, Tenth Edition In a process cost system, labor costs incurred maybe captured on time tickets.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
11.
A primary driver of overhead costs in continuous manufacturing operations is machine time used.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
12.
Equivalent units of production are used to determine the cost per unit of completed products.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
13.
Equivalent units of production measure the work done during a period, expressed in fully completed units.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
14.
Equivalent units of production is the sum of units completed and transferred out plus equivalent units of beginning work in process.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
15.
The weighted-average method of computing equivalent units is the most widely used method in practice.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
16.
There are no units in process at the beginning of the period, 1,500 units in process at the end of the period that are 40% complete, and 15,000 units transferred out during the period. Based on this information, there were 14,400 equivalent units of production during the period.
Ans: F, SO: 5, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
17.
The first step performed in preparing a production cost report is computing the equivalent units of production.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
Equivalent units of production must be calculated before the unit production costs can be computed.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
19.
The physical units in a department are another name for the equivalent units of production.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
Unit material cost is computed by taking total material costs charged to the department for the period and dividing by the physical units in the process during the period.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 21.
21 - 7
When equivalent units of production are different for materials and conversion costs, unit costs are computed for materials, conversion, and total manufacturing.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
The total manufacturing cost per unit is used in costing the units completed and transferred during the period.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
23.
A production cost report is an internal document for management that shows production quantity and cost data for a particular job.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
Production cost reports provide a basis for evaluating the productivity of a department.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
Companies often use a combination of a process cost and a job order cost system, called operations costing.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
26.
Large inventories of raw materials must be maintained in a just-in-time system.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
27.
Just-in-time strives to eliminate inventories by using a pull approach.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
28.
Rework costs typically increase in just-in-time processing.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
29.
Activity-based costing (ABC) can be used only with process cost systems.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management a
30.
Activity-based costing (ABC) eliminates arbitrary assignments of overhead.
Ans: F, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
31.
In continuous process manufacturing, generally once the production begins, it continues until the finished product emerges.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
32.
One similarity of process cost accounting with job order cost accounting is that both determine total manufacturing costs after each job.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 8 33.
Test Bank for Accounting Principles, Tenth Edition The flow of costs in a process costing system requires that materials be added in one department, labor added in another department and manufacturing overhead in a third department.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
34.
When finished goods are sold, the entry to record the cost of goods sold is a debit to Finished Goods Inventory and a credit to Cost of Goods Sold.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
35.
When there is no beginning work in process and materials are entered at the beginning of the process, equivalent units of materials are the same as the units started into production.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
36.
In order to compute the physical unit flow, a company must first compute unit production costs.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
In activity-based costing, the focus is on the activities performed to produce specific products.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
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T F F T T T
7. 8. 9. 10. 11. 12.
F F T T T T
13. 14. 15. 16. 17. 18.
T F T F F T
19. 20. 21. 22. 23. 24.
F F T T F T
25. 26. 27. 28. 29. a 30.
T F T F F F
31. 32. 33. 34. 35. 36.
T F F F T F
37.
T
MULTIPLE CHOICE QUESTIONS 38.
A process cost accounting system is most appropriate when a. a variety of different products are produced, each one requiring different types of materials, labor, and overhead. b. the focus of attention is on a particular job or order. c. similar products are mass-produced. d. individual products are custom made to the specification of customers.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
Process Costing 39.
21 - 9
A characteristic of products that are mass-produced in a continuous fashion is that a. the products are identical or very similar in nature. b. they are grouped in batches. c. they are produced at the time an order is received. d. their costs are accumulated on job cost sheets.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
40.
A process cost system would be used for all of the following products except a. chemicals. b. computer chips. c. motion pictures. d. soft drinks.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
41.
In a process cost system, a. a Work in Process account is maintained for each product. b. a materials requisition must identify the job on which the materials will be used. c. a Work in Process account is maintained for each process. d. one Work in Process account is maintained for all the processes, similar to a job order cost system.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Differences between a job order cost system and a process cost system include all of the following except the a. documents used to track costs. b. point at which costs are totaled. c. unit cost computations. d. flow of costs.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
43.
Which of these best reflects a distinguishing factor between a job order cost system and a process cost system? a. The detail at which costs are calculated. b. The time period each covers. c. The number of work in process accounts. d. The manufacturing cost elements included.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications
44.
Which of the following is a true statement about process cost systems? a. In process cost systems, costs are accumulated but not assigned. b. A process cost system has one work in process account for each process. c. In process cost systems, costs are summarized on job cost sheets. d. Unit costs are not computed in process cost systems.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
FOR INSTRUCTOR USE ONLY
21 - 10 Test Bank for Accounting Principles, Tenth Edition 45.
Which of the following is correct regarding cost systems? Job Order Process a. Work in process account several one for each process b. Work in process account one one c. Work in process account one one for each process d. Work in process account several one
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications
46.
In a process cost system, unit costs are determined using a a. numerator of costs of each job. b. denominator of units produced during the period. c. denominator of units produced for the job. d. denominator of units produced for the day.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
47.
In process cost accounting, manufacturing costs are summarized on a a. job order cost sheet. b. process order cost sheet. c. production cost report. d. manufacturing cost sheet.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Which of the following manufacturing cost elements occurs in a process cost system? a. Direct materials. b. Direct labor. c. Manufacturing overhead. d. All of these.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
49.
In a process cost system, product costs are summarized: a. on job cost sheets. b. on production cost reports. c. after each unit is produced. d. when the products are sold.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
When manufacturing overhead costs are assigned to production in a process cost system, they are debited to a. the Finished Goods Inventory account. b. Cost of Goods Sold. c. a Manufacturing Overhead account. d. the Work in Process account.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Process Costing 51.
21 - 11
A product requires processing in two departments, the Baking Department and then the Packaging Department, before it is completed. Costs transferred out of the Baking Department will be transferred to: a. Finished Goods Inventory. b. Cost of Goods Sold. c. Work in Process—Packaging Department. d. Manufacturing Overhead.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Which of the following would not appear as a debit in the Work in Process account of a second department in a two stage production process? a. Materials used. b. Overhead applied. c. Labor assigned. d. Cost of products transferred out.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
53.
Materials requisitions are: a. not used in process costing. b. generally used more frequently in process costing than job order costing. c. generally used less frequently in process costing than job order costing. d. used more frequently by latter stage production departments.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
54.
A primary driver of overhead costs in continuous manufacturing operations is: a. direct labor dollars. b. direct labor hours. c. machine hours. d. machine maintenance dollars.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
55.
Price Manufacturing assigns overhead based on machine hours. The Milling Department logs 1,800 machine hours and Cutting Department shows 3,000 machine hours for the period. If the overhead rate is $5 per machine hour, the entry to assign overhead will show a a. debit to Manufacturing Overhead for $24,000. b. credit to Work in Process—Cutting Department for $15,000. c. debit to Work in Process for $15,000. d. credit to Manufacturing Overhead for $24,000.
Ans: D, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
21 - 12 Test Bank for Accounting Principles, Tenth Edition 56.
Barnes and Miller Manufacturing is trying to determine the equivalent units for conversion costs with 10,000 units of ending work in process at 80% completion and 28,000 physical units. There are no beginning units in the department. Conversion costs occur evenly throughout the entire production period. What are the equivalent units for conversion costs for the current period? a. 38,000. b. 36,000. c. 8,000. d. 26,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
15,000 units in a process that are 70% complete are referred to as: a. 15,000 equivalent units of production. b. 4,500 equivalent units of production. c. 10,500 equivalent units of production. d. 4,500 equivalent units of production.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
58.
A process with no beginning work in process, completed and transferred out 95,000 units during a period and had 50,000 units in the ending work in process inventory that were 30% complete. The equivalent units of production for the period were: a. 95,000 equivalent units. b. 145,000 equivalent units. c. 110,000 equivalent units. d. 47,500 equivalent units.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
59.
A department adds raw materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process inventory; 80,000 units were started into production in January; and there were 20,000 units that were 40% complete in the ending work in process inventory at the end of January. What were the equivalent units of production for materials for the month of January? a. 88,000 equivalent units. b. 72,000 equivalent units. c. 60,000 equivalent units. d. 80,000 equivalent units.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Process Costing 60.
21 - 13
A department adds raw materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process inventory; 80,000 units were started into production in January; and there were 20,000 units that were 40% complete in the ending work in process inventory at the end of January. What were the equivalent units of production for conversion costs for the month of January? a. 60,000 equivalent units. b. 72,000 equivalent units. c. 68,000 equivalent units. d. 80,000 equivalent units.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
61.
Equivalent units are calculated by a. multiplying the percentage of work done by the equivalent units of output. b. dividing physical units by the percentage of work done. c. multiplying the percentage of work done by the physical units. d. dividing equivalent units by the percentage of work done.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
62.
Minor Company had the following department data: Physical Units Work in process, July 1 30,000 Completed and transferred out 135,000 Work in process, July 31 45,000 Materials are added at the beginning of the process. What is the total number of equivalent units for materials in July? a. 135,000. b. 150,000. c. 210,000. d. 180,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
63.
Corsi Company had the following department data: Physical Units Work in process, beginning -0Completed and transferred out 70,000 Work in process, ending 7,000 Materials are added at the beginning of the process. What is the total number of equivalent units for materials during the period? a. 70,000. b. 7,000. c. 77,000. d. 63,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
21 - 14 Test Bank for Accounting Principles, Tenth Edition 64.
Gantner Company had the following department information about physical units and percentage of completion: Physical Units Work in process, May 1 (60%) 60,000 Completed and transferred out 150,000 Work in process, May 31 (40%) 50,000 If materials are added at the beginning of the production process, what is the total number of equivalent units for materials during May? a. 210,000. b. 200,000. c. 194,000. d. 170,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
65.
It is necessary to calculate equivalent units of production in a department because a. a physical count of units is impossible. b. some units worked on in the department are not fully complete. c. the physical units in the department are always 100% complete. d. at times a department may use a job order cost system and then switch to a process cost system.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
66.
In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 80,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. How many units were transferred out of the process in June? a. 80,000 units. b. 70,000 units. c. 90,000 units. d. 100,000 units.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
67.
In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 80,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. The equivalent units of production for materials for June were a. 90,000 equivalent units. b. 100,000 equivalent units. c. 104,000 equivalent units. d. 80,000 equivalent units.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Process Costing 68.
21 - 15
In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 80,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. The equivalent units of production for conversion costs for June were a. 80,000 equivalent units. b. 94,000 equivalent units. c. 90,000 equivalent units. d. 100,000 equivalent units.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
69.
A process with no beginning work in process, completed and transferred out 28,000 units during a period and had 14,000 units in the ending work in process that were 50% complete. How much is equivalent units of production for the period for conversion costs? a. 35,000 equivalent units. b. 42,000 equivalent units. c. 49,000 equivalent units. d. 21,000 equivalent units.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
70.
A process with 1,600 units of beginning work in process, completed and transferred out 20,000 units during a period. There were 10,000 units in the ending work in process that were 50% complete as to conversion costs. Materials are added 80% at the beginning of the process and 20% when the units are 90% complete. How much is equivalent units of production for the period for material costs? a. 24,000 equivalent units. b. 30,000 equivalent units. c. 22,000 equivalent units. d. 28,000 equivalent units.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
71.
Hanker Company had the following department data on physical units: Work in process, beginning Completed and transferred out Work in process, ending
3,000 12,000 2,400
Materials are added at the beginning of the process. What is the total number of equivalent units for materials during the period? a. 12,600. b. 2,400. c. 14,400. d. 9,000. Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 16 Test Bank for Accounting Principles, Tenth Edition 72.
Super-Tech Industries had the following department information about physical units and percentage of completion: Physical Units Work in process, June 1 (75%) 8,000 Completed and transferred out 18,000 Work in process, June 30 (50%) 12,000 If materials are added at the beginning of the production process, what is the total number of equivalent units for materials during June? a. 15,000. b. 30,000. c. 32,000. d. 24,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
73.
Gloria Company had no beginning work in process. During the period, 12,000 units were completed, and there were 1,200 units of ending work in process. How many units were started into production? a. 13,200. b. 12,000. c. 10,800. d. 1,200.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
74.
Cohen Manufacturing is trying to determine the equivalent units for conversion costs with 5,000 units of ending work in process at 80% completion and 35,000 physical units that are 100% complete as to materials. There are no beginning units in the department. Materials are added at the beginning of the process, and conversion costs occur evenly throughout the entire production period. What is the equivalent units for conversion costs for the current period? a. 40,000. b. 39,000. c. 4,000. d. 34,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
If beginning work in process is 4,000 units, ending work in process is 2,000 units, and the units accounted for equals 12,000 units, what must units started into production be? a. 16,000. b. 14,000. c. 8,000. d. 10,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 76.
21 - 17
The Molding Department of Kennett Company has the following production data: beginning work in process 25,000 units (60% complete), started into production 425,000 units, completed and transferred out 400,000 units, and ending work in process 50,000 units (40% complete). Assuming materials are entered at the beginning of the process, equivalent units for materials are: a. 450,000. b. 375,000. c. 400,000. d. 475,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
77.
The Molding Department of Kennett Company has the following production data: beginning work in process 25,000 units (60% complete), started into production 425,000 units, completed and transferred out 400,000 units, and ending work in process 50,000 units (40% complete). Assuming conversion costs are incurred uniformly during the process, the equivalent units for conversion costs are: a. 450,000. b. 405,000. c. 420,000. d. 400,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
78.
The Molding Department of Boswell Company has the following production data: beginning work process 40,000 units (60% complete), started into production 680,000 units, completed and transferred out 640,000 units, and ending work in process 80,000 units (40% complete). Assuming materials are entered at the beginning of the process, equivalent units for materials are: a. 720,000. b. 600,000. c. 640,000. d. 760,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
79.
The Molding Department of Boswell Company has the following production data: beginning work process 40,000 units (60% complete), started into production 680,000 units, completed and transferred out 640,000 units, and ending work in process 80,000 units (40% complete). Assuming conversion costs are incurred uniformly during the process, the equivalent units for conversion costs are: a. 720,000. b. 760,000. c. 672,000. d. 600,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 18 Test Bank for Accounting Principles, Tenth Edition 80.
Crawford Company has the following equivalent units for July: materials 20,000 and conversion costs 18,000. Production cost data are: Work in process, July 1 Costs added in July
Materials $ 3,200 25,200
Conversion $ 1,500 21,000
The unit production costs for July are: Materials Conversion Costs a. $1.26 $1.25 b. 1.42 1.17 c. 1.26 1.17 d. 1.42 1.25 Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
81.
In Moyer Company, the Cutting Department had beginning work in process of 6,000 units, transferred out 16,000 units, and had an ending work in process of 3,000 units. How many units were started by Moyer during the month? a. 10,000. b. 13,000. c. 16,000. d. 19,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
82.
In the Shaping Department of Rollins Company the unit materials cost is $5.00 and the unit conversions cost is $3.00. The department transferred out 20,000 units and had 2,500 units in ending work in process 20% complete. If all materials are added at the beginning of the process, the total cost to be assigned to the ending work in process is a. 4,000. b. 12,500. c. 14,000. d. 20,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
83.
Holton Company has the following equivalent units for July: materials 20,000 and conversion 18,000. Production cost data are: Work in process, July 1 Costs added in July
Materials $ 4,800 37,800
Conversion $ 2,250 31,500
The unit production costs for July are:
a. b. c. d.
Materials $1.89 2.13 1.89 2.13
Conversion Costs $1.88 1.75 1.75 1.88
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Process Costing 84.
21 - 19
In Kapler Company, the Cutting Department had beginning work in process of 8,000 units, transferred out 20,000 units, and had an ending work in process of 4,000 units. How many units were started by Kapler during the month? a. 12,000. b. 16,000. c. 20,000. d. 24,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
85.
In the Shaping Department of Jenkins Company the unit materials cost is $2.50 and the unit conversion cost is $1.50. The department transferred out 8,000 units and had 2,000 units in ending work in process 20% complete. If all materials are added at the beginning of the process, the total cost to be assigned to the ending work in process is a. $1,600. b. $5,000. c. $5,600. d. $8,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
86.
Cinder Company had the following department information for the month: Total materials costs Equivalent units of materials Total conversion costs Equivalent units of conversion costs
$ 80,000 10,000 $120,000 20,000
How much is the total manufacturing cost per unit? a. $14.00. b. $6.66. c. $6.00. d. $8.00. Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
87.
Materials costs of $500,000 and conversion costs of $535,500 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 100,000 units were started into production in September, and there were 8,000 units in ending work in process that were 40% complete at the end of September. What was the total amount of manufacturing costs assigned to those units that were completed and transferred out of the process in September? a. $460,000. b. $977,500. c. $1,035,500. d. $1,063,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 20 Test Bank for Accounting Principles, Tenth Edition 88.
Materials costs of $500,000 and conversion costs of $535,500 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 100,000 units were started into production in September, and there were 8,000 units in ending work in process that were 40% complete at the end of September. What was the total amount of manufacturing costs assigned to the 8,000 units in the ending work in process? a. $40,000. b. $18,000. c. $34,000. d. $58,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
89.
Charley Company’s Assembly Department has materials cost at $3 per unit and conversion cost at $6 per unit. There are 20,000 units in ending work in process, all of which are 70% complete as to conversion costs. How much are total costs to be assigned to inventory? a. $84,000. b. $144,000. c. $126,000. d. $180,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
90.
Byrd Manufacturing decided to analyze certain costs for June of the current year. Units started into production equaled 14,000 and ending work in process equaled 2,000 units. With no beginning work in process inventory, how much is the conversion cost per unit if ending work in process was 25% complete and total conversion costs equaled $35,000? a. $2.19. b. $8.75. c. $2.80. d. $1.40.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
91.
Long Manufacturing has recently tried to improve its analysis for its manufacturing process. Units started into production equaled 6,000 and ending work in process equaled 400 units. Long had no beginning work in process inventory. Conversion costs are applied equally throughout production, and materials are applied at the beginning of the process. How much is the materials cost per unit if ending work in process was 25% complete and total materials costs equaled $24,000? a. $4.00. b. $4.21. c. $15.00. d. $3.75.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 92.
21 - 21
Conversion cost per unit equals $7.00. Total materials costs are $60,000. Equivalent units are 20,000. How much is the total manufacturing cost per unit? a. $10.00. b. $7.00. c. $4.00. d. $3.00.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
93.
Physical units are 40,000. Total conversion costs are $237,000. There are 1,000 units in ending inventory which are 50% complete as to conversion costs. How much are conversion costs per unit? a. $6.00. b. $5.92. c. $11.86. d. $5.78.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
94.
Madison Industries has equivalent units of 4,000 for materials and for conversion costs. Total manufacturing costs are $160,000. Total materials costs are $120,000. How much is the conversion cost per unit? a. $4.00. b. $10.00. c. $40.00. d. $8.00.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
95.
Equivalent units for materials total 30,000. There were 24,000 units completed and transferred out. Equivalent units for conversion costs equals 27,000. How much are the physical units for conversion costs if ending work in process is 50% complete? a. 27,000. b. 30,000. c. 6,000. d. 24,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
96.
If equivalent units are 12,000 for conversion costs and units transferred out equals 8,000, what stage of completion should the ending work in process be for the 16,000 units remaining? a. 75%. b. 25%. c. 10%. d. 20%.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 22 Test Bank for Accounting Principles, Tenth Edition 97.
In the month of April, a department had 500 units in the beginning work in process inventory that were 60% complete. These units had $40,000 of materials costs and $30,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred to the finished goods inventory and there were 2,000 units that were 25% complete in the ending work in process inventory on April 30. During April, manufacturing costs charged to the department were: Materials $920,000; Conversion costs $1,020,000. The cost assigned to the units transferred to finished goods during April was a. $1,800,000. b. $1,810,000. c. $1,880,000. d. $1,790,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
98.
In the month of April, a department had 500 units in the beginning work in process inventory that were 60% complete. These units had $40,000 of materials costs and $30,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred to the finished goods inventory and there were 2,000 units that were 25% complete in the ending work in process inventory on April 30. During April, manufacturing costs charged to the department were: Materials $920,000; Conversion costs $1,020,000. The cost assigned to the units in the ending work in process inventory on April 30 was a. $240,000. b. $210,000. c. $160,000. d. $290,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
99.
Zibba Company enters materials at the beginning of the process. In January, there was no beginning work in process, but there were 200 units in the ending work in process inventory. The number of units completed equals the number of a. units started. b. units started less 200. c. units started plus 200. d. equivalent units.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
100.
If there are no units in process at the beginning of the period, then a. the company must be using a job order cost system. b. only one computation of equivalent units of production will be necessary. c. the units started into production will equal the number of units transferred out. d. the units to be accounted for will equal the units transferred out and the units in process at the end of the period.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 101.
21 - 23
Which of the following is not a necessary step in preparing a production cost report? a. Compute the equivalent units of production. b. Compute the physical unit flow. c. Prepare the job order cost sheet. d. Prepare a cost reconciliation schedule.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
102.
Honrad Company's Assembly Department has materials cost at $4 per unit and conversion cost at $8 per unit. There are 20,000 units in ending work in process, all of which are 70% complete as to conversion costs. How much are total costs to be assigned to inventory? a. $112,000. b. $192,000. c. $168,800. d. $240,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
103.
In a process cost system, units to be accounted for in a department are equal to the a. number of units started or transferred into the department. b. number of units transferred out of the department. c. units in the beginning inventory plus the units started or transferred into the department. d. ending inventory plus the units started or transferred into the department.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
104.
The total units accounted for equals units in a. beginning work in process – units transferred out. b. beginning work in process + ending work in process. c. ending work in process + units transferred out. d. ending work in process – units started into production.
Ans: C, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105.
The Slicing Department production process shows: Beginning Work in Process Ending Work in Process Total units to be accounted for
Units 10,000 50,000 160,000
How many units were started into production in Department 1? a. 170,000. b. 110,000. c. 160,000. d. 150,000. Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 24 Test Bank for Accounting Principles, Tenth Edition 106.
Department 1 of a two department production process shows: Beginning Work in Process Ending Work in Process Total units to be accounted for
Units 10,000 50,000 160,000
How many units were transferred out to Department 2? a. 50,000. b. 110,000. c. 160,000. d. 150,000. Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
107.
The Assembly Department shows the following information: Beginning Work in Process Ending Work in Process Units Transferred Out
Units 20,000 50,000 31,000
How many total units are to be accounted for by the Assembly Department? a. 81,000. b. 50,000. c. 70,000. d. 61,000. Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
108.
The last department in a production process shows the following information at the end of the period: Units Beginning Work in Process 25,000 Started into Production 200,000 Ending Work in Process 50,000 How many units have been transferred out to finished goods during the period? a. 200,000. b. 225,000. c. 250,000. d. 175,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
109.
A process began the month with 3,000 units in the beginning work in process inventory and ended the month with 2,000 units in the ending work in process. If 15,000 units were completed and transferred out of the process during the month, how many units were started into production during the month? a. 14,000. b. 16,000. c. 15,000. d. 13,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 110.
21 - 25
If 120,000 units are started into production and 40,000 units are in process at the end of the period, how many units were completed and transferred out? a. 120,000. b. 40,000. c. 80,000. d. 160,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
111.
Total units to be accounted for less units in beginning work in process equals a. total units accounted for. b. units transferred out. c. units started into production. d. equivalent units.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
112.
If 120,000 units are transferred out of a department and there are 20,000 units still in process at the end of a period, the number of units that were started into production during the period is a. 140,000. b. 120,000. c. 100,000. d. 20,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
113.
A department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of July, there was no beginning work in process; 40,000 units were completed and transferred out; and there were 20,000 units in the ending work in process that were 40% complete. During July, $96,000 materials costs and $84,000 conversion costs were charged to the department. The unit production costs for materials and conversion costs for July was a. b. c. d.
Materials $1.60 $1.60 $2.00 $2.40
Conversion Costs $1.40 $1.75 $1.40 $2.13
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
114.
Conversion cost per unit equals $6. Total materials costs equal $80,000. Equivalent units for materials are 10,000. How much is the total manufacturing cost per unit? a. $14. b. $6. c. $12. d. $8.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 26 Test Bank for Accounting Principles, Tenth Edition 115.
The following department data are available: Total materials costs Equivalent units of materials Total conversion costs Equivalent units of conversion costs
$240,000 60,000 $135,000 30,000
What is the total manufacturing cost per unit? a. $4.00. b. $4.50. c. $8.50. d. $6.25. Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
116.
Byers Company had the following department information for the month: Total materials costs Equivalent units of materials Total conversion costs Equivalent units of conversion costs
$48,000 5,000 $80,000 10,000
What is the total manufacturing cost per unit? a. $8.53. b. $8.00. c. $9.60. d. $17.60. Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
117.
Physical units are 160,000. Total conversion costs are $276,500. There are 4,000 units in ending inventory which are 50% complete as to conversion costs. How much is the conversion cost per unit? a. $1.75. b. $1.73. c. $1.71. d. $1.69.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
118.
A department had the following information for the month: Total materials costs Conversion cost per unit Total manufacturing cost per unit
$210,000 $3.00 $5.00
What are the equivalent units of production for materials? a. 105,000. b. 70,000. c. 42,000. d. Cannot be determined Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 119.
21 - 27
Maisley Manufacturing decided to analyze certain costs for June of the current year. Units started into production equaled 28,000 and ending work in process equaled 4,000. With no beginning work in process inventory, how much is the conversion cost per unit if ending work in process was 25% complete and total conversion costs equaled $105,000? a. $3.30. b. $3.75. c. $4.20. d. $2.10.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
120.
Materials costs of $800,000 and conversion costs of $1,020,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 20,000 units were started into production in September, and there were 5,000 units in ending work in process that were 40% complete at the end of September. What was the total amount of manufacturing costs assigned to those units that were completed and transferred out of the process in September? a. $1,500,000. b. $2,000,000. c. $1,606,500. d. $1,365,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
121.
Materials costs of $800,000 and conversion costs of $1,020,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 20,000 units were started into production in September, and there were 5,000 units in ending work in process that were 40% complete at the end of September. What was the total amount of manufacturing costs assigned to the 5,000 units in the ending work in process? a. $455,000. b. $500,000. c. $320,000. d. $200,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 28 Test Bank for Accounting Principles, Tenth Edition 122.
Mayer Manufacturing has recently tried to improve its analysis for its manufacturing process. Units started into production equaled 18,000 and ending work in process equaled 1,200 units. Mayer had no beginning work in process inventory. Conversion costs are applied equally throughout production, and materials are applied at the beginning of the process. How much is the materials cost per unit if ending work in process was 25% complete and total materials costs equaled $90,000? a. $5.00. b. $5.27. c. $20.00. d. $4.69.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
123.
Madison Industries has equivalent units of 8,000 for materials and for conversion costs. Total manufacturing costs are $160,000. Total materials costs are $120,000. How much is the conversion cost per unit? a. $15. b. $5. c. $20. d. $4.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
124.
In a process cost system, a production cost report is prepared a. only for the first processing department. b. for all departments in the aggregate. c. for each processing department. d. only for the last processing department.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
A production cost report a. is prepared for each product. b. is prepared from a job cost sheet. c. will show quantity and cost data for a production department. d. will not identify a specific department if more than one department is involved in the production process.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
In the production cost report, the total a. physical units accounted for equals the costs accounted for. b. physical units accounted for equals the units to be accounted for. c. costs charged equals the units to be accounted for. d. costs accounted for equals the costs of the units started into production.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Process Costing 127.
21 - 29
Just-in-time processing requires a. a constant build-up of finished goods inventory just in case unexpected or rush orders are received. b. that suppliers of the company be able to deliver on short notice exact quantities of raw materials. c. that the quality control system be eliminated so that production is completed without interruption. d. an increase in the level of raw materials inventory so that production can be completed just-in-time before the delivery date promised.
Ans: B, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
128.
Many U.S. firms are switching to JIT processing because a. they desire a "push" approach to manufacturing. b. it eliminates conversion costs. c. it can reduce the funds invested in inventories. d. it is a means of building up inventories.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
129.
The elements of JIT do not include: a. dependable suppliers. b. efficient competitors. c. a total quality control system. d. a multiskilled work force.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
130.
In a JIT cost accounting system: a. reduced product quality is offset by reduced cost. b. manufacturing overhead is applied in the traditional manner. c. Raw Materials and Work in Process Inventory accounts are replaced by Raw and InProcess Inventory. d. conversion costs are eliminated.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
131.
Which of the following is not considered a benefit of JIT processing? a. More efficient production because all raw materials are delivered to one central receiving warehouse. b. Product quality is enhanced through a total quality control system. c. Rework costs and inventory storage costs should be reduced or eliminated. d. Manufacturing inventories are significantly reduced.
Ans: A, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
132.
What is the biggest disadvantage of ABC? a. It does not provide costing information needed for GAAP purposes. b. It causes management to make frivolous decisions. c. It often causes managers to argue about the best activity measure. d. It is expensive.
Ans: D, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 30 Test Bank for Accounting Principles, Tenth Edition 133.
An important assumption in using ABC is that: a. production must take place on a continuous basis. b. all costs in an activity should respond proportionately to changes in the activity level of the cost driver. c. production must take place on a just-in-time basis. d. all costs are pushed through each process when customer orders are received.
Ans: B, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
134.
What is true concerning an ABC philosophy? a. Costs should be applied using one activity level for simplicity. b. Each overhead cost should respond proportionally to changes in the activity level of its cost driver. c. One best cost driver should be selected. d. No work in process inventories should be used.
Ans: B, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
135.
Under the ABC philosophy: a. all inventories should be reduced or eliminated. b. the push approach should be used in the first department of a process and the pull approach should be used in all subsequent departments. c. the cost of a product is equal to the sum of the costs of all activities performed to manufacture it. d. only one cost driver can be used.
Ans: C, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management
136.
Which would be an appropriate cost driver for the delivery activity? a. Customers. b. Purchase orders. c. Shipments. d. Inspections.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
137.
Which would be an appropriate cost driver for the ordering activity? a. Machine setups. b. Purchase orders. c. Machine hours. d. Inspections.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
138. Which of the following is not a benefit of activity-based costing? a. More accurate product costing. b. Enhanced control over overhead costs. c. Better management decisions. d. Less costly to use.
Ans: D, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing
21 - 31
a
139. Which of the following is a limitation of activity-based costing? a. More cost bases. b. Less control over overhead costs. c. Poorer management decisions. d. Some arbitrary allocations continue.
Ans: D, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
140.
A process cost system would be used by all of the following except a(n) a. chemical company. b. advertising company. c. oil company. d. computer chip company.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
141.
Which of the following is considered a difference between a job order cost and a process cost system? a. The manufacturing cost elements. b. Documents used to track costs. c. The accumulation of the costs of materials, labor, and overhead. d. The flow of costs.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
142.
The basic similarities between job order cost and process cost systems include all of the following except the a. manufacturing cost elements. b. flow of costs. c. point at which costs are totaled. d. accumulation of the costs of materials, labor, and overhead.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
143
Equivalent units of production are a measure of a. units completed and transferred out. b. units transferred out. c. units in ending work in process. d. the work done in a period expressed in fully completed units.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
144.
Total physical units to be accounted for are equal to the units a. started (or transferred) into production. b. started (or transferred) into production plus the units in beginning work in process. c. started (or transferred) into production less the units in beginning work in process. d. completed and transferred out.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 32 Test Bank for Accounting Principles, Tenth Edition 145.
In computing equivalent units, ___________ is not part of the equivalent units of production formula. a. units transferred out b. beginning work in process c. ending work in process d. None of these is correct.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
146.
In Saint-Simon, Inc., the Assembly Department started 30,000 units and completed 35,000 units. If beginning work in process was 15,000 units, how many units are in ending work in process? a. 0. b. 5,000. c. 10,000. d. 20,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
147.
The total units to be accounted for is computed by adding a. beginning units in process to units transferred out. b. ending units in process to units started into production. c. beginning units in process to units started into production. d. ending units in process to total units accounted for.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
148.
In the Camria Company, materials are entered at the beginning of the process. If there is no beginning work in process, but there is an ending work in process inventory, the number of equivalent units as to materials costs will be a. the same as the units started. b. the same as the units completed. c. less than the units started. d. less than the units completed.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
149.
For the Assembly Department, unit materials cost is $8 and unit conversion cost is $12. If there are 10,000 units in ending work in process 75% complete as to conversion costs, the costs to be assigned to the inventory are a. $200,000. b. $170,000. c. $150,000. d. $180,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
150.
The total costs accounted for in a production cost report equal the a. cost of units completed and transferred out only. b. cost of units started into production. c. cost of units completed and transferred out plus the cost of ending work in process. d. cost of beginning work in process plus the cost of units completed and transferred out.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Process Costing 151.
21 - 33
In a production cost report, which one of the following sections is not shown under Costs? a. Unit costs. b. Costs to be accounted for. c. Costs during the period. d. Units accounted for.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
Which of the following statements is incorrect concerning just-in-time (JIT) processing? a. U.S. firms are switching to JIT processing in response to foreign competition. b. JIT manufacturing is dedicated to producing the right products at the right time as they are needed. c. JIT strives to eliminate inventories by using a "push" approach in manufacturing. d. JIT accounting creates a Raw and In-Process Inventory account.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
c a c c d c b c b c d b d c d c c
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.
d d c c d c c d c b b c b b a d c
72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
b a b c a c a c d b c d b c a b d
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.
b c a a a b b b a b b d c b c c d
106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.
b a d a c c a b a c d a a c a c a
123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. a 138. a 139.
b c c b b c b c a d b b c c b d d
140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
b b c d b b c c a b c d c
BRIEF EXERCISES BE 153 Tip Top Painting Company has the following production data for January: • • •
Beginning work in process, 0 units Units transferred out, 35,000 Units in ending work in process, 8,000, which are 30% complete for conversion costs
Materials are added only at the beginning of the process.
FOR INSTRUCTOR USE ONLY
21 - 34 Test Bank for Accounting Principles, Tenth Edition BE 153
(Cont.)
Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 153
(4 min.)
QUANTITIES
Physical Units
Units to be accounted for Work in process, January 1 Started into production Total units
0 43,000 43,000
Units accounted for Transferred out Work in process, January 31 Total units
35,000 8,000 43,000
Materials
Equivalent Units Conversion Costs
35,000 8,000 43,000
35,000 2,400 (8,000 × 30%) 37,400
BE 154 Lowman Painting Company has the following production data for March: • • •
Beginning work in process, 2,000 units Units transferred out, 42,000 Units in ending work in process, 10,000, which are 80% complete for conversion costs
Materials are added only at the beginning of the process. Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 154
(4 min.)
QUANTITIES
Physical Units
Units to be accounted for Work in process, March 1 Started into production Total units
2,000 50,000 52,000
Units accounted for Transferred out Work in process, March 31 Total units
42,000 10,000 52,000
Equivalent Units Materials Conversion Costs
42,000 10,000 52,000
FOR INSTRUCTOR USE ONLY
42,000 8,000 (10,000 × 80%) 50,000
Process Costing
21 - 35
BE 155 The Kirkland Department of Delta Manufacturing began the month of December with beginning work in process of 4,000 units that are 100% complete as to materials and 30% complete as to conversion costs. Units transferred out are 10,000 units. Ending work in process contains 5,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 155
(4 min.)
QUANTITIES
Physical Units
Equivalent Units Materials Conversion Costs
Units to be accounted for Work in process, December 1 4,000 Started into production 11,000 Total units 15,000 Units accounted for Transferred out 10,000 Work in process, December 31 5,000 Total units 15,000
10,000 5,000 15,000
10,000 3,000 (5,000 × 60%) 13,000
BE 156 White Supplies’ total material costs are $50,000 and total conversion costs are $40,000. Equivalent units of production for materials are 10,000, and 5,000 for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 156
(3 min.)
COSTS Unit costs Costs incurred Equivalent units Unit costs
Materials $50,000 10,000 $ 5.00
Conversion Costs $40,000 5,000 $ 8.00
FOR INSTRUCTOR USE ONLY
Total $90,000 $13.00
21 - 36 Test Bank for Accounting Principles, Tenth Edition BE 157 Apoly Manufacturing Company has the following production data for January. Ending Work in Process Beginning Work in Process
Units Started into Production
Units
% Complete as to Conversion Cost
-0-
8,500
900
30%
Instructions Compute the physical units for January. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 157
(4 min.)
Beginning work in process Started into production Total units to be accounted for
-08,500 8,500
Transferred out Ending work in process Total units accounted for
7,600 900 8,500
BE 158 Sandusky Widget Company has the following production data for March. Ending Work in Process Month
Beginning Work in Process
March BE 158 (cont.)
Units Transferred Out
Units
% Complete as to Conversion Cost
8,100
800
20%
1,200
Instructions Compute the physical units for March. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 158
(4 min.)
Beginning work in process Started into production Total units to be accounted for
1,200 7,700 8,900
Transferred out Ending work in process Total units accounted for
8,100 800 8,900
FOR INSTRUCTOR USE ONLY
Process Costing
21 - 37
BE 159 Sequal Company has the following production data for June: units transferred out 50,000, and ending work in process 6,000 units that are 100% complete for materials and 30% complete for conversion costs. Unit materials cost is $5 and unit conversion cost is $9. Instructions Determine the costs to be assigned to the units transferred out and the units in ending work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 159
(4 min.)
Work in process, June 30 Materials (6,000 × $5) Conversion costs (6,000 × 30% × $9) Total cost of work in process Units transferred out (50,000 × $14)
$30,000 16,200 $46,200 $700,000
BE 160 Tomlinson Company has the following production data for May: • Beginning work in process, 0 units • Units started, 62,000 • Ending work in process, 5,000 units that are 100% complete for materials and 60% complete for conversion costs • Unit materials cost, $5 • Unit conversion cost, $10 Instructions Determine the costs to be assigned to the units transferred out and the units in ending work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 160
(4 min.)
Work in process, May 31 Materials (5,000 × $5) Conversion costs (5,000 × 60% × $10) Total cost of work in process
$25,000 30,000 $55,000
Units transferred out (57,000 × $17)
$969,000
FOR INSTRUCTOR USE ONLY
21 - 38 Test Bank for Accounting Principles, Tenth Edition BE 161 Dirt Cleaners, Inc. has the following production data for January: Transferred out Ending work in process
50,000 units 6,000 units
The units in ending work in process are 100% complete for materials and 60% complete for conversion costs. There is no beginning work in process. Materials cost is $6 per unit and conversion costs are $11 per unit. Instructions Determine the costs to be assigned to the units transferred out and the units in ending work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 161
(4 min.)
Cost Reconciliation Schedule Costs accounted for Transferred out (50,000 × $17) Work in process, June 30 Materials (6,000 × $6) Conversion costs (3,600* × $11) Total costs *(6,000 x 60%)
$ 850,000 $ 36,000 39,600
75,600 $925,600
BE 162 Production costs chargeable to the Sanding Department in July for Joyful Art are $20,000 for materials, $26,000 for labor, and $10,000 for manufacturing overhead. Equivalent units of production are 25,000 for materials and 20,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 162
(4 min.)
COSTS Unit costs Costs in July Equivalent units Unit costs
Materials $20,000 25,000 $0.80
Conversion Costs $36,000 20,000 $1.80
FOR INSTRUCTOR USE ONLY
Total $56,000 $2.60
Process Costing
21 - 39
EXERCISES Ex. 163 Lutz Manufacturing Company produces a product in two departments: (1) Mixing and (2) Finishing. The company uses a process cost accounting system. (a) Purchased raw materials for $50,000 on account. (b) Raw materials requisitioned for production were: Direct materials Mixing department Finishing department
$20,000 14,000
(c) Incurred labor costs of $69,000. (d) Factory labor used: Mixing department Finishing department
$44,000 25,000
(e) Manufacturing overhead is applied to the product based on machine hours used in each department: Mixing department—300 machine hours at $30 per machine hour. Finishing department—500 machine hours at $20 per machine hour. (f)
Units costing $56,000 were completed in the Mixing Department and were transferred to the Finishing Department.
(g) Units costing $60,000 were completed in the Finishing Department and were transferred to finished goods. (h) Finished goods costing $40,000 were sold on account for $55,000. Instructions Prepare the journal entries to record the preceding transactions for Lutz Manufacturing Company. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 163 (a)
(b)
(c)
(20–28 min.)
Raw Materials Inventory .............................................................. Accounts Payable ............................................................... (Purchase of raw materials on account)
50,000
Work in Process—Mixing ............................................................ Work in Process—Finishing ........................................................ Raw Materials Inventory ..................................................... (To record materials used in production)
20,000 14,000
Factory Labor .............................................................................. Factory Wages Payable ...................................................... (To record payroll liability)
69,000
FOR INSTRUCTOR USE ONLY
50,000
34,000
69,000
21 - 40 Test Bank for Accounting Principles, Tenth Edition Solution 163 (d)
(e)
(f)
(g)
(h)
(Cont.)
Work in Process—Mixing ............................................................. Work in Process—Finishing ......................................................... Factory Labor ...................................................................... (To assign factory labor to production)
44,000 25,000
Work in Process—Mixing (300 × $30).......................................... Work in Process—Finishing (500 × $20) ...................................... Manufacturing Overhead..................................................... (To assign overhead to processes)
9,000 10,000
Work in Process—Finishing ......................................................... Work in Process—Mixing .................................................... (To record transfer of units to the Finishing Department)
56,000
Finished Goods Inventory ............................................................ Work in Process—Finishing ................................................ (To record transfer of units to finished goods)
60,000
Accounts Receivable ................................................................... Sales ................................................................................... (To record sale of finished goods on account)
55,000
Cost of Goods Sold...................................................................... Finished Goods Inventory ................................................... (To record cost of goods sold)
40,000
69,000
19,000
56,000
60,000
55,000
40,000
Ex. 164 Sanders Company has two production departments: Fabricating and Finishing. Beginning inventories are: Work in Process—Fabricating, $6,030; Work in Process—Finishing, $4,100; and Finished Goods, $5,600. During the month the following transactions occurred: 1. Purchased $40,000 of raw materials on account. 2. Incurred $65,000 of factory labor. Wages are unpaid. 3. Incurred $50,000 of manufacturing overhead; $40,000 was paid and the remainder is unpaid. 4. Requisitioned materials for Fabricating, $10,000 and Finishing, $8,000. 5. Used factory labor for Finishing, $52,000 and Fabricating, $13,000. 6. Applied $45,000 of overhead based on machine hours used in each department. The Finishing Department used twice as many machine hours as did Fabricating. Instructions Journalize the transactions for the month. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Process Costing Solution 164
21 - 41
(12–16 min.)
1. Raw Materials Inventory ................................................................. Accounts Payable ..................................................................
40,000
2. Factory Labor ................................................................................. Factory Wages Payable.........................................................
65,000
3. Manufacturing Overhead ................................................................ Accounts Payable .................................................................. Cash ......................................................................................
50,000
4. Work in Process—Fabricating ........................................................ Work in Process—Finishing ........................................................... Raw Materials Inventory ........................................................
10,000 8,000
5. Work in Process—Fabricating ........................................................ Work in Process—Finishing ........................................................... Factory Labor ........................................................................
13,000 52,000
6. Work in Process—Fabricating ........................................................ Work in Process—Finishing ........................................................... Manufacturing Overhead .......................................................
15,000 30,000
40,000
65,000
10,000 40,000
18,000
65,000
45,000
Ex. 165 The Pasta Factory manufactures spaghetti sauce through two production departments: Cooking and Packaging. For the month of February, the work in process accounts show the following debits: Cooking Packaging Beginning work in process $ -0$ 6,000 Materials 40,000 26,000 Labor 16,000 9,000 Overhead 30,000 19,000 Costs transferred in 65,000 Instructions Journalize the February transactions that involved the work in process accounts. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 165
(10–15 min.)
Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Raw Materials Inventory ..............................................................
40,000 26,000
Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Factory Labor ..............................................................................
16,000 9,000
Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Manufacturing Overhead .............................................................
30,000 19,000
FOR INSTRUCTOR USE ONLY
66,000
25,000
49,000
21 - 42 Test Bank for Accounting Principles, Tenth Edition Solution 165
(Cont.)
Work in Process—Packaging ............................................................... Work in Process—Cooking ..........................................................
65,000 65,000
Ex. 166 Benson Industries uses a process cost system. Products are processed first by Department A, second by Department B, and then they are transferred to the finished goods warehouse. Shown below is the cost information for Department B during the month of October: Costs of units transferred in Manufacturing costs added in Department B: Direct materials Direct labor Manufacturing overhead Total costs charged to Department B in October
$120,000 $50,000 6,000 19,000
75,000 $195,000
The cost of work in process in Department B at October 1 is $25,000, and the cost of work in process at October 31 has been determined to be $30,000. Instructions Prepare journal entries to record for the month of October: (a) The transfer of production from Department A to B. (b) The manufacturing costs incurred by Department B. (c) The transfer of completed units from Department B to the finished goods warehouse. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 166
(8–11 min.)
(a) Work in Process—Dept. B............................................................. Work in Process—Dept. A .....................................................
120,000
(b) Work in Process—Dept. B............................................................. Factory Labor......................................................................... Raw Materials Inventory......................................................... Manufacturing Overhead........................................................
75,000
(c) Finished Goods Inventory ($25,000 + $195,000 – $30,000) .......... Work in Process—Dept. B .....................................................
190,000
120,000 6,000 50,000 19,000 190,000
Ex. 167 Hardy Company manufactures a single product by a continuous process, involving two production departments. The records indicate that $120,000 of direct materials were issued to and $200,000 of direct labor was incurred by Department 1 in the manufacture of the product. The factory overhead rate is $25 per machine hour; machine hours were 5,000 in Department 1. Work in process in the department at the beginning of the period totaled $35,000; and work in process at the end of the period was $25,000.
FOR INSTRUCTOR USE ONLY
Process Costing Ex. 167
21 - 43
(Cont.)
Instructions Prepare entries to record (a) The flow of costs into Department 1 for (1) direct materials (2) direct labor (3) overhead (b) The transfer of production costs to Department 2. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 167 (a)
(1)
Work in Process—Dept. 1................................................... Raw Materials Inventory .............................................
120,000
Work in Process—Dept. 1................................................... Factory Labor .............................................................
200,000
Work in Process—Dept. 1................................................... Manufacturing Overhead (5,000 × $25)......................
125,000
Work in Process—Dept. 2 ........................................................... Work in Process—Dept. 1...................................................
455,000*
(2)
(3)
(b)
(7–10 min.) 120,000
200,000
125,000
455,000
*$35,000 + $120,000 + $200,000 + $125,000 – $25,000 = $455,000 Ex. 168 Muffy Painting Company has the following production data for March.
Month March
Beginning Units Work in Process Transferred Out 3,000 42,000
Ending Work in Process % Complete as to Units Conversion Cost 8,000 75%
Instructions Compute equivalent units of production for March for both materials and conversion costs. Materials are entered at the beginning of the process. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 168
(10 min.)
Quantities Units to be accounted for Work in process, March 1 Started into production Total units Units accounted for Transferred out Work in process, March 31 Total units
Physical Units
Equivalent Units Materials Conversion Costs
3,000 47,000 50,000 42,000 8,000 50,000
42,000 8,000 50,000
FOR INSTRUCTOR USE ONLY
42,000 6,000 (8,000 × 75%) 48,000
21 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 169 The Nitrogen Fixation Department of Tomco Manufacturing began the month of December with beginning work in process of 4,000 units that are 100% complete as to materials and 30% complete as to conversion costs. Units transferred out are 12,000 units. Ending work in process contains 5,000 units that are 100% complete as to materials and 40% complete as to conversion costs. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 169
(10 min.)
Quantities Physical Units Units to be accounted for Work in process, December 1 4,000 Started into production 13,000 Total units 17,000 Units accounted for Transferred out Work in process, December 31 Total units
12,000 5,000 17,000
Equivalent Units Materials Conversion Costs
12,000 5,000 17,000
12,000 2,000 14,000
(5,000 ×40%)
Ex. 170 At Crenshaw Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion, and production data for its Painting Department in selected months are as follows:
Month July Sept.
Beginning Work In Process Percentage Units Completed -0— 2,500 20%
Units Completed and Transferred Out 11,000 9,000
Ending Work In Process Percentage Units Completed 500 90% 4,000 70%
Instructions (a) Compute the physical units for July. (b) Compute the equivalent units of production for materials and conversion costs for September. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing Solution 170 (a)
(b)
21 - 45
(10–14 min.)
COMPUTATION OF PHYSICAL UNITS Beginning work in process Started into production Total units to be accounted for
July -011,500 11,500
Transferred out Ending work in process Total units accounted for
11,000 500 11,500
COMPUTATION OF EQUIVALENT UNITS Units accounted for Transferred out Work in process, Sept. 30 Total equivalent units
Physical Units 9,000 4,000 13,000
Equivalent Units Materials Conversion Costs 9,000 9,000 4,000 2,800 (4,000 × .70) 13,000 11,800
Ex. 171 Watts Company adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Instructions Complete the following calculation of equivalent units for materials and conversion costs. Physical Units Completed and transferred out
Equivalent Units Materials Conversion Costs
40,000
Ending work in process Materials Conversion costs, 75% complete
9,000
Total units Ans: N/A, SO: 5,6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 171
(4–7 min.)
Completed and transferred out Ending work in process Materials Conversion costs—75% complete Total units
Physical Units 40,000
Equivalent Units Materials Conversion Costs 40,000 40,000
12,000*
*9,000 ÷ .75
FOR INSTRUCTOR USE ONLY
12,000* 52,000
9,000 49,000
21 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 172 The general ledger of Oates Company has the following work in process account. WORK IN PROCESS—FINISHING 6/1 6/30 6/30 6/30 6/30
Balance Materials Labor Overhead Balance
8,000 1,800 3,800 2,800 ?
6/30
Transferred out
?
Production records show that there were 2,000 units in beginning inventory, 50% complete; 6,000 units started, and 4,500 units transferred out. The beginning work in process had conversion costs of $3,300. The units in ending inventory were 60% complete. Materials are added at the beginning of the process. Instructions Answer the following questions. (a) How many units are in process at June 30? (b) What is the unit conversion cost for June? (c) What is the conversion cost in the June 30 inventory? Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 172
(10–14 min.)
(a)
Work in process, June 1 Started into production Units to be accounted for Less: Transferred out Work in process, June 30
2,000 6,000 8,000 4,500 3,500
(b)
Conversion costs Transferred out Work in process, June 30 Total
Physical Units 4,500 3,500 8,000
Equivalent Units 4,500 2,100 (3,500 × .60) 6,600
Unit conversion cost = $1.70 ($3,300 + $6,600) ÷ 6,600 = $1.50 (c)
Conversion cost in June 30 inventory: 2,100 × $1.50 = $3,150
Ex. 173 The Assembly Department uses a process cost accounting system and a weighted-average cost flow assumption. The department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. During July, $190,000 of materials costs and $135,500 in conversion costs were charged to the department. The beginning work in process inventory was $93,000 on July 1, comprised of $80,000 of materials costs and $13,000 of conversion costs. Other data for the month of July are as follows: Beginning work in process inventory, 7/1 Units completed and transferred out Ending work in process inventory, 7/31
25,000 units 90,000 units 30,000 units
FOR INSTRUCTOR USE ONLY
(40% complete) (30% complete)
Process Costing Ex. 173
21 - 47
(Cont.)
Instructions Answer the following questions and show computations to support your answers. 1. How many physical units have to be accounted for in July? 2. What are the equivalent units of production for materials and for conversion costs for the month of July? 3. What is the total cost assigned to the 90,000 units that were transferred out of the process in July? 4. What is the total cost of the July 31 inventory? Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 173
(15–20 min.)
1. Units transferred out Work in process, July 31 Units accounted for
90,000 30,000 120,000
2. Equivalent units of production:
Transferred out Work in process, July 31 Total
Physical Units 90,000 30,000 120,000
Equivalent Units Materials Conversion Costs 90,000 90,000 30,000 9,000* 120,000 99,000
*(30,000 × .30) 3. Materials cost per unit = Conversion cost per unit = Total unit cost *($80,000 + $190,000)
$2.25 $1.50 $3.75
($270,000* ÷ 120,000 units) ($148,500** ÷ 99,000 units)
**($13,000 + $135,500)
Total cost assigned to units transferred out: 90,000 × $3.75 = $337,500 4. Total cost of July 31 inventory: (30,000 × $2.25) + (9,000 × $1.50) = $81,000 Ex. 174 The Finishing Department of Edwards Manufacturing has the following production and cost data for July: 1. Transferred out, 4,000 units. 2. Started 2,000 units that are 40% completed at July 31. 3. Materials added, $30,000; conversion costs incurred, $19,200. Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process.
FOR INSTRUCTOR USE ONLY
21 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 174
(Cont.)
Instructions (a) Compute the equivalent units of production for materials and conversion costs for the month of July. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 174
(15–20 min.)
(a) Transferred Out Work in Process, July 31 Total
Physical Units 4,000 2,000 6,000
Equivalent Units Materials Conversion Costs 4,000 4,000 2,000 800* 6,000 4,800
*(2,000 × .40) (b)
Materials cost per unit = Conversion cost per unit =
$ 5 4 $9
Cost Reconciliation Schedule Costs accounted for Transferred out (4,000 × $9) Work in process, July 31 Materials (2,000 × $5) Conversion costs (800 × $4) Total costs
($30,000 ÷ 6,000 units) ($19,200 ÷ 4,800 units)
$36,000 $10,000 3,200
$13,200 $49,200
Ex. 175 Massey Corporation uses a process cost system and the weighted-average cost flow assumption. Production begins in the Fabricating Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On March 1, the beginning work in process inventory consisted of 20,000 units which were 60% complete and had a cost of $175,000, $145,000 of which were materials costs. During March, the following occurred: Materials added Conversion costs incurred Units completed and transferred out in March Units in ending work in process March 31 (40% complete)
FOR INSTRUCTOR USE ONLY
$305,000 $120,000 65,000 25,000
Process Costing Ex. 175
21 - 49
(Cont.)
Instructions Answer the following questions and show the computations that support your answers. 1. What are the equivalent units of production for materials and conversion costs in the Fabricating Department for the month of March? 2. What are the costs assigned to the ending work in process inventory on March 31? 3. What are the costs assigned to units completed and transferred out during March? Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 175
(15–20 min.)
1. Equivalent units of production:
Transferred out Work in process, March 31 Total
Physical Units 65,000 25,000 90,000
Equivalent Units Materials Conversion Costs 65,000 65,000 25,000 10,000* 90,000 75,000
*(25,000 × .40) 2.
Materials unit cost Conversion unit cost Total unit cost *($145,000 + $305,000)
$5 2 $7
($450,000* ÷ 90,000 units) ($150,000** ÷ 75,000 units)
**[($175,000 – $145,000) + $120,000]
Costs assigned to work in process, March 31 Materials costs $125,000 (25,000 units × $5) Conversion costs 20,000 (10,000 units × $2) Total $145,000 3. Costs assigned to units completed and transferred out: 65,000 × $7 = $455,000 Ex. 176 Given below are the production data for Department No. 1 for the first month of operation: Costs charged to Department 1: Materials $12,000 Labor 2,600 Overhead 13,600 During this first month of operations, 3,000 units were started into production; 2,500 units were transferred out; and the remaining 500 units are 100% completed with respect to materials and 40% complete with respect to conversion costs.
FOR INSTRUCTOR USE ONLY
21 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 176
(Cont.)
Instructions Compute the following: (a) Unit materials cost. (b) Equivalent units of conversion costs. (c) Unit conversion cost. (d) Total cost of 500 units in process at end of month. (e) Total cost of 2,500 units transferred out. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 176
(14–18 min.)
(a)
Unit materials cost: $12,000 ÷ 3,000 equivalent units for materials = $4.00.
(b)
Equivalent units of conversion costs: 2,500 completed + (40% × 500) = 2,700 equivalent units of conversion costs.
(c)
Unit conversion cost: ($2,600 + $13,600) ÷ 2,700 equivalent units = $6.00.
(d)
Total cost of 500 units in work in process Materials, 500 × $4.00 = Conversion costs, 200 × $6.00 = Total
(e)
$2,000 1,200 $3,200
Total cost of 2,500 transferred out units: 2,500 × ($4.00 + $6.00) = $25,000.
Ex. 177 The ledger of Kinsler Company has the following work in process account.
5/1 5/31 5/31 5/31 5/31
Balance Materials Labor Overhead Balance
Work in Process—Painting 5,390 5/31 Transferred out 7,740 4,110 2,470 ?
?
Production records show that there were 700 units in the beginning inventory, 30% complete, 2,900 units started, and 3,100 units transferred. The beginning work in process had materials cost of $3,060 and conversion costs of $2,330. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process. Instructions (a) How many units are in process at May 31? (b) What is the unit materials cost for May? (c) What is the unit conversion cost for May? (d) What is the total cost of units transferred out in May? (e) What is the cost of the May 31 inventory? Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing Solution 177 (a)
21 - 51
(10 min.)
Work in process, May 1 Started into production Total units to be accounted for Less: Transferred out Work in process, May 31
700 2,900 3,600 3,100 500
(b) Materials 3,100
Units transferred out Work in process, May 31 500 100% 500 40%
Equivalent Units Conversion Costs 3,100
500
Work in process, May 1 Costs added Total materials cost
3,600
200 3,300
Direct Materials $ 3,060 7,740 $10,800
Conversion Costs $2,330 6,580 $8,910
$10,800 ÷ 3,600 = $3.00 (c)
$8,910 ÷ 3,300 = $2.70
(d)
Transferred out (3,100 $5.70)
(e)
Work in process Materials (500 $3.00) Conversion costs (200 $2.70)
$17,670
$1,500 540 $2,040
Ex. 178 The Cutting Department of Sanderson Manufacturing has the following production and cost data for July. Production 1. Transferred out 10,000 units 2. Started 5,000 units that are 60% complete as to conversion costs and 100% complete as to materials at July 31.
Costs Beginning work in process Materials Labor Manufacturing overhead
FOR INSTRUCTOR USE ONLY
$
-060,000 21,600 25,200
21 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 178
(Cont.)
Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Instructions (a) Determine the equivalent units of production for (1) materials and (2) conversion costs. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 178
(8 min.) Materials 10,000
(a) Units transferred out Work in process, July 31 5,000 100% 5,000 60%
5,000 15,000
(b)
Conversion Costs 10,000
3,000 13,000
Materials: $60,000 ÷ 15,000 = $4.00 Conversion costs: ($21,600 + $25,200) ÷ 13,000 = $3.60 Costs accounted for Transferred out (10,000 $7.60) Work in process, July 31 Materials (5,000 $4.00) Conversion costs (3,000 $3.60) Total costs
$ 76,000 $20,000 10,800
30,800 $106,800
Ex. 179 Wilkinson Company has gathered the following information. Units in beginning work in process Units started into production Units in ending work in process Percent complete for conversion costs in ending work in process Costs incurred: Direct materials Direct labor Overhead
-060,000 10,000 40% $ 81,000 $ 99,000 $130,500
Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units transferred out and in process. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing Solution 179
21 - 53
(8 min.)
(a)
Materials: 50,000 + 10,000 = 60,000 Conversion costs: 50,000 + (10,000 40%) = 54,000
(b)
Materials: $81,000/60,000 = $1.35 Conversion costs: ($99,000 + $130,500)/54,000 = $4.25
(c)
Units transferred out: 50,000 $5.60 = $280,000 Units in ending work in process: 10,000 $1.35 = $13,500 4,000 $4.25 = 17,000 $30,500
Ex. 180 Carlton Company has gathered the following information Units in beginning work in process Units started into production Units in ending work in process Percent complete for conversion costs in ending work in process Costs incurred: Direct materials Direct labor Overhead
25,000 115,000 30,000 60% $161,000 $235,400 $180,600
Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units transferred out and in process. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 180
(8 min.)
(a)
Materials: 110,000(1) + 30,000 = 140,000 Conversion costs: 110,000 + (30,000 60%) = 128,000 (1) 25,000 + 115,000 – 30,000
(b)
Materials: $161,000/140,000 = $1.15 Conversion costs: ($235,400 + $180,600)/128,000 = $3.25
FOR INSTRUCTOR USE ONLY
21 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 180 (c)
(Cont.)
Units transferred out: 110,000 $4.40= $484,000 Units in ending work in process: 30,000 $1.15 = $ 34,500 18,000 $3.25 = 58,500 $ 93,000
Ex. 181 The Polishing Department of Estaban Manufacturing Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process. Production: Beginning inventory 2,000 units that are 100% complete as to materials and 30% complete as to conversion costs; units started during the period are 38,000, ending inventory of 6,000 units 10% complete as to conversion costs. Manufacturing costs: Beginning inventory costs, comprised of $18,000 of materials and $13,000 of conversion costs; materials costs added in Polishing during the month, $202,000 labor and overhead applied in Polishing during the month $176,200 and $312,500 respectively. Instructions (a) Compute the equivalent units of productions for materials and conversion costs for the month of September. (b) Compute the unit costs for materials and conversion costs for the month. (c) Determine the costs to be assigned to the units transferred out and in process. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 181
(14–18 min.)
(a) Work in process, September 1 Units started into production
Units transferred out Work in process, September 30
Units transferred out Work in process 6,000 100% 6,000 10%
Physical Units 2,000 38,000 40,000 34,000 6,000 40,000
Materials 34,000
Equivalent Units Conversion Costs 34,000
6,000 40,000
FOR INSTRUCTOR USE ONLY
600 34,600
Process Costing Solution 181
21 - 55
(Cont.)
(b)
Materials Work in process, September 1 Direct materials..................................
$ 18,000
Costs added to production during September ................................ Total materials cost ..................................
202,000 $220,000
$220,000 40,000 = $5.50 (Materials cost per unit) Conversion Costs Work in process, September 1 Conversion costs ...............................
$ 13,000
Costs added to production during September Conversion costs ................................ Total conversion costs ................................
488,700 $501,700
$501,700 34,600 = $14.50 (c)
Costs accounted for Transferred out (34,000 $20) ................... Work in process, September 30 Materials (6,000 $5.50) .......................... Conversion costs (600 $14.50) ................ Total costs ................................................
$680,000 $33,000 8,700
41,700 $721,700
Ex. 182 Grey Building Supplies' total materials costs are $40,000 and total conversion costs are $33,000. Equivalent units of production for materials are 10,000, and 6,000 for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
21 - 56 Test Bank for Accounting Principles, Tenth Edition Solution 182
(6–8 min.)
COSTS Unit Costs Costs incurred Equivalent units Unit costs
Materials $40,000 10,000 $4.00
Conversion Costs $33,000 6,000 $5.50
Total $73,000 $9.50
Ex. 183 Glazer, Inc. has the following production data for June: Transferred out Ending work in process
50,000 units 5,000 units
The units in work in process are 100% complete for materials and 60% complete for conversion costs. Materials costs are $4 per unit and conversion costs are $9 per unit. Instructions Determine the costs to be assigned to the units transferred out and the units in ending work in process. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 183
(8 min.)
Cost Reconciliation Schedule Costs accounted for Transferred out (50,000 × $13) Work in process, June 30 Materials (5,000 × $4) Conversion costs (3,000* × $9) Total costs *(5,000 × 60%)
$ 650,000 $20,000 27,000
47,000 $697,000
Ex. 184 Production costs chargeable to the Sanding Department in July in Magnum Company are $30,000 for materials, $17,000 for labor, and $13,000 for manufacturing overhead. Equivalent units of production are 25,000 for materials and 15,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 184
(6-8 min.)
COSTS Unit Costs Costs in July Equivalent units Unit costs
Materials $30,000 25,000 $1.20
Conversion Costs $30,000 15,000 $2.00
FOR INSTRUCTOR USE ONLY
Total $60,000 $3.20
Process Costing
21 - 57
Ex. 185 Mayer Manufacturing Company uses a process cost system. The Molding Department adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Work in process on May 1 was 75% complete and work in process on May 31 was 40% complete. Instructions Complete the Production Cost Report for the Molding Department for the month of May using the above information and the information below. Ex. 185
(cont.) MAYER MANUFACTURING COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2012
QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units Units accounted for Transferred out Work in process, May 31 Total units
COSTS Unit costs Costs in May Equivalent units Unit costs
Physical Units
Materials
8,000 27,000 35,000
30,000 5,000 35,000
Materials $140,000 $
Conversion Costs $160,000 $
Costs to be accounted for Work in process, May 1 Started into production Total costs Cost Reconciliation Schedule Costs accounted for Transferred out Work in process, May 31 Materials Conversion costs Total costs
Equivalent Units Conversion Costs
Total $300,000 $
$ 60,000 240,000 $300,000
$ $ $300,000
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
21 - 58 Test Bank for Accounting Principles, Tenth Edition Solution 185
(12–16 min.) MAYER MANUFACTURING COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2012
QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units Units accounted for Transferred out Work in process, May 31 Total units
Physical Units
Materials
Equivalent Units Conversion Costs
8,000 27,000 35,000
30,000 5,000 35,000
COSTS Unit costs Costs in May Equivalent units Unit costs
30,000 5,000 35,000
Materials $140,000 35,000 $ 4
30,000 2,000 (5,000 × 40%) 32,000
Conversion Costs $160,000 32,000 $ 5
Costs to be accounted for Work in process, May 1 Started into production Total costs
Total $300,000 $
9
$ 60,000 240,000 $300,000
Cost Reconciliation Schedule Costs accounted for Transferred out (30,000 × $9) Work in process, May 31 Materials (5,000 × $4) Conversion costs (2,000 × $5) Total costs
$270,000 $ 20,000 10,000
30,000 $300,000
Ex. 186 Baker Winery manufactures a fine wine in two departments, Fermenting and Bottling. In the Fermenting Department, grapes are aged in casks for a period of 30 days. In the Bottling Department, the wine is bottled and then sent to the finished goods warehouse. Labor and overhead are incurred uniformly through both processes. Materials are entered at the beginning of both processes. Cost and production data for the Fermenting Department for December 2012 are presented below: Cost data Beginning work in process inventory Materials Conversion costs Total costs
$ 37,000 ($30,000 of materials cost) 390,000 121,000 $548,000
FOR INSTRUCTOR USE ONLY
Process Costing Ex. 186
21 - 59
(cont.)
Production data Beginning work in process (gallons) Gallons started into production Ending work in process (gallons)
5,000 (40%) 65,000 8,000 (25%)
Instructions (a) Compute the equivalent units of production. (b) Determine the unit production costs. (c) Determine the costs to be assigned to units transferred out and ending work in process. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 186
(17–25 min.)
(a) Transferred out Ending work in process Total
Physical Units 62,000* 8,000 70,000
Equivalent Units Materials Conversion Costs 62,000 62,000 8,000 2,000 (8,000 × .25) 70,000 64,000
*(5,000 + 65,000) – 8,000 (b) Unit Production Costs: Materials Conversion costs Total unit cost *($30,000 + $390,000)
$ 6 ($420,000* ÷ 70,000) 2 ($128,000** ÷ 64,000) $8 **[($37,000 – $30,000) + $121,000]
(c) Costs assigned to units transferred out and ending work in process: Transferred out (62,000 × $8) Ending work in process Materials (8,000 × $6) Conversion costs (2,000 × $2)
Total Costs Assigned $496,000 $48,000 4,000
52,000 $548,000
Ex. 187 The Assembly Department of Nitz Company has the following production and cost data at the end of May, 2012. Production: 25,000 units started into production; 20,000 units transferred out and 5,000 units 100% completed as to materials and 40% completed as to conversion costs. Manufacturing Costs: Materials added at beginning of process, $90,000; labor, $72,000; overhead $60,000. Instructions Prepare a production cost report for the month of May. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
21 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 187
(22–30 min.) NITZ COMPANY Assembly Department—Production Cost Report For the Month Ended May 31, 2012 Equivalent Units Materials Conversion Costs
Physical Units QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units
0 25,000 25,000
Units accounted for Transferred out Work in process, May 31 Total units accounted for
20,000 5,000 25,000
20,000 5,000 25,000
20,000 2,000 22,000
Materials $90,000 25,000 $ 3.60
Conversion Costs $132,000 22,000 $6.00
Total $222,000
COSTS Unit costs Costs in May Equivalent units Unit costs Costs to be accounted for Work in process, May 1 Started into production Total costs
$9.60
$ 0 222,000 $222,000
Cost Reconciliation Schedule Costs accounted for Transferred out (20,000 × $9.60) Work in process, May 31 Materials (5,000 × $3.60) Conversion Costs (2,000 × $6) Total costs
$192,000 18,000 12,000
30,000 $222,000
Ex. 188 Romero Company—Perth Division is a new state of the art production facility that manufactures landing gears for airplanes. The ending September 30th work in process is comprised of labor and overhead and is approximately 60% complete. All materials are assumed to be 100% complete. Total materials costs during the period totaled $840,000. Instructions As the new plant accountant, you are asked to complete the production cost report which appears as follows:
FOR INSTRUCTOR USE ONLY
Process Costing Ex. 188
21 - 61
(cont.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2012
QUANTITIES Physical Units Units to be accounted for Work in process, September 1 300 Started into production 900 Total units 1,200 Units accounted for Transferred out Work in process, September 30 Total units COSTS Unit Costs Costs in September Equivalent units Unit costs
700 500 1,200
Materials $840,000 $
Equivalent Units Materials Conversion Costs
700 500 1,200
Conversion Costs $ $
260
Costs to be accounted for Work in process, Sept. 1 Started into production Total costs
700
Total $1,100,000 $
$ 243,400 $
Cost Reconciliation Schedule Costs accounted for Transferred out Work in process, September Materials Conversion costs Total costs
$ $ 78,000 $1,100,000
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 188
(10-15 min.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2012
QUANTITIES Physical Units Units to be accounted for Work in process, September 1 300 Started into production 900 Total units 1,200
Equivalent Units Materials Conversion Costs
FOR INSTRUCTOR USE ONLY
21 - 62 Test Bank for Accounting Principles, Tenth Edition Solution 188
(Cont.)
Units accounted for Transferred out Work in process, September 30 Total units
700 500 1,200
COSTS Unit Costs Costs in September Equivalent units Unit costs
Materials $840,000 1,200 $ 700
700 500 1,200
Conversion Costs $260,000 1,000 $ 260
Costs to be accounted for Work in process, Sept. 1 Started into production Total costs
700 300 1,000
Total $1,100,000 $960
$ 243,400 856,600 $1,100,000
Cost Reconciliation Schedule Costs accounted for Transferred out (700 × $960) Work in process, September Materials (500 × $700) Conversion costs (300 × $260) Total costs
$ 672,000 $350,000 78,000
428,000 $1,100,000
COMPLETION STATEMENTS 189.
Process cost systems are used to apply costs to similar products that are ____________ in a ____________ fashion.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Cost Management
190.
Separate _________________ accounts are maintained for each production department or manufacturing process in a process cost system.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
191.
In a process cost system, manufacturing costs are summarized in a ________________ report for each department.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
192.
A primary driver of overhead costs in continuous manufacturing operations is _______________.
Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
193.
Equivalent units of production measure the work done during the period, expressed in fully ________________ units.
Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Process Costing 194.
21 - 63
Unit production costs are expressed in terms of _____________ units of production.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
195.
If a processing department has 27,000 units in process at the beginning of the period, completes and transfers out 90,000 and has 18,000 units in process at the end of the period, then the number of units started into production during the period was ______________ units.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
196.
A cost reconciliation schedule is prepared to assign total costs to units ______________, and to the units in the _________________ work in process.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
197.
The production cost report is an internal document that shows production quantity and ______________ for a production department.
Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
198.
One of the major benefits of JIT is the elimination of ______________ and ____________ inventory accounts.
Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
199.
Under ABC, costs are traced from ________________ to products.
Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
200.
ABC seeks to identify the _______________ that measure the activities performed on the product.
Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
201.
The primary benefit of activity-based costing is ______________ product costing.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
Answers to Completion Statements 189. 190. 191. 192. 193. 194. 195.
mass-produced, continuous work in process production cost machine hours completed equivalent 81,000
196. 197. 198. 199. 200. 201.
transferred out, ending cost data raw materials, work in process activities cost drivers more accurate
FOR INSTRUCTOR USE ONLY
21 - 64 Test Bank for Accounting Principles, Tenth Edition
MATCHING 202. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Just-in-time processing Equivalent units of production Total units accounted for Production cost report Cost reconciliation schedule
____
1.
A summary of both production quantity and cost data for a production department.
____
2.
Shows that the total costs accounted for equal the total costs to be accounted for.
____
3.
Work done during a period expressed in fully completed units.
____
4.
Focuses on the activities performed in manufacturing a specific product.
____
5.
Actual units to be accounted for during a period, irrespective of any work performed.
____
6.
Units transferred out during the period plus units in ending work in process.
____
7.
Unit materials costs plus unit conversion costs.
____
8.
Total units accounted for minus units in ending work in process.
____
9.
Costs expressed in terms of equivalent units of production.
____ 10.
F. G. H. I. J.
Units transferred out Activity-based costing Physical units Unit production costs Total manufacturing cost per unit
Uses a “pull approach” in manufacturing.
Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
D E B G H
6. 7. 8. 9. 10.
C J F I A
SHORT-ANSWER ESSAY QUESTIONS S-A E 203 Why do some companies need a cost accounting system while others do not? What are the determining characteristics or factors that influence the type of cost accounting system that is appropriate for a company? Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Process Costing
21 - 65
Solution 203 Companies need a cost accounting system only if they need to measure, record, and report the costs of manufacturing products. The two basic types of cost accounting systems are job order costing and process costing. A job order cost system is appropriate when production consists of batches of unique products (jobs). A process cost system is used to apply costs to similar products that are mass-produced in a continuous fashion. S-A E 204 The production cost report summarizes the activities that have taken place in a department or process over a period of time. Identify the major types of information found on a production cost report, and indicate who in the business organization uses this type of information and for what purpose the information is used. Ans: N/A, SO: 6, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 204 The types of information found in a production cost report are units to be accounted for and units accounted for, unit costs, and costs to be accounted for and costs accounted for. Production cost reports provide a basis for evaluating the productivity of a department and so are used by production managers. In addition, the cost data can be used by middle management to assess whether unit costs and total costs are reasonable. When the quantity and cost data are compared with predetermined goals, top management can also ascertain whether current performance is meeting planned objectives. Of course, the information in the report is also used for recordkeeping and income determination by the accounting department. S-A E 205 Your roommate is curious about the features of process cost accounting. Identify and explain the distinctive features for your roommate. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
Solution 205 The features of process costing are: (1) separate work in process accounts for each process, (2) production cost reports, (3) product costs computed for each accounting period, and (4) unit costs computed based on total manufacturing costs. S-A E 206 What purposes are served by a production cost report? Ans: N/A, SO: 6, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting
Solution 206 The production cost report provides the basis for evaluating: (1) the productivity of a department, (2) whether unit and total costs are reasonable, and (3) whether management's predetermined production and cost goals are being met.
FOR INSTRUCTOR USE ONLY
21 - 66 Test Bank for Accounting Principles, Tenth Edition S-A E 207 (Ethics) Dolly's Dream Homes, Inc. manufactures doll houses in a continuous process. Various customizing features and furnishings are added at the end of the process to create the various models that are sold. The basic design and floor plans of all the houses are identical, however. During the most recent month, the lumber used in trimming the houses was inadvertently recorded as direct materials. At month end, when the error was discovered, Susie Rief, the accountant, was told by the accounting manager, Karen Tate, not to bother with correcting the error, because the dollar amount of the error was not "worth it." Susie believes that the dollar amount is not as important as the quality of the reports. She wonders whether she would be committing an unethical act if she were to make the changes anyway, despite her superior's telling her not to. Required: 1. Who are the stakeholders in this situation? 2. Was it unethical for the company to ask that the error not be corrected? Explain briefly. 3. Would it be unethical for Susie to correct the error? Explain briefly. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics
Solution 207 1. The stakeholders include: • Susie Rief and Karen Tate • Dolly's Dream Homes • possibly the present customer, or future customers 2. The company was not unethical in asking that the error not be corrected because it was too small in dollar amount to be considered material. In fact, ignoring small errors improves efficiency. 3. Susie would be failing in the obedience due to her superior if she went ahead and corrected the error. Whether it would be a serious fault depends upon how easily the error could be corrected. The superior probably would not care, either way, if the dollar amount is small and the correction procedure is minor. However, just letting the matter drop would be better. S-A E 208 (Communication) Lawrence Leather Goods recently instituted just-in-time management of its inventories. The accounting department carefully modified all its reports to reflect these changes. Required: Prepare a short memo to production department managers, briefly explaining the primary changes they will see on the production cost report. Ans: N/A, SO: 8, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Process Costing
21 - 67
Solution 208 TO:
Managers in all Production Departments
FROM: Accounting RE:
JIT and reporting
Congratulations on a job well done, in instituting JIT! You are already realizing many of the benefits of efficient handling of inventory. Another of the benefits you will enjoy is simplified reporting. In the production cost reports you have been provided, there have been separate categories for materials and conversion costs. In some cases, there were several kinds of materials. JIT has allowed us to simplify this, and now there is only one column, for Raw and In Process. You may remember that each category was also adjusted for beginning and ending inventories. Since we no longer will have routine levels of inventory, we will be able to simplify this part of the reporting as well. We will now report only this month's use of materials, for example, and only the costs added to work in process costs this month, and only finished goods completed this period. If adjustments are needed for ending inventories, we will make them at the end of the year as a single adjustment. Please contact the accounting department if you have further questions. (signed)
FOR INSTRUCTOR USE ONLY
CHAPTER 22 COST-VOLUME-PROFIT SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
7 8 9 9 10 10 1 1
K K K K K K K K
sg
33. 34. sg 35. sg 36. sg 37.
3 5 6 8 9
K C K K K
6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 8 8 7 7 7 7 7 7 8
AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
138. 139. 140. 141. 142. 143. a 144. a 145. a 146. a 147. a 148. sg 149. st 150. sg 151. st 152. sg 153. st 154. sg 155. st 156. sg 157. st 158. sg 159. sg 160. sg,a 161.
8 8 9 9 9 9 9 10 10 10 10 2 3 3 4 5 5 6 6 7 7 8 9 10
K C AP C K K AP AP K K C K K AP K C K AP K AP K AP AP AP
162. 3 AP 164. 5 AP 166. 6 AP 168. 6 AP 163. 5 AP 165. 5 AP 167. 6 AP 169. 8 AP sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter.
170. 171.
8 8
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 2 2
K K K C C C K K
9. 10. 11. 12. 13. 14. 15. 16.
2 3 3 3 3 3 3 4
C K K C K C K K
17. 18. 19. 20. 21. 22. 23. 24.
4 5 5 5 5 6 6 6
K K K K K K K AP
25. 26. 27. 28. a 29. a 30. sg 31. sg 32.
sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2
C K K C C K C C K C C K C K C C C C C K C C C K C
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 5 5
C AP K AP AP C C K C AP AP AP K K C AP AP K K C K C C AP K
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.
5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
AP C AP AP AP AP AP AP AP AP AP AP AP AP C AP AP K C C AP AP C K AP
113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
Brief Exercises
22 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 172. 1,3 173. 1,3,6,8, 174. 1,3,5,6, 175. 3 176. 3 177. 3
AP AP AN AP AP AP
178. 4 AN 179. 4 E 180. 4,6,7 AN 181. 5 AP 182. 5 AP 183. 5,6,7 AN
184. 5,6,7 AN 190. 6,7,8 AP 185. 5,6 AP 191. 6,8,9 AP 186. 5 AP 192. 6,7 AP 187. 5,6 AP 193. 6,7 C 188. 5,6,8 AP 194. 6,7 AP 189. 6 AP 195. 6,7 AP
196. 197. 198. 199. a 200. a 201.
7 8 7,9 9 9,10 10
AP AP AP AP AN AN
a
10 10
K K
Completion Statements 202. 203. 204.
1 1 1
K K K
205. 206. 207.
1 1 2
K K K
208. 209. 210.
3 5 6
K K K
211. 212. 213.
6 8 9
K K K
214. 215.
a
Matching Statements 216.
1
K
Short-Answer Essay 217. 218.
4 5
S S
219. 220.
1 3
S S
221. 222.
3 1
S S
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 6.
TF TF TF TF TF TF
31. 32. 38. 39. 40. 41.
TF TF MC MC MC MC
42. 43. 44. 45. 46. 47.
7. 8.
TF TF
9. 56.
TF MC
57. 58.
10. 11. 12. 13. 14.
TF TF TF TF TF
15. 33. 64. 65. 66.
TF TF MC MC MC
67. 68. 69. 70. 71.
16. 17.
TF TF
80. 81.
MC MC
82. 83.
18. 19. 20. 21. 34.
TF TF TF TF TF
86. 87. 88. 89. 90.
MC MC MC MC MC
91. 92. 93. 94. 95.
Type Item Type Item Type Study Objective 1 MC 48. MC 54. MC MC 49. MC 55. MC MC 50. MC 172. Ex MC 51. MC 173. Ex MC 52. MC 174. Ex MC 53. MC 202. C Study Objective 2 MC 59. MC 61. MC MC 60. MC 62. MC Study Objective 3 MC 72. MC 77. MC MC 73. MC 78. MC MC 74. MC 79. MC MC 75. MC 150. MC MC 76. MC 151. MC Study Objective 4 MC 84. MC 152. MC MC 85. MC 178. Ex Study Objective 5 MC 96. MC 164. BE MC 97. MC 165. BE MC 153. MC 174. Ex MC 154. MC 181. Ex MC 163. BE 182. Ex
FOR INSTRUCTOR USE ONLY
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203. 204. 205. 201. 216. 219.
C C C C MA SA
221.
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63. 149.
MC MC
207.
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162. 172. 173. 174. 175.
BE Ex Ex Ex Ex
176. 177. 208. 220.
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179. 180.
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183. 184. 185. 186. 187.
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188. 209. 218.
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Cost-Volume-Profit
22. 23. 24. 35. 98. 99. 100.
TF TF TF TF MC MC MC
101. 102. 103. 104. 105. 106. 107.
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25. 119. 120. 121. 122.
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MC MC MC
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a
29. TF a145. MC a147. 30. TF a146. MC a148. Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay a
Study Objective 6 MC 115. MC 167. MC 116. MC 168. MC 117. MC 173. MC 118. MC 174. MC 155. MC 180. MC 156. MC 183. MC 166. BE 184. Study Objective 7 MC 135. MC 181. MC 136. MC 183. MC 157. MC 184. MC 158. MC 190. MC 180. Ex 192. Study Objective 8 MC 170. BE 188. MC 171. BE 190. BE 173. Ex 191. Study Objective 9 MC 161. MC 199. MC 191. Ex 200. MC 198. Ex 213. Study Objective a10 MC a200. Ex a214. MC a201. Ex a215. BE = Brief Exercise Ex = Exercise
BE BE Ex Ex Ex Ex Ex
185. 187. 188. 189. 190. 191. 192.
Ex Ex Ex Ex Ex Ex Ex
Ex Ex Ex Ex Ex
193. 194. 195. 196. 198.
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197. 212.
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222.
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193. 194. 210. 211.
22 - 3
Ex Ex C C
Ex Ex C C C
C = Completion MA = Matching
CHAPTER STUDY OBJECTIVES 1. Distinguish between variable and fixed costs. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index. 2. Explain the significance of the relevant range. The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range. 3. Explain the concept of mixed costs. Mixed costs increase in total but not proportionately with changes in the activity level. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. One method that management may use to classify these costs is the high-low method. 4. List the five components of cost-volume-profit analysis. The five components of CVP analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fixed costs, and (e) sales mix.
FOR INSTRUCTOR USE ONLY
22 - 4
Test Bank for Accounting Principles, Tenth Edition
5. Indicate what contribution margin is and how it can be expressed. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. It is identified in a CVP income statement, which classifies costs as variable or fixed. 6. Identify the three ways to determine the break-even point. The break-even point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin technique, and (c) derived from a CVP graph. 7. Give the formulas for determining sales required to earn target net income. The general formula is: Required sales = Variable costs + Fixed costs + Target net income. Two other formulas are: Required sales in units = (Fixed costs + Target net income) ÷ Contribution margin per unit, and Required sales in dollars = (Fixed costs + Target net income) ÷ Contribution margin ratio. 8. Define margin of safety, and give the formulas for computing it. Margin of safety is the difference between actual or expected sales and sales at the break-even point. The formulas for margin of safety are: Actual (expected) sales – Break-even sales = Margin of safety in dollars; Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety ratio. 9. Describe the essential features of a cost-volume-profit income statement. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. a
10. Explain the difference between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs.
TRUE-FALSE STATEMENTS 1.
An activity index identifies the activity that has a causal relationship with a particular cost.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
2.
A variable cost remains constant per unit at various levels of activity.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
3.
A fixed cost remains constant in total and on a per unit basis at various levels of activity.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
4.
If volume increases, all costs will increase.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
5.
If the activity index decreases, total variable costs will decrease proportionately.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 6.
22 - 5
Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7.
For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8.
The relevant range of activity is the activity level where the firm will earn income.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
9.
Costs will not change in total within the relevant range of activity.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
10.
The high-low method is used in classifying a mixed cost into its variable and fixed elements.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
11.
A mixed cost has both selling and administrative cost elements.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
12.
The fixed cost element of a mixed cost is the cost of having a service available.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
13.
For planning purposes, mixed costs are generally grouped with fixed costs.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
15.
When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
16.
An assumption of CVP analysis is that all costs can be classified as either variable or fixed.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
17.
In CVP analysis, the term cost includes manufacturing costs, and selling and administrative expenses.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 6 18.
Test Bank for Accounting Principles, Tenth Edition Contribution margin is the amount of revenue remaining after deducting cost of goods sold.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
Unit contribution margin is the amount that each unit sold contributes towards the recovery of fixed costs and to income.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit sales price.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Both variable and fixed costs are included in calculating the contribution margin.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
22.
The break-even point is where total sales equal total variable costs.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
23.
The break-even point is equal to the fixed costs plus net income.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even volume, then net income will be $10,000.
Ans: T, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
A target net income is calculated by taking actual sales minus the margin of safety.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
The margin of safety is the difference between contribution margin and fixed costs.
Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
27.
A CVP income statement shows contribution margin instead of gross profit.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
A CVP income statement classifies total costs by functional areas.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
Variable costing is not acceptable in reporting to stockholders under generally accepted accounting principles.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
30.
If more units are sold than are produced in a period, variable costing income will be greater than absorption costing income.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 31.
22 - 7
The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
32.
The trend in most companies is to have more variable costs and fewer fixed costs.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
33.
For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
34.
The contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
35.
A cost-volume-profit graph shows the amount of net income or loss at each level of sales.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
36.
The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or (expected) sales.
Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
37.
A CVP income statement classifies expenses by function rather than by cost behavior.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T T F F T F
7. 8. 9. 10. 11. 12.
T F F T F T
13. 14. 15. 16. 17. 18.
F F T T T F
19. 20. 21. 22. 23. 24.
T F F F F T
25. 26. 27. 28. a 29. a 30.
F F T F T T
31. 32. 33. 34. 35. 36.
T F T F T T
37.
F
MULTIPLE CHOICE QUESTIONS 38.
For an activity base to be useful in cost behavior analysis, a. the activity should always be stated in dollars. b. there should be a correlation between changes in the level of activity and changes in costs. c. the activity should always be stated in terms of units. d. the activity level should be constant over a period of time.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 8 39.
Test Bank for Accounting Principles, Tenth Edition A variable cost is a cost that a. varies per unit at every level of activity. b. occurs at various times during the year. c. varies in total in proportion to changes in the level of activity. d. may or may not be incurred, depending on management's discretion.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
40.
A cost which remains constant per unit at various levels of activity is a a. variable cost. b. fixed cost. c. mixed cost. d. manufacturing cost.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
41.
Two costs at Simpson, Inc. appear below for specific months of operation. Delivery costs Utilities
Month January February
Amount $ 40,000 55,000
Units Produced 40,000 60,000
January February
$ 84,000 126,000
40,000 60,000
Which type of costs are these? a. Delivery costs and utilities are both variable. b. Delivery costs and utilities are both mixed. c. Utilities are mixed and delivery costs are variable. d. Delivery costs are mixed and utilities are variable. Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods
42.
An increase in the level of activity will have the following effects on unit costs for variable and fixed costs: Unit Variable Cost Unit Fixed Cost a. Increases Decreases b. Remains constant Remains constant c. Decreases Remains constant d. Remains constant Decreases
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
43.
A fixed cost is a cost which a. varies in total with changes in the level of activity. b. remains constant per unit with changes in the level of activity. c. varies inversely in total with changes in the level of activity. d. remains constant in total with changes in the level of activity.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 44.
22 - 9
Fixed costs normally will not include a. property taxes. b. direct labor. c. supervisory salaries. d. depreciation on buildings and equipment.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
45.
The increased use of automation and less use of the work force in companies has caused a trend towards an increase in a. both variable and fixed costs. b. fixed costs and a decrease in variable costs. c. variable costs and a decrease in fixed costs. d. variable costs and no change in fixed costs.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics
46.
Cost behavior analysis is a study of how a firm's costs a. relate to competitors' costs. b. relate to general price level changes. c. respond to changes in the level of business activity. d. respond to changes in the gross national product.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
47.
Cost behavior analysis applies to a. retailers. b. wholesalers. c. manufacturers. d. all entities.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
48.
If a firm increases its activity level, a. costs should remain the same. b. most costs will rise. c. no costs will remain the same. d. some costs will change, others will remain the same.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
49.
An activity index might be referred to as a cost a. driver. b. multiplier. c. element. d. correlation.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 10 Test Bank for Accounting Principles, Tenth Edition 50.
Cost activity indexes might help classify costs as a. temporary. b. permanent. c. variable. d. transient.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
51.
Which of the following is not a cost classification? a. Mixed b. Multiple c. Variable d. Fixed
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
52.
If the activity level increases 10%, total variable costs will a. remain the same. b. increase by more than 10%. c. decrease by less than 10%. d. increase 10%.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
53.
Which of the following costs are variable? Cost 10,000 Units 30,000 Units 1. $100,000 $300,000 2. 40,000 240,000 3. 90,000 90,000 4. 50,000 150,000 a. 1 and 2 b. 1 and 4 c. only 1 d. only 2
Ans: B, SO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods
54.
Changes in activity have a(n) _________ effect on fixed costs per unit. a. positive b. negative c. inverse d. neutral
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55.
Which of the following is not a fixed cost? a. Direct materials b. Depreciation c. Lease charge d. Property taxes
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 56.
22 - 11
Why is identification of a relevant range important? a. It is required under GAAP. b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis. c. It directly impacts the number of units of product a customer buys. d. It is a cost that is incurred by a company that must be accounted for.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
57.
The relevant range of activity refers to the a. geographical areas where the company plans to operate. b. activity level where all costs are curvilinear. c. levels of activity over which the company expects to operate. d. level of activity where all costs are constant.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58.
Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion? a. Labor specialization b. Overtime wages c. Total variable costs are constant within the relevant range d. Availability of quantity discounts
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
59.
Firms operating at 100% capacity a. are common. b. are the exception rather than the rule. c. have no fixed costs. d. have no variable costs.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Performance Measurement
60.
Which of the following would be the least controllable fixed costs? a. Property taxes b. Rent c. Research and development d. Management training programs
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
61.
Which one of the following is a name for the range over which a company expects to operate? a. Mixed range b. Fixed range c. Variable range d. Relevant range
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 12 Test Bank for Accounting Principles, Tenth Edition 62.
If graphed, fixed costs that behave in a curvilinear fashion resemble a(n) a. S-curve. b. inverted S-curve. c. straight line. d. stair-step pattern.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
63.
The graph of variable costs that behave in a curvilinear fashion will a. approximate a straight line within the relevant range. b. be sharply kinked on both sides of the relevant range. c. be downward sloping. d. be a stair-step pattern.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
64.
Townsend, Inc. collected the following production data for the past month: Units Produced 1,600 1,300 1,500 1,100
Total Cost $22,000 19,000 22,500 16,500
If the high-low method is used, what is the monthly total cost equation? a. Total cost = $4,400 + $11/unit b. Total cost = $5,500 + $10/unit c. Total cost = $0 + $15/unit d. Total cost = $3,300 + $12/unit Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
65.
A mixed cost contains a. a variable element and a fixed element. b. both selling and administrative costs. c. both retailing and manufacturing costs. d. both operating and nonoperating costs.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
At the high level of activity in November, 7,000 machine hours were run and power costs were $16,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $8,000. Using the high-low method, the estimated fixed cost element of power costs is a. $16,000. b. $8,000. c. $4,800. d. $11,200.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 67.
22 - 13
Simon Company's high and low level of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $104,000 in May and $40,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units. a. $90,000 b. $96,000 c. $78,000 d. $80,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
68.
Which of the following is not true about the graph of a mixed cost? a. It is possible to determine the amount of the fixed cost from the graph. b. There is a total cost line on the graph. c. The fixed cost portion of the graph is the same amount at all levels of activity. d. The variable cost portion of the graph is rectangular in shape.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Performance Measurement
69.
Which of the following is not a mixed cost? a. Car rental fee b. Electricity c. Depreciation d. Telephone Expense
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
70.
In using the high-low method, the fixed cost a. is determined by subtracting the total cost at the high level of activity from the total cost at the low activity level. b. is determined by adding the total variable cost to the total cost at the low activity level. c. is determined before the total variable cost. d. may be determined by subtracting the total variable cost from either the total cost at the low or high activity level.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
71.
If Whisper Wings Airlines cuts its domestic fares by 30%, a. its fixed costs will decrease. b. profit will increase by 30%. c. a profit can only be earned by decreasing the number of flights. d. a profit can be earned either by increasing the number of passengers or by decreasing variable costs.
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 14 Test Bank for Accounting Principles, Tenth Edition 72.
In applying the high-low method, which months are relevant? Month Miles Total Cost January 80,000 $ 96,000 February 50,000 80,000 March 70,000 94,000 April 90,000 130,000 a. b. c. d.
January and February January and April February and April February and March
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
73.
In applying the high-low method, what is the unit variable cost? Month January February March April a. b. c. d.
Miles 80,000 50,000 70,000 90,000
Total Cost $144,000 120,000 141,000 195,000
$2.16 $1.88 $2.40 Cannot be determined from the information given.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
74.
In applying the high-low method, what is the fixed cost? Month January February March April a. b. c. d.
Miles 80,000 50,000 70,000 90,000
Total Cost $144,000 120,000 141,000 195,000
$26,250 $54,000 $21,000 $75,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
75.
For analysis purposes, the high-low method usually produces a(n) a. reasonable estimate. b. precise estimate. c. overstated estimate. d. understated estimate.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 76.
22 - 15
The high-low method is criticized because it a. is not a graphical method. b. is a mathematical method. c. ignores much of the available data by concentrating on only the extreme points. d. doesn't provide reasonable estimates.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
77.
The high-low method is often employed in analyzing a. fixed costs. b. mixed costs. c. variable costs. d. conversion costs.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
78.
Richert Company's activity for the first three months of 2012 are as follows: January February March
Machine Hours 2,100 2,600 2,900
Electrical Cost $3,600 $4,350 $4,800
Using the high-low method, how much is the cost per machine hour? a. $1.50 b. $2.25 c. $1.69 d. $1.34 Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
79.
Tommy’s Seafood used high-low data from June and July to determine its variable cost of $18 per unit. Additional information follows: Month June July
Units produced 2,000 1,000
Total costs $48,000 30,000
If Tommy’s produces 2,300 units in August, how much is its total cost expected to be? a. $12,000 b. $59,400 c. $41,400 d. $53,400 Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
80.
In CVP analysis, the term "cost" a. includes only manufacturing costs. b. means cost of goods sold. c. includes manufacturing costs plus selling and administrative expenses. d. excludes all fixed manufacturing costs.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 16 Test Bank for Accounting Principles, Tenth Edition 81.
Which one of the following is not an assumption of CVP analysis? a. All units produced are sold. b. All costs are variable costs. c. Sales mix remains constant. d. The behavior of costs and revenues are linear within the relevant range.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
82.
CVP analysis does not consider a. level of activity. b. fixed cost per unit. c. variable cost per unit. d. sales mix.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
83.
Which of the following is not an underlying assumption of CVP analysis? a. Changes in activity are the only factors that affect costs. b. Cost classifications are reasonably accurate. c. Beginning inventory is larger than ending inventory. d. Sales mix is constant.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
84.
CVP analysis is not important in a. calculating depreciation expense. b. setting selling prices. c. determining the product mix. d. utilizing production facilities.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
85.
To which function of management is CVP analysis most applicable? a. Planning b. Motivating c. Directing d. Controlling
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
86.
Keith Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $14 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. How much is the contribution margin ratio? a. 20% b. 30% c. 70% d. 80%
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 87.
22 - 17
Contribution margin a. is always the same as gross profit margin. b. excludes variable selling costs from its calculation. c. is calculated by subtracting total manufacturing costs per unit from sales revenue per unit. d. equals sales revenue minus variable costs.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
88.
If a company had a contribution margin of $750,000 and a contribution margin ratio of 40%, total variable costs must have been a. $1,125,000. b. $450,000. c. $1,875,000. d. $300,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
89.
Which of the following would not be an acceptable way to express contribution margin? a. Sales minus variable costs b. Sales minus unit costs c. Unit selling price minus unit variable costs d. Contribution margin per unit divided by unit selling price
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
90.
A company has contribution margin per unit of $60 and a contribution margin ratio of 40%. What is the unit selling price? a. $100.00 b. $150.00 c. $24.00 d. Cannot be determined.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
91.
Sales are $500,000 and variable costs are $300,000. What is the contribution margin ratio? a. 67% b. 40% c. 60% d. Cannot be determined because amounts are not expressed per unit.
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
92.
Harvey’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $33,000. If sales are expected to increase $60,000, by how much will the company's net income increase? a. $27,000 b. $42,000 c. $18,000 d. $9,000
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
22 - 18 Test Bank for Accounting Principles, Tenth Edition 93.
Fessler, Inc. has a product with a selling price per unit of $200, the unit variable cost is $90, and the total monthly fixed costs are $300,000. How much is Fessler’s contribution margin ratio? a. 55% b. 45% c. 150% d. 222%
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
94.
Gibbs Company has a contribution margin of $300,000 and a contribution margin ratio of 30%. How much are total variable costs? a. $90,000 b. $700,000 c. $210,000 d. $1,000,000
Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
95.
Isakson Company has a contribution margin per unit of $21 and a contribution margin ratio of 60%. How much is the selling price of each unit? a. $35.00 b. $52.50 c. $12.60 d. Cannot be determined without more information.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
96.
A division sold 100,000 calculators during 2012: Sales Variable costs: Materials Order processing Billing labor Selling expenses Total variable costs Fixed costs
$2,000,000 $380,000 150,000 110,000 60,000 700,000 1,000,000
How much is the contribution margin per unit? a. $2 b. $7 c. $17 d. $13 Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
97.
At the break-even point of 2,000 units, variable costs are $110,000, and fixed costs are $64,000. How much is the selling price per unit? a. $87 b. $23 c. $32 d. Not enough information
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 98.
22 - 19
Hess, Inc. sells a product with a contribution margin of $12 per unit, fixed costs of $148,800, and sales for the current year of $200,000. How much is Hess’s break-even point? a. 9,200 units b. $51,200 c. 12,400 units d. 4,267 units
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
99.
Sutton Company produces flash drives for computers, which it sells for $20 each. The variable cost to make each flash drive is $13. During April, 700 drives were sold. Fixed costs for April were $2 per unit for a total of $1,400 for the month. How much is the monthly break-even level of sales in dollars for Sutton Company? a. $200 b. $4,000 c. $14,000 d. $8,400
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
100.
Sonoma Winery has fixed costs of $15,000 per year. Its warehouse sells wine with variable costs of 80% of its unit selling price. How much in sales does Sonoma need to break even per year? a. $12,000 b. $3,000 c. $18,750 d. $75,000
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
101.
Fallow-Hawke is a nonprofit organization that captures stray deer bewildered within residential communities. Fixed costs are $15,000. The variable cost of capturing each deer is $10.00 each. Fallow-Hawke is funded by a local philanthropy in the amount of $48,000 for 2012. How many deer can Fallow-Hawke capture during 2012? a. 3,300 b. 4,800 c. 6,300 d. 3,000
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
102.
At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are $32,000. How much is the selling price per unit? a. $43.50 b. $11.50 c. $16.00 d. $27.50
Ans: A, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 20 Test Bank for Accounting Principles, Tenth Edition 103.
A company has total fixed costs of $160,000 and a contribution margin ratio of 20%. The total sales necessary to break even are a. $640,000. b. $800,000. c. $200,000. d. $180,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
104.
A company sells a product which has a unit sales price of $5, unit variable cost of $3 and total fixed costs of $180,000. The number of units the company must sell to break even is a. 90,000 units. b. 36,000 units. c. 360,000 units. d. 60,000 units.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
105.
The break-even point is where a. total sales equal total variable costs. b. contribution margin equals total fixed costs. c. total variable costs equal total fixed costs. d. total sales equal total fixed costs.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
106.
The break-even point cannot be determined by a. computing it from a mathematical equation. b. computing it using contribution margin. c. reading the prior year's financial statements. d. deriving it from a CVP graph.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
107.
Select the correct statement concerning the cost-volume-profit graph at right: a. The point identified by "B" is the breakeven point. b. Line F is the variable cost line. c. At point B, profits equal total costs. d. Line E is the total cost line.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
108.
Fixed costs are $600,000 and the variable costs are 75% of the unit selling price. What is the break-even point in dollars? a. $1,400,000 b. $1,800,000 c. $2,400,000 d. $800,000
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 109.
22 - 21
Fixed costs are $2,400,000 and the contribution margin per unit is $150. What is the break-even point? a. $6,000,000 b. $16,000,000 c. 6,000 units d. 16,000 units
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
110.
Starr Company has the following data: Variable costs are 60% of the unit selling price. The contribution margin ratio is 40%. The contribution margin per unit is $500. The fixed costs are $300,000. Which of the following does not express the break-even point? a. $300,000 + .60X = X b. $300,000 + .40X = X c. $300,000 ÷ $500 = X d. $300,000 ÷ .40 = X
Ans: B, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
111.
A CVP graph does not include a a. variable cost line. b. fixed cost line. c. sales line. d. total cost line.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
112.
Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $270,000. What is Boswell contribution margin ratio? a. 68%. b. 45%. c. 32%. d. 55%.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
113.
Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $270,000. What is Boswell break-even point in units? a. 24,546. b. 30,000. c. 38,334. d. 42,188.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 22 Test Bank for Accounting Principles, Tenth Edition 114.
Winrow Company sells radios for $50 per unit. The fixed costs are $420,000 and the variable costs are 60% of the selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $100,000 and variable costs will be 50% of the selling price. The new break-even point in units is: a. 21,000 b. 20,800 c. 20,600 d. 16,800
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
115.
Norman Company sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $90,000. What sales are needed by Norman to break even? a. $120,000. b. $225,000. c. $270,000. d. $360,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
116.
Norman Company sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $90,000. How many MP3 players must Norman sell to earn net income of $210,000? a. 15,000. b. 5,250. c. 3,750. d. 4,500.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
117.
Fleming Company sells a product for $50 per unit. The fixed costs are $735,000 and the variable costs are 60% of the selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $175,000 and variable costs will be 50% of the selling price. The new break-even point in units is: a. 36,750. b. 36,400. c. 36,050. d. 29,400.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
118.
Blanton Company is planning to sell 800,000 units for $1.50 per unit. The contribution margin ratio is 20%. If Blanton will break even at this level of sales, what are the fixed costs? a. $240,000. b. $560,000. c. $800,000. d. $960,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 119.
22 - 23
Dempster Company reported the following results from the sale of 6,000 units in May: sales $300,000, variable costs $180,000, fixed costs $90,000, and net income $30,000. Assume that Dempster increases the selling price by 10% on June 1. How many units will have to be sold in June to maintain the same level of net income? a. 4,800. b. 5,160. c. 5,400. d. 6,000.
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
120.
Brown Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $4.90 per unit for a total of $4,900 for the month. If variable costs decrease by 10%, what happens to the break-even level of units per month for Brown Company? a. It is 10% higher than the original break-even point. b. It decreases about 14 units. c. It decreases about 35 units. d. It depends on the number of units the company expects to produce and sell.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
121.
A company desires to sell a sufficient quantity of products to earn a profit of $300,000. If the unit sales price is $20, unit variable cost is $12, and total fixed costs are $600,000, how many units must be sold to earn net income of $300,000? a. 168,750 units b. 112,500 units c. 90,000 units d. 67,500 units
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
122.
Kohler Corporation sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs. Which of the following is true about the break-even point in units? a. It will remain unchanged. b. It will decrease. c. It will increase. d. It cannot be determined from the information provided.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
123.
How much sales are required to earn a target net income of $160,000 if total fixed costs are $200,000 and the contribution margin ratio is 40%? a. $500,000 b. $810,000 c. $900,000 d. $400,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 24 Test Bank for Accounting Principles, Tenth Edition 124.
Variable costs for Hogan, Inc. are 25% of sales. Its selling price is $60 per unit. If Hogan sells one unit more than break-even units, how much will profit increase? a. $45 b. $15 c. $20 d. $240
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
125.
A company requires $1,360,000 in sales to meet its net income target. Its contribution margin is 30%, and fixed costs are $240,000. What is the target net income? a. $408,000 b. $312,000 c. $560,000 d. $168,000
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
126.
Casey Company has fixed costs of $2,500,000 and variable costs are 40% of sales. What are the required sales if Casey Company desires net income of $250,000? a. $4,583,333 b. $4,166,667 c. $6,875,000 d. $6,250,000
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
127.
Eusey Company requires sales of $2,000,000 to cover its fixed costs of $400,000 and to earn net income of $500,000. What percent are variable costs of sales? a. 25% b. 55% c. 20% d. 45%
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
128.
Fletcher, Inc. produces hair brushes. The selling price is $20 per unit and the variable costs are $8 per brush. Fixed costs per month are $4,800. If Fletcher sells 20 more units beyond breakeven, how much does profit increase as a result? a. $240 b. $400 c. $160 d. $800
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 129.
22 - 25
The following monthly data are available for Heffernan, Inc. which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $84,000; Actual sales for the month of June, 4,000 units. How much is the margin of safety for the company for June? a. $84,000 b. $42,000 c. $126,000 d. $1,000
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
130.
Small Tots Toys has actual sales of $400,000 and a break-even point of $300,000. How much is its margin of safety ratio? a. 25% b. 75% c. 133% d. 33%
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
131.
Kress, Inc. wants to sell a sufficient quantity of products to earn a profit of $60,000. If the unit sales price is $10, unit variable cost is $8, and total fixed costs are $120,000, how many units must be sold to earn income of $60,000? a. 90,000 units b. 60,000 units c. 22,500 units d. 900,000 units
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
132.
How much sales are required to earn a target income of $160,000 if total fixed costs are $200,000 and the contribution margin ratio is 40%? a. $600,000 b. $400,000 c. $900,000 d. $660,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
133.
Maxfield Company has fixed costs of $300,000 and variable costs are 60% of sales. How much will Maxfield Company report as sales when its net income equals $30,000? a. $825,000 b. $550,000 c. $780,000 d. $198,000
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 26 Test Bank for Accounting Principles, Tenth Edition 134.
Parvin Company produces flash drives for computers, which it sells for $20 each. Each flash drive costs $8 of variable costs to make. During April, 700 drives were sold. Fixed costs for April were $4 per unit for a total of $2,800 for the month. How much does Parvin’s operating income increase for each $1,000 increase in revenue per month? a. $600 b. $400 c. $14,000 d. Not enough information to determine the answer.
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
135.
McCauley Bagpipes produces two models: Model 24 has sales of 500 units with a contribution margin of $40 each; Model 26 has sales of 350 units with a contribution margin of $50 each. If sales of Model 26 increase by 100 units, how much will profit change? a. $5,000 increase b. $17,500 increase c. $22,500 increase d. $35,000 increase
Ans: A, SO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
136.
Noble Company produces only one product. Monthly fixed expenses are $12,000, monthly unit sales are 2,500, and the unit contribution margin is $10. How much is monthly net profit? a. $25,000 b. $37,000 c. $0 d. $13,000
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
137.
The following monthly data are available for Lyle, Inc. which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $84,000; Actual sales for the month of June, 4,000 units. How much is the margin of safety for the company for June? a. $28,000 b. $42,000 c. $25,200 d. $1,000
Ans: B, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
138.
The amount by which actual or expected sales exceeds break-even sales is referred to as a. contribution margin. b. unanticipated profit. c. margin of safety. d. target net income.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 139.
22 - 27
In evaluating the margin of safety, the a. break-even point is not relevant. b. higher the margin of safety ratio, the greater the margin of safety. c. higher the dollar amount, the lower the margin of safety. d. higher the margin of safety ratio, the lower the fixed costs.
Ans: B, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
140.
The following information is available for Mathews Company: Sales Cost of goods sold
$550,000 390,000
Total fixed expenses Total variable expenses
$150,000 360,000
A CVP income statement would report a. gross profit of $160,000. b. contribution margin of $400,000. c. gross profit of $190,000. d. contribution margin of $190,000. Ans: D, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
141.
Which is the true statement? a. In a CVP income statement, costs and expenses are classified only by function. b. The CVP income statement is prepared for both internal and external use. c. The CVP income statement shows contribution margin instead of gross profit. d. In a traditional income statement, costs and expenses are classified as either variable or fixed.
Ans: C, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
142.
The equation which reflects a CVP income statement is a. Sales = Cost of goods sold + Operating expenses + Net income. b. Sales + Fixed costs = Variable costs + Net income. c. Sales – Variable costs + Fixed costs = Net income. d. Sales – Variable costs – Fixed costs = Net income.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
143.
The CVP income statement a. is distributed internally and externally. b. classifies costs by functions. c. discloses contribution margin in the body of the statement. d. will reflect a different net income than the traditional income statement.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
144.
Paulsen Company sells 100,000 units for $13 a unit. Fixed costs are $350,000 and net income is $250,000. What should be reported as variable expenses in the CVP income statement? a. $600,000. b. $700,000. c. $950,000. d. $1,050,000.
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 28 Test Bank for Accounting Principles, Tenth Edition 145.
In Henderson Company, 50,000 units are produced and 40,000 units are sold. Variable manufacturing costs per unit are $8 and fixed manufacturing costs are $120,000. The cost of the ending finished goods inventory under each costing approach is: Absorption Costing a. $104,000 b. 104,000 c. 112,000 d. 1,120,000
Variable Costing $ 80,000 100,000 80,000 100,000
Ans: A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
146. Under variable costing, fixed manufacturing costs are a. charged to the product. b. not reported in the income statement. c. considered to be a period cost. d. reported on the balance sheet as a prepayment.
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
147. The costing approach that charges all manufacturing costs to the product is referred to as a. variable costing. b. contribution margin costing. c. direct costing. d. absorption costing.
Ans: D, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
148. If more units are produced than are sold during a period, variable costing income a. will be greater than absorption costing income. b. will be less than absorption costing income. c. will be the same as absorption costing income. d. may be either greater or less than absorption costing income.
Ans: B, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
149.
Within the relevant range, the variable cost per unit a. differs at each activity level. b. remains constant at each activity level. c. increases as production increases. d. decreases as production increases.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
150.
An example of a mixed cost is a. direct materials. b. supervisory salaries. c. utility costs. d. property taxes.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit 151.
22 - 29
In the Gabbana Company, maintenance costs are a mixed cost. At the low level of activity (160 direct labor hours), maintenance costs are $600. At the high level of activity (400 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost? a. b. c. d.
Variable Cost Per Unit $2.08 $2.08 $2.75 $3.75
Total Fixed Cost $268 $500 $220 $400
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
152.
Cost-volume-profit analysis includes all of the following assumptions except a. the behavior of costs is curvilinear throughout the relevant range. b. costs can be classified accurately as either variable or fixed. c. changes in activity are the only factors that affect costs. d. all units produced are sold.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
153.
The contribution margin ratio increases when a. fixed costs increase. b. fixed costs decrease. c. variable costs as a percentage of sales decrease. d. variable costs as a percentage of sales increase.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
154.
Contribution margin is a. the amount of revenue remaining after deducting fixed costs. b. available to cover fixed costs and contribute to income for the company. c. sales less fixed costs. d. unit selling price less unit fixed costs.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
155.
Dolce Company is planning to sell 400,000 hammers for $3 per unit. The contribution margin ratio is 20%. If Dolce will break even at this level of sales, what are the fixed costs? a. $240,000 b. $560,000 c. $800,000 d. $960,000
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
156.
At the break-even point, a. sales equal total variable costs. b. contribution margin equals total variable costs. c. contribution margin equals total fixed costs. d. sales equal total fixed costs.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
22 - 30 Test Bank for Accounting Principles, Tenth Edition 157.
Lagerfield Company reported the following results from the sale of 5,000 hammers in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. Assume that Lagerfield increases the selling price of hammers by 10% on June 1. How many hammers will have to be sold in June to maintain the same level of net income? a. 4,000 b. 4,300 c. 4,500 d. 5,000
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
158.
Required sales in dollars to meet a target net income is computed by dividing a. fixed costs plus target net income by contribution margin per unit. b. variable costs plus target net income by contribution margin per unit. c. fixed costs plus target net income by contribution margin ratio. d. total costs plus target net income by contribution margin ratio.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
159.
Gaultier Company had actual sales of $800,000 when break-even sales were $600,000. What is the margin of safety ratio? a. 25% b. 33% c. 67% d. 75%
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
160.
Givenchy Company sells 100,000 wrenches for $18 per unit. Fixed costs are $525,000 and net income is $375,000. What should be reported as variable expenses in the CVP income statement? a. $810,000 b. $900,000 c. $1,425,000 d. $1,275,000
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
161. Hermes Company sales are $1,200,000, cost of goods under absorption costing is $900,000, and total operating expenses are $180,000. If cost of good sold is 70% variable and total operating expenses are 60% fixed, what is the contribution margin under variable costing? a. $570,000 b. $498,000 c. $462,000 d. $390,000
Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 31
Answers to Multiple Choice Questions Item
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
Ans.
b c a d d d b b c d d a c b d b c a
Item
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
Ans.
Item
b c c b a d d a a a c d d c d d c b
74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
Ans.
a a c b a d c b b c a a b d a b b b
Item
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
Ans.
d a b a d a c b d a a b a b c d c d
Item
Ans.
110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127.
b a b b b c a b a a b b c c a d a b
Item
128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. a 144. a 145.
Ans.
a b a a c a a a d b c b d c d c b a
Item a
146. 147. a 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. a
Ans.
c d b b c a a c b a c a c a b b
BRIEF EXERCISES BE 162 Nease Company accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost Miles Driven Total Cost January 10,000 $15,000 March 9,000 $12,500 February 8,000 $14,500 April 7,500 $12,000 Instructions Compute the variable and fixed cost elements using the high-low method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 162
(4 min.)
$15,000 − $12,000 ————————— = $1.20 = variable cost per mile 10,000 − 7,500 $1.20 (10,000) + FC = $15,000 Fixed cost = $3,000 Or $1.20 (7,500) + FC = $12,000 Fixed cost = $3,000
FOR INSTRUCTOR USE ONLY
22 - 32 Test Bank for Accounting Principles, Tenth Edition BE 163 Ace Company makes 2 products, footballs and baseballs. Additional information follows: Units Sales Variable costs Fixed costs Net income
Footballs 4,000 $60,000 36,000 9,000 $15,000
Baseballs 2,500 $25,000 7,000 9,000 $ 9,000
Profit per unit
$3.75
$3.60
Instructions Ace has unlimited demand for both products. Therefore, which product should Ace tell his sales people to emphasize? Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 163
(5 min.)
Contribution margin per unit: [$60,000 – $36,000] ÷ 4,000 = $6 [$25,000 – $7,000] ÷ 2,500 = $7.20
Footballs: Baseballs:
Ace should tell his sales people to sell more baseballs due to the higher contribution margin per unit. BE 164 Determine the missing amounts.
1. 2. 3.
Unit Selling Price
Unit Variable Costs
$300 $600 E.
$195 C. F.
Contribution Margin per Unit A. $150 $480
Contribution Margin Ratio B. D. 40%
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 164
(4 min.)
A. $300 – $195 = $105 B. $105 ÷ $300 = 35% C. $600 – $150 = $450 D. $150 ÷ $600 = 25% E. $480 ÷ 40% = $1,200 F. If 40% = CM ratio, then 60% = variable cost percentage; $1,200 × 60% = $720 Or $1,200 – $480 = $720
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 33
BE 165 Danny’s Fish Camp has sales of $1,500,000 for the first quarter of 2012. In making the sales, the company incurred the following costs and expenses. Product costs Selling expenses Administrative expenses
Variable $500,000 100,000 80,000
Fixed $550,000 75,000 67,000
Instructions Calculate net income under CVP for 2012. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 165
(4 min.)
$1,500,000 − [$500,000 + $100,000 + $80,000] − [$550,000 + $75,000 + $67,000] = $128,000 BE 166 Mitchell Cabinets has fixed costs totaling $132,000. Its contribution margin per unit is $1.50, and the selling price is $5.50 per unit. Instructions Compute the break-even point in units. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 166
(3 min.)
$1.50X – $132,000 = 0 X = 88,000 units BE 167 Bess Donuts sells boxes of donuts each with a variable cost percentage of 35%. Its fixed costs are $54,600 per year. Instructions Determine the sales dollars Bess needs to break even per year. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 167
(3 min.)
Contribution margin ratio = 100% – 35% = 65% .65x – $54,600 = 0 X = $84,000 of sales dollars
FOR INSTRUCTOR USE ONLY
22 - 34 Test Bank for Accounting Principles, Tenth Edition BE 168 Dieker Goods Company has a unit selling price of $500, variable cost per unit $300, and fixed costs of $190,000. Instructions Compute the break-even point in units and in sales dollars. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 168
(4 min.)
$500X − $300X − $190,000 = 0 BEP in units = X = 950 units BEP in dollars = 950 units × $500 = $475,000 BE 169 Fillmore Cookery reported actual sales of $2,000,000, and fixed costs of $350,000. The contribution margin ratio is 25%. Instructions Compute the margin of safety in dollars and the margin of safety ratio. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 169
(4 min.)
BEP in dollars: $350,000 ÷ 25% = $1,400,000 Margin of safety in dollars: $2,000,000 − $1,400,000 = $600,000 Margin of safety ratio: $600,000 ÷ $2,000,000 = 30% BE 170 The following monthly data are available for Kratzberg, Inc. which produces only one product which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses are $16,000. Actual sales for the month of May totaled 2,000 units. Instructions Compute the margin of safety in units and dollars for the company for May. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 170
(4 min.)
BEP in units: $18X - $8X – $16,000 = 0 BEP in units = X = 1,600 units Units at current sales level = 2,000 Margin of safety = (2,000 – 1,600) × $18 = $7,200 Sales can drop by $7,200 before the company incurs a loss
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 35
BE 171 At break-even point, a company sells 1,200 widgets. Its selling price is $6 per widget, variable cost is $2 per widget, and its fixed cost is $4 per widget. Instructions If it sells 200 additional widgets, determine the company’s incremental profit.
Solution 171
(4 min.)
$6(1,200) – $2(1,200) – X = 0 Total fixed costs = X = $4,800 Incremental profit = 200 × ($6 – $2) = $800 Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
EXERCISES Ex. 172 Hughes Company manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The Utilities and Maintenance are mixed costs. The fixed portions of these costs are $300 and $200, respectively. Costs Incurred Production in Units 2,000 4,000 Production Costs a. Direct Materials $ 4,000 ? b. Direct Labor 16,000 ? c. Utilities 1,000 ? d. Rent 3,000 ? e. Indirect Labor 4,200 ? f. Supervisory Salaries 1,500 ? g. Maintenance 900 ? h. Depreciation 2,500 ? Instructions Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge of cost behavior to determine which of the other costs are fixed or variable. Ans: N/A, SO: 1,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 36 Test Bank for Accounting Principles, Tenth Edition Solution 172
(12–18 min.) Costs Incurred
Production in Units Production Costs a. Direct Materials b. Direct Labor c. Utilities d. Rent e. Indirect Labor f. Supervisory Salaries g. Maintenance h. Depreciation a. b. c.
Variable Variable Mixed
d. e. f. g.
Fixed Variable Fixed Mixed
h.
Fixed
2,000
4,000
$ 4,000 16,000 1,000 3,000 4,200 1,500 900 2,500
$ 8,000 32,000 1,700 3,000 8,400 1,500 1,600 2,500
$4,000 ÷ 2,000 = $2.00 per unit; 4,000 × $2.00 = $8,000 $16,000 ÷ 2,000 = $8.00 per unit; 4,000 × $8.00 = $32,000 $1,000 – $300 = $700; $700 ÷ 2,000 = $.35 per unit of variable costs; 4,000 × $.35 = $1,400 + $300 (fixed) = $1,700 $3,000 $4,200 ÷ 2,000 = $2.10 per unit; 4,000 × $2.10 = $8,400 $1,500 $900 – $200 = $700 variable portion; $700 ÷ 2,000 = $.35 4,000 × $.35 = $1,400 + $200 (fixed portion) = $1,600 $2,500
Ex. 173 Sam Hummel is considering opening a Kwik Oil Change Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, Wages $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Kwik Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows: Number of Oil Changes 4,000 6,000 9,000 12,000 14,000
Utility Costs $ 6,000 $ 7,300 $ 9,600 $12,600 $15,000
Mr. Hummel anticipates that he can provide the oil change service with a filter at $25.00 each. Instructions (a) Using the high-low method, determine variable costs per unit and total fixed costs. (b) Determine the break-even point in number of oil changes and sales dollars. (c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of $10,000, assuming fixed costs are $32,000 and the contribution margin per unit is $8. Ans: N/A, SO: 1,3,6,8,, Bloom: AP, Difficulty: Hard, Min: 19, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit Solution 173 (a)
22 - 37
(19–24 min.)
Separation of mixed costs: ($15,000 – $6,000) $9,000 Change in cost/Change in quantity: ————————— = ——— = $.90 per oil change (14,000 – 4,000) 10,000 Variable costs: Oil (5 quarts × $2.00) Filter Franchise fee Utility costs (variable) Total variable
$10.00 3.00 1.10 .90 $15.00
Fixed costs: Rent Depreciation Wages Utility costs Total
$ 9,200 7,000 16,400 2,400* $35,000
*$6,000 – (4,000 × .90) = $2,400 (b) (1) Break-even oil changes in units: Fixed costs Contribution margin per unit
=
$35,000 $10.00*
= 3,500 oil changes
=
$35,000 .40
= $87,500
(2) Break-even sales in dollars: Fixed costs Contribution margin ratio
*Selling price per unit (a) Variable cost per unit Contribution margin per unit (b) Contribution margin ratio (b) ÷ (a) (c)
Fixed costs + Net income Contribution margin per unit
$25.00 15.00 $10.00 40% =
$32,000 + $10,000 $8
= 5,250 oil changes
Ex. 174 Kate Locke operates a bed and breakfast hotel in a resort area in the Smoky Mountains. Depreciation on the hotel is $60,000 per year. Kate employs a maintenance person at an annual salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10.00 per person per night and the cost of food which is $5.00 per person per night.
FOR INSTRUCTOR USE ONLY
22 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 174
(Cont.)
Instructions (a) Determine the number of rentals and the sales revenue Kate needs to break even using the contribution margin technique. (b) If the current level of rentals is 3,500, by what percentage can rentals decrease before Kate has to worry about having a net loss? (c) Kate is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3.00 for food costs per person per night. Kate feels she can increase the room rate to $66 per person per night. Determine the number of rentals and the sales revenue Kate needs to break even if the changes are made. Ans: N/A, SO: 1,3,5,6,, Bloom: AN, Difficulty: Hard, Min: 22, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 174 (a)
(22–27 min.)
Variable costs per person per night: Laundry and cleaning $10.00 Breakfast 5.00 Total variable $15.00
Fixed costs: Depreciation Maintenance Cleaning Real estate tax Total fixed
Break-even number of persons per night rentals: Fixed costs Contribution margin per person per night *Sales price per unit Variable cost per unit Contribution margin per unit
=
$126,000 $45*
= 2,800 rentals
$60.00 15.00 $45.00
Break-even sales in dollars: Fixed costs Contribution margin ratio
=
$126,000 75%**
= $168,000
**Contribution margin per unit (a) $45 Sales price per unit (b) $60 Contribution margin ratio (a) ÷ (b) = 75% (b)
Margin of safety:
Actual rentals - Break-even rentals Actual rentals
=
(3,500 – 2,800) 3,500
= 20%
FOR INSTRUCTOR USE ONLY
$ 60,000 32,000 24,000 10,000 $126,000
Cost-Volume-Profit Solution 174
(c)
22 - 39
(Cont.)
Variable costs per person per night: Laundry and cleaning $10.00 Breakfast 8.00 Total variable $18.00
Fixed costs: Depreciation Maintenance Cleaning Real estate tax Total fixed
$ 60,000 32,000 24,000 10,000 $126,000
Break-even number of persons per night rentals: Fixed costs Contribution margin per person per night *Sales price per unit Variable cost per unit Contribution margin per unit
=
$126,000 $48*
= 2,625 rentals
$66 18 $48
Break-even point in sales dollars: 2,625 × $66 = $173,250 Ex. 175 Keys Company accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost May 10,000 $17,000 June 8,000 13,500 July 9,000 14,400 August 7,000 12,500 Instructions Compute the variable and fixed cost elements using the high-low method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 175
(5 min.)
$17,000 – $12,500 10,000 – 7,000
= $1.50 = variable cost per mile
($1.50 x 10,000) + fixed cost = $17,000 Fixed cost = $2,000
FOR INSTRUCTOR USE ONLY
22 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 176 Nielsen Company gathered the following information on power costs and factory machine usage for the last six months: Month January February March April May June
Power Cost $24,400 29,200 29,000 22,340 19,900 14,900
Factory Machine Hours 13,900 17,600 16,800 13,200 11,600 6,600
Instructions Using the high-low method of analyzing costs, answer the following questions and show computations to support your answers. (a)
What is the estimated variable portion of power costs per factory machine hour?
(b)
What is the estimated fixed power cost each month?
(c)
If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power cost for July?
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 176 (a)
(10–15 min.)
Variable power cost per factory machine hour:
$29,200 – $14,900 17,600 – 6,600
=
$14,300 11,000
= $1.30 per factory machine hour
(b) Monthly fixed power cost:
Total costs Less: Variable costs 17,600 × $1.30 6,600 × $1.30 Total fixed costs (c)
High (February) $29,200
Low (June) $14,900
22,880 $ 6,320
Estimated total power costs for July: Variable cost (10,000 × $1.30) Fixed cost Total estimated power cost
8,580 $ 6,320
$13,000 6,320 $19,320
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 41
Ex. 177 The Olney Clinic has the following monthly telephone records and costs: Calls 2,000 1,500 2,200 2,500 2,300 1,700
Costs $2,400 2,000 2,600 2,800 2,700 2,200
Instructions Identify the fixed and variable cost elements using the high-low method. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 177
(10–15 min.)
High calls minus low calls: 2,500 – 1,500 = 1,000 Change in cost: $2,800 – $2,000 = $800 $800 ÷ 1,000 = $.80 variable cost per call High $2,800
Total Cost Less: Variable costs 2,500 × $.80 1,500 × $.80 Total fixed costs
Low $2,000
2,000 $ 800
1,200 $ 800
Ex. 178 Determine the missing amounts. Unit Selling Price 1. $300 2. $600 3. E
Unit Variable Costs $180 C F
Contribution Margin Per Unit A $210 $300
Contribution Margin Ratio B D 30%
Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 178 A. B. C. D. E. F.
(10 min.)
$300 – $180 = $120 $120 ÷ $300 = 40% $600 – $210 = $390 $210 ÷ $600 = 35% $300 ÷ 30% = $1,000 If 30% = CM ratio, then 70% = variable cost percentage $1,000 × 70% = $700
FOR INSTRUCTOR USE ONLY
22 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 179 Quinn Company reports the following results for the month of November: Sales (10,000 units) Variable costs Contribution margin Fixed costs Net income
$600,000 420,000 180,000 110,000 $ 70,000
Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 5% with no change in total variable costs. 2. Reduce variable costs to 66 2/3% of sales. 3. Reduce fixed costs by $10,000. Instructions If maximizing net income is the objective, which is the best course of action? Ans: N/A, SO: 4, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 179
(15–20 min.)
1. Current selling price is: $600,000 ÷ 10,000 units = $60 Increase $60 by 5%: $60 × 1.05 = $63 Revised sales Variable costs Contribution margin Fixed costs Net income
$630,000 420,000 210,000 110,000 $100,000
2. Sales Variable costs (reduce variable costs to 66 2/3% of sales) Contribution margin Fixed costs Net income
$600,000 400,000 200,000 110,000 $ 90,000
3. Sales Variable costs Contribution margin Fixed costs (reduce fixed costs by $10,000) Net income
$600,000 420,000 180,000 100,000 $ 80,000
Increasing the price will increase net income from $70,000 to $100,000. Option (2) will increase net income to only $90,000, and Option (3) will increase net income to only $80,000.
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 43
Ex. 180 Rankin Company had a net loss of $150,000 in 2012 when the selling price per unit was $20, the variable costs per unit were $14, and the fixed costs were $600,000. Management expects per unit data and total fixed costs to be the same in 2013. Management has set a goal of earning net income of $150,000 in 2013. Instructions (a) Compute the units sold in 2012. (b) Compute the number of units that would have to be sold in 2013 to reach management's desired net income level. (c) Assume that Rankin Company sells the same number of units in 2013 as it did in 2012. What would the selling price have to be in order to reach the target net income? Use the mathematical equation. Ans: N/A, SO: 4,6,7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 180
(15–20 min.)
(a) Units sold in 2012
Fixed costs – Net loss = Contribution margin per unit
=
$600,000 – $150,000 $20 - $14
= $450,000 ÷ $6 = 75,000 units
(b) Units sold in 2013
Fixed costs + Net income = Contribution margin per unit
=
$600,000 + $150,000 $20 - $14
= $750,000 ÷ $6 = 125,000 units
(c) Selling price needed in 2013 =
Variable costs + Fixed costs + Net income 75,000 units
Selling price needed in 2013 =
75,000($14) + $600,000 + $150,000 75,000 units = $1,800,000 ÷ 75,000 = $24
Ex. 181 In the month of September, Thiel Company sold 800 units of product. The average sales price was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales. Instructions (a) Determine the contribution margin in dollars, per unit, and as a ratio. (b) Using the contribution margin technique, compute the break-even point in dollars and in units. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 181 (a)
(12–17 min.)
Contribution margin (in dollars) Sales (800 × $30) Less: Variable costs ($24,000 × 70%) Contribution margin
$24,000 16,800 $ 7,200
Contribution margin per unit Unit sales price Less: Variable cost per unit ($30 × 70%) Contribution margin per unit
$30 21 $ 9
Contribution margin ratio $9 ÷ $30 = 30% (b)
Break-even sales (in dollars) Fixed costs ÷ Contribution margin ratio $6,300 ÷ 30% = $21,000 Break-even sales (in units) Fixed costs ÷ Contribution margin per unit $6,300 ÷ $9 = 700 units
Ex. 182 In 2012, Runge Company had a break-even point of $800,000 based on a selling price of $10 per unit and fixed costs of $320,000. In 2013, the selling price and variable costs per unit did not change, but the break-even point increased to $900,000. Instructions (a) Compute the variable cost per unit and the contribution margin ratio for 2012. (b) Using the contribution margin ratio, compute the increase in fixed costs for 2013. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 182
(15–20 min.)
(a) Unit contribution margin =
Fixed Costs Break-even Sales in Units $320,000 80,000
=
(b)
=
$320,000 ($800,000 ÷ $10)
= $4
Variable cost per unit Contribution margin ratio
= =
$10 – $4 = $6 $4 ÷ $10 = 40%
Fixed costs
= =
Break-even Sales × CM Ratio $900,000 × 40% = $360,000
Therefore, fixed costs increased $40,000 ($360,000 – $320,000).
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 45
Ex. 183 The income statement for Nyland Company for 2012 appears below. NYLAND COMPANY Income Statement For the Year Ended December 31, 2012 —————————————————————————————————————————— Sales (40,000 units) ................................................................................... $1,000,000 Variable expenses ..................................................................................... 700,000 Contribution margin .................................................................................... 300,000 Fixed expenses .......................................................................................... 345,000 Net income (loss) ....................................................................................... $ (45,000) Instructions Answer the following independent questions and show computations using the contribution margin technique to support your answers: 1. What was the company's break-even point in sales dollars in 2012? 2. How many additional units would the company have had to sell in 2013 in order to earn net income of $45,000? 3. If the company is able to reduce variable costs by $2.50 per unit in 2013 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $45,000? Ans: N/A, SO: 5,6,7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 183
(15–20 min.)
1.
$345,000 30%
2.
$345,000 + $45,000 30% $1,300,000 $25
= $1,150,000
= $1,300,000 Total sales needed.
= 52,000 total units to be sold
40,000 actual units sold 12,000 additional units to be sold Note: Required sales in units can be obtained directly by dividing fixed costs plus profit by contribution margin per unit: ($345,000 + $45,000) ÷ ($25 – $17.50) = 52,000 units 3.
2012 2013
Variable cost per unit = $17.50 Variable cost reduction = 2.50 Variable cost per unit $15.00
($700,000 ÷ 40,000 units)
Expected contribution margin $10 ($25 – $15) $345,000 + $45,000 $10
= 39,000 units FOR INSTRUCTOR USE ONLY
22 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 184 Polk Company developed the following information for its product: Per Unit $90 63 $27
Sales price Variable cost Contribution margin Total fixed costs
$1,080,000
Instructions Answer the following independent questions and show computations using the contribution margin technique to support your answers. 1. How many units must be sold to break even? 2. What is the total sales that must be generated for the company to earn a profit of $60,000? 3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making? 4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $210,000. Ans: N/A, SO: 5,6,7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 184
1. 2.
(15–20 min.)
$1,080,000 $27
= 40,000 units must be sold to break even.
Contribution margin ratio = 30% ($27 ÷ $90). $1,080,000 + $60,000 .30
3. 4.
$108,000 $27
= $3,800,000 total sales
= 4,000 additional units
New sales price New variable cost New contribution margin
$108.00 69.30 $ 38.70
($90 × 1.20) ($63 × 1.10)
New total fixed costs $1,290,000 ($1,080,000 + $210,000) $1,290,000 38.70
= 33,333 units (rounded) is the new breakeven point.
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 47
Ex. 185 Prentice Manufacturing's sales slumped badly in 2012 due to so many people purchasing gifts online. The company's income statement showed the following results from selling 500,000 units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss $375,000. Costs and expenses consisted of the following: Cost of goods sold Selling expenses Administrative expenses
Total $2,000,000 200,000 300,000 $2,500,000
Variable $1,300,000 50,000 150,000 $1,500,000
Fixed 700,000 150,000 150,000 $1,000,000
$
Management is considering the following alternative for 2013: Purchase new automated equipment that will change the proportion between variable and fixed expenses sold to 45% variable and 55% fixed. Instructions (a) Compute the break-even point in dollars for 2012. (b) Compute the break-even point in dollars under the alternative course of action. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 185
(8–10 min.)
(a) Selling price = $2,125,000 ÷ 500,000 = $4.25 per unit Variable cost per unit = $1,500,000 500,000 = $3 per unit Sales – Variable cost – Fixed cost = 0 $4.25X – $3.00X – $1,000,000 = 0 Break-even point in units = 800,000 units ($1,000,000 ÷ $1.25) Break-even point in dollars = 800,000 × $4.25 = $3,400,000 (b) New variable cost per unit = (45% × $2,500,000) ÷ 500,000 = $2.25 per unit $4.25X – $2.25X – ($2,500,000 × 55%) = 0 New break-even point in units = 687,500 units ($1,375,000 ÷ $2) New break-even point in dollars = 687,500 × $4.25 = $2,921,875 Ex. 186 Nunley Company estimates that variable costs will be 60% of sales and fixed costs will total $1,920,000. The selling price of the product is $10, and 600,000 units will be sold. Instructions Using the mathematical equation, (a) Compute the break-even point in units and dollars. (b) Compute the margin of safety in dollars and as a ratio. (c) Compute net income. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 48 Test Bank for Accounting Principles, Tenth Edition Solution 186 (a)
(15–20 min.)
Break-even sales in units $10X = $6X + $1,920,000 $4X = $1,920,000 X = 480,000 units Break-even point in dollars X = .6X + $1,920,000 .4X = $1,920,000 X = $4,800,000
(b) Margin of safety in dollars $6,000,000 – $4,800,000 = $1,200,000 Margin of safety ratio $1,200,000 ÷ $6,000,000 = 20% (c)
Net Income Sales Variable Costs Fixed Costs Net Income
$6,000,000 (3,600,000) (1,920,000) $ 480,000
Ex. 187 CNC Company has the following information available for September 2012. Unit selling price of video game consoles Unit variable costs Total fixed costs Units sold
$ 400 $ 280 $48,000 500
Instructions (a) Prepare a CVP income statement that shows both total and per unit amounts. (b) Compute CNC's breakeven in units. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 187
(10 min.)
(a)
CNC COMPANY CVP Income Statement For the Month Ended September 30, 2012 _____________________________________________________________________________ Total Per Unit Sales (500 video game consoles)........................................ $200,000 $400 Variable costs...................................................................... 140,000 280 Contribution margin ............................................................. 60,000 $120 Fixed costs .......................................................................... 48,000 Net income .......................................................................... $ 12,000
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit Solution 187 (b)
22 - 49
(Cont.)
Sales = Variable costs + Fixed costs $400X = $280X + $48,000 $120X = 48,000 X = 400 units
Ex. 188 In the month of June, Natalie's Beauty Salon gave 2,500 haircuts, shampoos, and permanents at an average price of $40. During the month, fixed costs were $21,000 and variable costs were 70% of sales. Instructions (a) Determine the contribution margin in dollars, per unit, and as a ratio. (b) Using the contribution margin technique, compute the break-even point in dollars and in units. (c) Compute the margin of safety dollars and as a ratio. Ans: N/A, SO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 188 (a)
(10 min.)
Contribution margin (in dollars):
Variable cost (per unit): Contribution margin (per unit) Contribution margin (ratio): (b)
Breakeven sales (in dollars): Breakeven sales (in units):
(c)
Margin of safety (in dollars): Margin of safety (ratio)
Sales = (2,500 $40) = Variable costs = $100,000 .70 = Contribution margin $40 .70 = $28. $40 – ($40 70%) = $12. $12 $40 = 30%
$100,000 70,000 $ 30,000
$21,000 = $70,000. 30% $21,000 = 2,100 units. $10
$100,000 – $70,000 = $30,000. $30,000 $100,000 = 30%
Ex. 189 Ogle Company has a unit selling price of $500, variable cost per unit of $300, and fixed costs of $260,000. Instructions Compute the break-even point in units and in sales dollars. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 189
(5 min.)
$500X – $300X – $260,000 = 0 Break-even point in units = X = 1,300 units ($260,000 ÷ $200) Break-even point in dollars = 1,300 units × $500 = $650,000 Ex. 190 Lomax Company makes student book bags that sell for $20 each. For the coming year, management expects fixed costs to be $225,000. Variable costs are $15 per unit. Instructions (a) Compute break-even sales in dollars using the mathematical equation. (b) Compute break-even sales using the contribution margin ratio. (c) Compute margin of safety ratio assuming actual sales are $1,200,000. (d) Compute the sales required to earn net income of $150,000, using the mathematical equation. Ans: N/A, SO: 6,7,8, Bloom: AP, Difficulty: Medium, Min: 19, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 190
(19–24 min.)
(a)
Break-even Sales = Variable Costs + Fixed Costs X = .75X + $225,000 .25X = $225,000 X = $900,000
(b)
Contribution Margin per Unit = Unit Selling Price – Unit Variable Cost CM = $20 – $15 = $5 Contribution Margin per Unit Unit Selling Price
Contribution Margin Ratio =
CM Ratio = $5 ÷ $20 = 25% Fixed Costs Contribution Margin Ratio
Break-even Sales =
= $225,000 ÷ 25% = $900,000 (c)
Sales Less: Break-even Sales Margin of Safety Margin of Safety Ratio =
$1,200,000 900,000 $ 300,000 Margin of Safety Actual Sales
= $300,000 ÷ $1,200,000 = 25% (d)
Required Sales = Variable Costs + Fixed Costs + Targeted Net Income X = .75X + $225,000 + $150,000 .25X = $375,000 X = $1,500,000 FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 51
Ex. 191 Kohler Company developed the following information for the product it sells: Sales price Variable cost of goods sold Fixed cost of goods sold Variable selling expense Variable administrative expense Fixed selling expense Fixed administrative expense
$50 per unit $28 per unit $650,000 10% of sales price $2.00 per unit $400,000 $300,000
For the year ended December 31, 2012, Kohler Company produced and sold 100,000 units of product. Instructions (a)
Prepare a CVP income statement using the contribution margin format for Wayman Company for 2012.
(b)
What was the company's break-even point in units in 2012? Use the contribution margin technique.
(c)
What was the company's margin of safety in dollars in 2012?
Ans: N/A, SO: 6,8,9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 191
(20–25 min.)
(a)
KOHLER COMPANY Income Statement For the Year Ended December 31, 2012 ——————————————————————————————————————————— Sales ........................................................................................ $5,000,000 Variable expenses Cost of goods sold .............................................................. $2,800,000 Administrative ..................................................................... 200,000 Selling expenses ................................................................ 500,000 Total variable expenses ...................................................... 3,500,000 Contribution margin .................................................................. 1,500,000 Fixed expenses Cost of goods sold .............................................................. 650,000 Selling ................................................................................ 400,000 Administrative ..................................................................... 300,000 Total fixed expenses........................................................... 1,350,000 Net income ............................................................................... $ 150,000 (b)
Break-even point was 90,000 units in 2012. Variable costs per unit Cost of goods sold $28 Administrative 2 Selling 5 $35
Contribution margin per unit Sales price Variable cost Contribution margin
$1,350,000 ÷ $15 = 90,000 units to break even. FOR INSTRUCTOR USE ONLY
$50 35 $15
22 - 52 Test Bank for Accounting Principles, Tenth Edition Solution 191 (c)
(Cont.)
Margin of safety in dollars was $500,000 Actual sales Break-even sales (90,000 × $50) Margin of safety
$5,000,000 4,500,000 $ 500,000
Ex. 192 Mandy's Music, Inc. produces a hip-hop CD that is sold for $20. The contribution margin ratio is 40%. Fixed expenses total $9,200. Instructions (a) Compute the variable cost per unit. (b) Compute how many CDs Mandy's Music will have to sell in order to break even. (c) Compute how many CDs Mandy's Music will have to sell in order to make a target net income of $16,200. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 192
(7–10 min.)
(a) Variable cost per unit: $20 × (1 – .40) = $12/unit (b) $20X – $12X – $9,200 = 0 X = 1,150 units ($9,200 ÷ $8) (c) $20X – $12X – $9,200 = $16,200 X = 3,175 units ($25,400 ÷ $8) Ex. 193 Nott Company has prepared the following cost-volume-profit graph: I B
H
E A F
G
C
D
Instructions For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item.
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit Ex. 193
22 - 53
(Cont.)
____
1. Activity base
____
2. Break-even point
____
3. Dollars
____
4. Fixed costs
____
5. Loss
____
6. Profit
____
7. Revenues
____
8. Total costs
____
9. Variable costs
Ans: N/A, SO: 6,7, Bloom: C, Difficulty: Medium, Min: 9, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 193 1. 2. 3. 4. 5. 6. 7. 8. 9.
D A E C G B I H F
(9–14 min.)
Activity base Break-even point Dollars Fixed costs Loss Profit Revenues Total costs Variable costs
Ex. 194 Mays Company had $125,000 of net income in 2012 when the selling price per unit was $100, the variable costs per unit were $70, and the fixed costs were $475,000. Management expects per unit data and total fixed costs to remain the same in 2013. The president of Mays Company is under pressure from stockholders to increase net income by $60,000 in 2013. Instructions (a) Compute the number of units sold in 2012. (b) Compute the number of units that would have to be sold in 2013 to reach the stockholders' desired profit level. (c) Assume that Mays Company sells the same number of units in 2013 as it did in 2012. What would the selling price have to be in order to reach the stockholders' desired profit level. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
22 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 194 (a)
(10–14 min.)
Sales = Variable cost + Fixed cost + Target net income $100X = $70X + $475,000 + $125,000 $30X = $600,000 X = 20,000 units
Or
Units sold in 2010 =
$475,000 + $125,000 $100 - $70
$475,000 + $185,000 $100 - $70 *$125,000 + $60,000 = $185,000
(b) Units sold in 2010 =
(c)
$475,000 + $185,000 X - $70
= 20,000 units
= 22,000 units
= 20,000 units where X = new selling price
$660,000 = 20,000X – $1,400,000 $2,060,000X = 20,000X X = $103 Ex. 195 Larue Company reports the following operating results for the month of August: Sales $400,000 (units 5,000); variable costs $280,000; and fixed costs $95,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 10% with no change in total variable costs. 2. Reduce variable costs to 65% of sales. 3. Reduce fixed costs by $15,000. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the highest net income? Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 195
(6 min.)
(1)
Unit sales price = $400,000 5,000 units = $80 Increase selling price to $88, or ($80 110%). Net income = $440,000 – $280,000 – $95,000 = $65,000.
(2)
Reduce variable costs to 65% of sales. Net income = $400,000 – $260,000 – $95,000 = $45,000.
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit Solution 195 (3)
22 - 55
(Cont.)
Reduce fixed costs to $80,000, or ($95,000 – $15,000). Net income = $400,000 – $280,000 – $80,000 = $40,000.
Alternative 1, increasing selling price, will produce the highest net income. Ex. 196 Oliver Company earned net income of $350,000 last year. This year it wants to earn net income of $450,000. The company's fixed costs are expected to be $300,000, and variable costs are expected to be 70% of sales. Instructions (a) Determine the required sales to meet the target net income of $450,000 using the mathematical equation. (b) Using a CVP income statement format, prove your answer. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 196 (a)
(8–12 min.)
Sales = Variable Cost + Fixed Cost + Target Net Income X = .70X + $300,000 + $450,000 .30X = $750,000 X = $2,500,000 Required sales are $2,500,000.
(b)
Sales Variable costs Contribution margin Fixed costs Target net income
$2,500,000 1,750,000 750,000 300,000 $ 450,000
Ex. 197 Partridge Company reported actual sales of $2,000,000, and fixed costs of $510,000. The contribution margin ratio is 30%. Instructions Compute the margin of safety in dollars and the margin of safety ratio. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 197
(7 min.)
Break-even point in dollars: $510,000 ÷ 30% = $1,700,000 Margin of safety in dollars: $2,000,000 – $1,700,000 = $300,000 Margin of safety ratio: $300,000 ÷ $2,000,000 = 15%
FOR INSTRUCTOR USE ONLY
22 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 198 Newton, Inc. earned net income of $100,000 during 2012. The company wants to earn net income of $40,000 more during 2013. The company's fixed costs are expected to be $84,000, and variable costs are expected to be 30% of sales. Instructions (a) Determine the required sales to meet the target net income during 2013. (b) Fill in the dollar amounts for the summary income statement for 2013 below, based on your answer to part (a). Sales revenue $ Variable costs Contribution margin Fixed costs Net income
$
Ans: N/A, SO: 7,9, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198
(6–8 min.)
(a) 70%X – $84,000 = $140,000 Required sales = $320,000 ($224,000 ÷ .70) (b) Sales revenue Variable costs ($320,000 ×.30) Contribution margin Fixed costs Net income
$320,000 96,000 224,000 84,000 $140,000
Ex. 199 Maddox Company had sales in 2012 of $1,600,000 on 80,000 units. Variable costs totaled $960,000, and fixed costs totaled $400,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $2.40). However, to process the new raw material, fixed operating costs will increase by $50,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold. Instructions Prepare a CVP income statement for 2012, assuming the changes are made as described. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit Solution 199
22 - 57
(10 min.)
MADDOX COMPANY CVP Income Statement (Current) For the Year Ended December 31, 2012 _____________________________________________________________________________ Total Per Unit Sales (80,000 $20) ........................................................... $1,600,000 $20 Variable expenses (80,000 $12)....................................... 960,000 12 Contribution margin ............................................................. 640,000 $ 8 Fixed expenses ................................................................... 400,000 Net income.......................................................................... $ 240,000
MADDOX COMPANY CVP Income Statement (with changes) For the Year Ended December 31, 2012 _____________________________________________________________________________ Total Per Unit Sales [84,000 units (1) $18.80 (2)] ................................... $1,579,200 $18.80 Variable expenses [84,000 $9.60 (3)] ............................... 806,400 9.60 Contribution margin (84,000 $9.20) .................................. 772,800 $ 9.20 Fixed expenses ($400,000 + $50,000) ................................ 450,000 Net income.......................................................................... $ 322,800 (1) (80,000 105%). (2) $20.00 – ($2.40 50%) = $18.80. (3) $12.00 – ($12 20%) = $9.60
a
Ex. 200
Lowery Company developed the following unit information for January, 2012, its first month of operations: Per Unit Total Costs Sales price $20 Variable costs Direct materials 5 Direct labor 3 Variable manufacturing overhead 4 Selling and administrative expenses 2 Fixed selling and administrative expenses $29,000 Fixed manufacturing overhead 48,000 During January, 16,000 units were produced and 12,000 units were sold.
FOR INSTRUCTOR USE ONLY
22 - 58 Test Bank for Accounting Principles, Tenth Edition a
Ex. 200
(Cont.)
Instructions (a) Prepare an income statement under the variable costing approach using the CVP format. (b) What would be the net income (loss) if the absorption cost approach had been used? Explain any income difference between absorption and variable costing. Ans: N/A, SO: 9,10, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 200
(20–25 min.)
(a)
LOWERY COMPANY Income Statement For the Month Ended January 31, 2012 (Variable costing) ——————————————————————————————————————————— Sales (12,000 units × $20) ................................................................ $240,000 Variable expenses Inventory, January 1 .................................................................... $ -0Variable manufacturing costs (16,000 units × $12) ...................... 192,000 Cost of goods available for sale ................................................... 192,000 Inventory, January 31 (4,000 units × $12).................................... 48,000 Variable cost of goods sold .......................................................... 144,000 Variable selling and administrative expenses (12,000 × 2) .......... 24,000 Total variable expenses ......................................................... 168,000 Contribution margin ........................................................................... 72,000 Fixed expenses Manufacturing overhead .............................................................. 48,000 Selling and administrative ............................................................ 29,000 Total fixed expenses .............................................................. 77,000 Loss from operations ......................................................................... $ (5,000) (b) If absorption costing had been used, Lowery would report income from operations of $7,000. Under absorption costing, fixed manufacturing overhead of $12,000* would be allocated as a product cost and would be part of the value of the finished goods inventory on the balance sheet. Therefore, income under absorption costing would be $12,000 greater than the $5,000 loss under variable costing. *$48,000 ÷ 16,000 = $3 unit fixed manufacturing overhead Ending inventory = 4,000 units × $3 = $12,000
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 59
a
Ex. 201
Jordan Company developed the following information for 2012: Selling and Administrative Expenses Variable Fixed Units in beginning inventory Units sold Direct materials used Direct labor Units produced Manufacturing overhead Variable Fixed
$30,000 $50,000 -026,000 $75,000 $95,000 30,000 $40,000 $90,000
Instructions Answer the following questions. (a) What would be the amount of the cost of goods sold under the absorption costing approach? (b) What would be the cost of the ending inventory under the variable costing approach? (c) Which approach would show the greater income for 2012 and by how much? Ans: N/A, SO: 10, Bloom: AN, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
Solution 201
(16–21 min.)
Direct materials ............................................................... Direct labor ..................................................................... Variable manufacturing overhead.................................... Fixed manufacturing overhead ........................................ Total manufacturing costs incurred .................................
Absorption Costing $ 75,000 95,000 40,000 90,000 $300,000
Variable Costing $ 75,000 95,000 40,000 — $210,000
Production in units .......................................................... Production unit cost ........................................................
30,000 $10
30,000 $ 7
(a) Cost of goods sold under the absorption costing approach would be $260,000 (26,000 units × $10). (b) Cost of ending inventory under the variable costing approach would be $28,000 (4,000 units × $7). (c) Absorption costing income in 2012 would be greater by $12,000 (4,000 units × $3).
FOR INSTRUCTOR USE ONLY
22 - 60 Test Bank for Accounting Principles, Tenth Edition
COMPLETION STATEMENTS 202. Knowledge of cost behavior is important in ______________________ analysis. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
203. A _________________ cost remains constant per unit at every level of activity. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
204. Unit fixed costs __________________ with the changes in the level of activity. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
205. Total fixed costs are ___________ over various levels of activities, whereas total variable costs __________________ directly and ________________ with changes in the activity level. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
206. An assumption of CVP analysis is that variable and fixed costs have a _______________ relationship with an activity base. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
207. The range over which a company expects to operate is referred to as the _____________ range. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
208. A cost that has both variable and fixed elements is referred to as a _________________ cost. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
209. The amount of revenue remaining after deducting total variable costs is called the _________________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210. The _______________ point is when total revenues equal total costs. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
211. _________________ divided by the contribution margin ratio will give the amount of _________________ to break even. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
212. The difference between actual or expected sales and break-even sales is called the __________________________. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 61
213. An income statement which emphasizes cost behavior is prepared using the _________________________ format. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
214. Under variable costing, ____________________ manufacturing costs are considered to be period costs.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
215. When units produced are greater than units sold, income under ________________ costing is higher than under ______________ costing.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 202. 203. 204. 205. 206. 207. 208.
cost-volume-profit (CVP) variable vary inversely constant, vary, proportionately linear relevant mixed
209. 210. 211. 212. 213. a 214. a 215.
contribution margin break-even Fixed costs, sales (in dollars) margin of safety contribution margin fixed absorption, variable
MATCHING 216. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Activity index Variable costs Fixed costs High-low method Relevant range Mixed costs
G. H. I. J. a K. a L.
Break-even point Contribution margin Margin of safety Contribution margin ratio Variable costing Absorption costing
____ 1. The amount of revenue remaining after deducting variable costs. ____ 2. Costs that contain both a variable and a fixed element. ____ 3. The percentage of sales dollars available to cover fixed costs and produce income. ____ 4. Identifies the activity which causes changes in the behavior of costs. ____ 5. The difference between actual or expected sales and sales at the break-even point. ____ 6. Costs that vary in total directly and proportionately with changes in the activity level. ____ 7. The level of activity at which total revenues equal total costs. ____ 8. The range over which the company expects to operate during the year. ____ 9. Costs that remain the same in total regardless of changes in the activity level. FOR INSTRUCTOR USE ONLY
22 - 62 Test Bank for Accounting Principles, Tenth Edition Matching
(Cont.)
____ 10. A costing approach in which all manufacturing costs are charged to the product. ____ 11. A method that uses the total costs incurred at the high and low levels of activity. ____ 12. A costing approach in which only variable manufacturing costs are product costs and fixed manufacturing costs are period costs (expenses). Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5. 6.
H F J A I B
7. 8. 9. a 10. 11. a 12.
G E C L D K
SHORT-ANSWER ESSAY QUESTIONS S-A E 217 A cost-volume-profit graph is frequently used in business meetings because it presents a picture of cost relationships within a company. Briefly describe the type of information and data that you would need in order to prepare a CVP graph. After a CVP graph is prepared, what are the major points that could be made from the graph that would be of interest to management? Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 217 To begin constructing a CVP graph, information is needed concerning the maximum estimated level of sales units and the unit sales price. This is necessary to create the axes and also to plot the total revenue line from the origin. In addition, the costs must be broken down into fixed and variable components in order to plot both the fixed cost line and the total cost line. Using a CVP graph, management can readily identify the break-even point and can see how much profit or loss would result from varying levels of sales. The graph also makes it easy to portray the effects of any changes such as costs or selling prices. S-A E 218 A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. Ans: N/A, SO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 63
Solution 218 Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs. Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs. S-A E 219 (a) (b)
Karen Bleu asks your help in understanding the term "activity index." Explain the meaning and importance of this term for Karen. State the two ways that variable costs may be defined.
Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 219 (a)
The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed.
(b)
Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.
S-A E 220 How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? Ans: N/A, SO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 220 For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method. S-A E 221 (Ethics) Keller Company requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line. Gina Lamb is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product, 10,000 would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Anne Smythe, another manager. Anne strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable, since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable.
FOR INSTRUCTOR USE ONLY
22 - 64 Test Bank for Accounting Principles, Tenth Edition S-A E 221 (Cont.) Required: 1. Who are the stakeholders in this decision? 2. Is it ethical for Gina to revise the costs as indicated? Briefly explain. 3. What should Gina do? Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
Solution 221 1. The stakeholders include: Gina Lamb Keller Company Keller’s customers 2. It is ethical to revise the costs, certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels, such as those anticipated for this project, the project is likely to be less profitable than forecast. To the extent that Gina is submitting misleading figures in order to get her project approved, she is behaving unethically. 3. Gina should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination. S-A E 222
(Communication)
For two years, Richard Elkins has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future. The fixed costs for the department are $50,000, with $1.50 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Elkins is considering two options to improve profitability. One would reduce variable costs to $1.25, and the other would reduce fixed costs to $35,000. Required: Given the fact that sales are increasing, make a short (one paragraph) recommendation to Mr. Elkins about which option he should choose. Support your recommendation with a calculation showing him how profitability will change with each option. Ans: N/A, SO: 10, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Quantitative Methods
FOR INSTRUCTOR USE ONLY
Cost-Volume-Profit
22 - 65
Solution 222 The variable costs should be reduced to $1.25 per unit in order to ensure maximum profitability of the paper doll product line. The calculations are as follows: Current Profit = ($3 × 80,000) – ($1.50 × 80,000) – $50,000 = $240,000 – $120,000 – $50,000 = $70,000 Plan #1: Reduce Variable Costs to $1.25 Profit = ($3 × 80,000) – ($1.25 × 80,000) – $50,000 = $240,000 – $100,000 – $50,000 = $90,000 Plan #2: Reduce Fixed Costs to $35,000 Profit = ($3 × 80,000) – ($1.50 × 80,000) – $35,000 = $240,000 – $120,000 – $35,000 = $85,000
FOR INSTRUCTOR USE ONLY
CHAPTER 23 BUDGETARY PLANNING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
4 5 5 6 6 6 1 2
K C C K C C K K
sg
33. 34. sg 35. sg 36.
3 3 5 6
K K K C
5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
AP C K C K C K AP AP K AP K C AP C AP AP AP AP AP AP AP AP AP AP
137. 138. 139. 140. 141. 142. 143. 144. 145. 146. st 147. sg 148. st 149. sg 150. st 151. sg 152. st 153. sg 154. st 155. sg 156. sg 157. sg 158.
6 6 6 6 6 6 6 6 6 6 1 1 2 2 3 3 4 5 5 5 6 6
C K C C C C C C C C K K K K K AP K AP K AP K K
159. 3 AP 161. 3 AP 163. 5 AP 165. 5 AP 160. 3 AP 162. 3 AP 164. 5 AP 166. 5 AP sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website.
167. 168.
5 5
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 2 2
K C C C C K K K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 2 3
C C C C K K C K
17. 18. 19. 20. 21. 22. 23. 24.
3 3 3 3 3 3 3 3
K C C C C K C C
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61.
1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K K K C C C K C C C C C C C C K K K K K K K C C AP
62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K AP C C K C C C K C AN C K K AP AP AP AP AP AP AP C C K C
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 5 3 5 4 4 4 5 5
C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C K AP AP
112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136.
Brief Exercises
23 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 169. 170. 171. 172. 173. 174.
3 3 3 3 3 3
AP AP AP AP AP AP
175. 176. 177. 178. 179. 180.
3 3 3 3 3 3
AP AP C AP AP AP
181. 182. 183. 184. 185. 186.
3,4 4 4 5 5 5
AP AP AP AP AP AP
187. 188. 189. 190. 191. 192.
5 5 5 5 5 5
AP C AP AP AP AP
3 5 6
K K K
193. 194. 195.
5,6 6 6
AP AP C
Completion Statements 196. 197. 198.
1 1 2
K K K
208.
1
K
209. 210.
1 1
K K
199. 200. 201.
2 2 2
K K K
202. 203. 204.
2 3 3
K K K
205. 206. 207.
Matching Short-Answer Essay 211. 212.
3 2
K K
213. 214.
3 3
K K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3.
TF TF TF
4. 5. 6.
TF TF TF
31. 37. 38.
7. 8. 9. 10. 11. 12.
TF TF TF TF TF TF
13. 14. 15. 32. 43. 44.
TF TF TF TF MC MC
45. 46. 47. 48. 49. 50.
16. 17. 18. 19. 20. 21. 22. 23. 24. 33. 34. 62.
TF TF TF TF TF TF TF TF TF TF TF MC
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.
MC MC MC MC MC MC MC MC MC MC MC MC
75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
Type
Item
Type
Item
Study Objective 1 TF 39. MC 42. MC 40. MC 147. MC 41. MC 148. Study Objective 2 MC 51. MC 57. MC 52. MC 58. MC 53. MC 59. MC 54. MC 60. MC 55. MC 61. MC 56. MC 149. Study Objective 3 MC 87. MC 99. MC 88. MC 100. MC 89. MC 101. MC 90. MC 102. MC 91. MC 103. MC 92. MC 151. MC 93. MC 152. MC 94. MC 159. MC 95. MC 160. MC 96. MC 161. MC 97. MC 162. MC 98. MC 169.
For Instructor Use Only
Type
Item
Type
Item
Type
MC MC MC
196. 197. 208.
C C Ma
209.
SA
MC MC MC MC MC MC
150. 198. 199. 200. 201. 202.
MC C C C C C
MC MC MC MC MC MC MC BE BE BE BE Ex
170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181.
Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex
203. 204. 205. 210. 213. 214.
C C C SA SA SA
Budgetary Planning
25. 107.
TF MC
108. 109.
MC MC
153. 181.
26. 27. 35. 104. 106. 110. 111. 112.
TF TF TF MC MC MC MC MC
113. 114. 115. 116. 117. 118. 119. 120.
MC MC MC MC MC MC MC MC
121. 122. 123. 124. 125. 126. 127. 128.
28. 29. 30.
TF TF TF
36. 137. 138.
TF MC MC
139. 140. 141.
Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay
Study Objective 4 MC 182. Ex Ex 183. Ex Study Objective 5 MC 129. MC MC 130. MC MC 131. MC MC 132. MC MC 133. MC MC 134. MC MC 135. MC MC 136. MC Study Objective 6 MC 142. MC MC 143. MC MC 144. MC
23 - 3
154. 155. 156. 163. 164. 165. 166. 167.
MC MC MC BE BE BE BE BE
168. 182. 183. 184. 185. 186. 187. 188.
BE Ex Ex Ex Ex Ex Ex Ex
189. 190. 191. 192. 193. 206.
Ex Ex Ex Ex Ex C
145. 146. 157.
MC MC MC
158. MC 193. Ex 194. Ex
195. 207.
Ex C
BE = Brief Exercise Ex = Exercise
C = Completion Ma = Matching
CHAPTER STUDY OBJECTIVES 1. Identify the benefits of budgeting. The primary advantages of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives. 2. State the essentials of effective budgeting. The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management. 3. Identify the budgets that comprise the master budget. The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet. 4. Describe the sources for preparing the budgeted income statement. The budgeted income statement is prepared from (a) the sales budget, (b) the budgets for direct materials, direct labor, and manufacturing overhead, and (c) the selling and administrative expense budget. 5. Explain the principal sections of a cash budget. The cash budget has three sections (receipts, disbursements, and financing) and the beginning and ending cash balances. 6. Indicate the applicability of budgeting in nonmanufacturing companies. Budgeting may be used by merchandisers for development of a master budget. In service enterprises budgeting is a critical factor in coordinating staff needs with anticipated services. In not-forprofit organizations, the starting point in budgeting is usually expenditures, not receipts. For Instructor Use Only
23 - 4
Test Bank for Accounting Principles, Tenth Edition
TRUE-FALSE STATEMENTS 1.
Budgets are statements of management's plans stated in financial terms.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
2.
A benefit of budgeting is that it provides definite objectives for evaluating performance.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
3.
A budget can be a means of communicating a company's objectives to external parties.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
4.
A budget can be used as a basis for evaluating performance.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
5.
A well-developed budget can operate and enforce itself.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
6.
The budget itself and the administration of the budget are the responsibility of the accounting department.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
7.
Effective budgeting requires clearly defined lines of authority and responsibility.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
8.
The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
9.
Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Management, AICPA PC: Interaction, IMA: Performance Measurement
10.
A budget can facilitate the coordination of activities among the segments of a large company.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
11.
The longer the budget period, the more reliable the estimates of future outcomes.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
12.
The budget committee has the responsibility for coordinating the preparation of the budget.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
13.
The budget is developed within the framework of a sales forecast.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 14.
23 - 5
Budgeting and long-range planning are two terms that describe the same process.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
15.
Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
16.
The master budget reflects management's long-term plans encompassing five years or more.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
17.
The master budget consists of operating and financial budgets.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
18.
Financial budgets must be completed before the operating budgets can be prepared.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
19.
The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
20.
The number of direct labor hours needed for production is obtained from the production budget.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
21.
A manufacturing overhead budget is not needed if the company develops a predetermined overhead rate to apply overhead.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
22.
The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
23.
A production budget should be prepared before the sales budget.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
24.
The direct materials budget contains both quantity and cost data.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
25.
The budgeted income statement indicates the expected profitability of operations for the next year.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 6 26.
Test Bank for Accounting Principles, Tenth Edition If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
27.
The budgeted balance sheet is prepared entirely from the budgets for the current year.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
28.
The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
29.
A merchandiser has a merchandise purchases budget rather than a production budget.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
30.
A critical factor in budgeting for a service firm is to determine the amount of products to purchase.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
31.
The budget itself and the administration of the budget are entirely accounting responsibilities.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
32.
Financial planning models and statistical and mathematical techniques may be used in forecasting sales.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
33.
The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
34.
The manufacturing overhead budget shows the expected manufacturing overhead costs.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
35.
In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
36.
In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning
23 - 7
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
T T F T F F
7. 8. 9. 10. 11. 12.
T F T T F T
13. 14. 15. 16. 17. 18.
T F T F T F
19. 20. 21. 22. 23. 24.
F T F F F T
25. 26. 27. 28. 29. 30.
T F F T T F
31. 32. 33. 34. 35. 36.
F T T T T F
MULTIPLE CHOICE QUESTIONS 37.
Why are budgets useful in the planning process? a. They provide management with information about the company's past performance. b. They help communicate goals and provide a basis for evaluation. c. They guarantee the company will be profitable if it meets its objectives. d. They enable the budget committee to earn their paycheck.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
38.
A budget a. is a substitute for management. b. is an aid to management. c. can operate or enforce itself. d. is the responsibility of the accounting department.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
39.
Accounting generally has the responsibility for a. setting company goals. b. expressing the budget in financial terms. c. enforcing the budget. d. administration of the budget.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
40.
Which one of the following is not a benefit of budgeting? a. It facilitates the coordination of activities. b. It provides definite objectives for evaluating performance. c. It provides assurance that the company will achieve its objectives. d. It requires all levels of management to plan ahead on a recurring basis.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
41.
Budgeting is usually most closely associated with which management function? a. Planning b. Directing c. Motivating d. Controlling
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 8 42.
Test Bank for Accounting Principles, Tenth Edition Which of the following items does not follow from the adoption of a budget? a. Promote efficiency b. Deterrent to waste c. Basis for performance evaluation d. Guarantee of accomplishing the profit objective
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
43.
Which is true of budgets? a. They are voted on and approved by stockholders. b. They are used in the planning, but not in the control, process. c. There is a standard form and structure for budgets. d. They are used in performance evaluation.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
44.
A common starting point in the budgeting process is a. expected future net income. b. past performance. c. to motivate the sales force. d. a clean slate, with no expectations.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
45.
If budgets are to be effective, all of the following must be present except a. acceptance at all levels of management. b. research and analysis in setting realistic goals. c. stockholders' approval of the budget. d. sound organizational structure.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
46.
If budgets are to be effective, there must be a. a history of successful operations. b. independent verification of budget goals. c. an organizational structure with clearly defined lines of authority and responsibility. d. excess plant capacity.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
47.
It is important that budgets be accepted by a. division managers. b. department heads. c. supervisors. d. all of these.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 48.
23 - 9
Which of the following statements about budget acceptance in an organization is true? a. The most widely accepted budget by the organization is the one prepared by top management. b. The most widely accepted budget by the organization is the one prepared by the department heads. c. Budgets are hardly ever accepted by anyone except top management. d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
49.
Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable? a. Department managers should be held accountable for all variances from budgets for their departments. b. Department managers should only be held accountable for controllable variances for their departments. c. Department managers should be credited for favorable variances even if they are beyond their control. d. Department managers' performances should not be evaluated based on actual results to budgeted results.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Business Economics
50.
An unrealistic budget is more likely to result when it a. has been developed in a top down fashion. b. has been developed in a bottom up fashion. c. has been developed by all levels of management. d. is developed with performance appraisal usages in mind.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Business Economics
51.
A budget is most likely to be effective if a. it is used to assess blame when things do not occur according to plans. b. it is not used to evaluate a manager's performance. c. employees and managers at the lower levels do not get involved in the budgeting process. d. it has top management support.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
52.
In many companies, responsibility for coordinating the preparation of the budget is assigned to a. the company's independent certified public accountants. b. the company's internal auditors. c. the company's board of directors. d. a budget committee.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
For Instructor Use Only
23 - 10 Test Bank for Accounting Principles, Tenth Edition 53.
A budget period should be a. monthly. b. for a year or more. c. long-term. d. long enough to provide an obtainable goal under normal business conditions.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
54.
If a company has adopted continuous budgeting, the budget will show plans for a. every day. b. a full year ahead. c. the current year and the next year. d. at least five years.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
55.
The most common budget period is a. one month. b. three months. c. six months. d. one year.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
56.
Budget development for the coming year usually starts a. a year in advance. b. the first month of the year to be budgeted. c. several months before the end of the current year. d. the last month of the previous year.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
57.
The budget committee would not normally include the a. research director. b. treasurer. c. sales manager. d. external auditor.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
58.
The budget committee in a company is often headed by the a. president. b. controller. c. treasurer. d. budget director.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
59.
Long-range planning a. generally presents more detailed information than an annual budget. b. generally encompasses a longer period of time than an annual budget. c. is usually more accurate than an annual budget. d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 60.
23 - 11
Long-range planning usually encompasses a period of at least a. six months. b. 1 year. c. 5 years. d. 10 years.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
61.
Which of the following is not a proper match-up? a. Long range planning → Strategies b. Budgeting → Short-term goals c. Long-range planning → 5 years d. Budgeting → Long-term goals
Ans: D, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
62.
Which is the last step in developing the master budget? a. Preparing the budgeted balance sheet b. Preparing the cost of goods manufactured budget c. Preparing the budgeted income statement d. Preparing the cash budget
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
63.
If there were 140,000 pounds of raw materials on hand on January 1, 280,000 pounds are desired for inventory at January 31, and 840,000 pounds are required for January production, how many pounds of raw materials should be purchased in January? a. 700,000 pounds b. 1,120,000 pounds c. 560,000 pounds d. 980,000 pounds
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
64.
The total direct labor hours required in preparing a direct labor budget are calculated using the a. sales forecast. b. production budget. c. direct materials budget. d. sales budget.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
65.
The direct materials and direct labor budgets provide information for preparing the a. sales budget. b. production budget. c. manufacturing overhead budget. d. cash budget.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 12 Test Bank for Accounting Principles, Tenth Edition 66.
A sales forecast a. shows a forecast for the firm only. b. shows a forecast for the industry only. c. shows forecasts for the industry and for the firm. d. plays a minor role in the development of the master budget.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
67.
Which of the following is not an operating budget? a. Direct labor budget b. Sales budget c. Production budget d. Cash budget
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
68.
Which of the following is not a financial budget? a. Capital expenditure budget b. Cash budget c. Manufacturing overhead budget d. Budgeted balance sheet
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
69.
Which of the following is done to improve the reliability of the sales forecast? a. Employ financial planning models b. Lengthen the planning horizon to more than a year c. Rely solely on outside consultants d. Use the sales forecasts from the previous year
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
70.
The financial budgets include the a. cash budget and the selling and administrative expense budget. b. cash budget and the budgeted balance sheet. c. budgeted balance sheet and the budgeted income statement. d. cash budget and the production budget.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
71.
The culmination of preparing operating budgets is the a. budgeted balance sheet. b. production budget. c. cash budget. d. budgeted income statement.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 72.
23 - 13
The following information is taken from the production budget for the first quarter: Beginning inventory in units Sales budgeted for the quarter Capacity in units of production facility
1,800 684,000 708,000
How many finished goods units should be produced during the quarter if the company desires 4,800 units available to start the next quarter? a. 687,000 b. 681,000 c. 711,000 d. 688,800 Ans: A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
73.
An overly optimistic sales budget may result in a. increases in selling prices late in the year. b. insufficient inventories. c. increased sales during the year. d. excessive inventories.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
74.
In a production budget, total required units are the budgeted sales units plus a. beginning finished goods units. b. desired ending finished goods units. c. desired ending finished goods units plus beginning finished goods units. d. desired ending finished goods units minus beginning finished goods units.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
75.
The direct materials budget details 1. the quantity of direct materials to be purchased. 2. the cost of direct materials to be purchased. a. 1 b. 2 c. both 1 and 2 d. neither 1 nor 2
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
76.
The production budget shows expected unit sales of 64,000. Beginning finished goods units are 11,200. Required production units are 67,200. What are the desired ending finished goods units? a. 8,000 b. 11,200 c. 12,800 d. 14,400
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 14 Test Bank for Accounting Principles, Tenth Edition 77.
The production budget shows expected unit sales are 100,000. The required production units are 104,000. What are the beginning and desired ending finished goods units, respectively? a. b. c. d.
Beginning Units 10,000 6,000 4,000 10,000
Ending Units 6,000 10,000 10,000 4,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
78.
The production budget shows that expected unit sales are 80,000. The total required units are 90,000. What are the required production units? a. 10,000 b. 15,000 c. 20,000 d. Cannot be determined from the data provided.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
79.
The direct materials budget shows: Units to be produced Total pounds needed for production Total materials required
6,000 24,000 26,400
What are the direct materials per unit? a. .44 pounds b. 4.0 pounds c. 4.4 pounds d. Cannot be determined from the data provided. Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
80.
The direct materials budget shows: Desired ending direct materials Total materials required Direct materials purchases
72,000 pounds 108,000 pounds 94,800 pounds
The total direct materials needed for production is a. 36,000 pounds. b. 13,200 pounds. c. 22,800 pounds. d. 202,800 pounds. Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 81.
23 - 15
If the required direct materials purchases are 36,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds? a. 90,000 b. 18,000 c. 54,000 d. 36,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
82.
Hackett Manufacturing makes and sells blenders. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available: Variable Cost Per Unit Sold Monthly Fixed Cost Sales commissions $0.60 $ 6,000 Shipping 1.20 Advertising 0.30 Executive salaries 40,000 Depreciation on office equipment 8,000 Other 0.35 28,000 Expenses are paid in the month incurred. If the company has budgeted to sell 8,000 blenders in October, how much is the total budgeted variable selling and administrative expenses for October? a. $16,800 b. $18,400 c. $101,600 d. $19,600
Ans: D, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
83.
Which of the following expenses would not appear on a selling and administrative expense budget? a. Sales commissions b. Depreciation c. Property taxes d. Indirect labor
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
84.
Which of the following would not appear as a fixed expense on a selling and administrative expense budget? a. Freight-out b. Office salaries c. Property taxes d. Depreciation
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 16 Test Bank for Accounting Principles, Tenth Edition 85.
A master budget consists of a. an interrelated long-term plan and operating budgets. b. financial budgets and a long-term plan. c. interrelated financial budgets and operating budgets. d. all the accounting journals and ledgers used by a company.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
86.
The starting point in preparing a master budget is the preparation of the a. production budget. b. sales budget. c. purchasing budget. d. personnel budget.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
87.
Which one of the following is not needed in preparing a production budget? a. Budgeted unit sales b. Budgeted raw materials c. Beginning finished goods units d. Ending finished goods units
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
88.
A company budgeted unit sales of 204,000 units for January, 2012 and 240,000 units for February, 2012. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 61,200 units of inventory on hand on December 31, 2011, how many units should be produced in January, 2012 in order for the company to meet its goals? a. 214,800 units b. 204,000 units c. 193,200 units d. 276,000 units
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
89.
At January 1, 2012, Bella Company has beginning inventory of 2,000 DVD players. Bella estimates it will sell 10,000 units during the first quarter of 2012 with a 12% increase in sales each quarter. Bella’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each DVD player costs $100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2012? a. $450,000 b. $1,950,000 c. $1,881,600 d. $12,544
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 90.
23 - 17
Hastings, Inc. plans to sell 4,000 backpacks during May; 3,800 in June, and 4,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Hastings produce during June? a. 3,830 b. 4,400 c. 3,770 d. Not enough information to determine.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
91.
Combs Co. is planning to sell 400 hair dryers and produce 380 hair dryers during March. Each hair dryer requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Combs Co. has 300 kilos of plastic in beginning inventory and wants to have 200 kilos in ending inventory. How much is the total amount of budgeted direct labor for March? a. $3,000 b. $6,000 c. $2,850 d. $5,700
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
92.
Jacob Manufacturing is planning to sell 1,200 boxes of ceramic tile, with production estimated at 1,160 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.50 per pound and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Jacob has 5,200 pounds of clay mix in beginning inventory and wants to have 6,000 pounds in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month? a. $4,785 b. $4,950 c. $19,140 d. $19,800
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
93.
Jacob Manufacturing is planning to sell 1,200 boxes of ceramic tile, with production estimated at 1,160 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.50 per pound and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Jacob has 5,200 pounds of clay mix in beginning inventory and wants to have 6,000 pounds in ending inventory. What is the total amount to be budgeted for direct labor for the month? a. $4,350 b. $17,400 c. $4,500 d. $69,600
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 18 Test Bank for Accounting Principles, Tenth Edition 94.
Jacob Manufacturing is planning to sell 1,200 boxes of ceramic tile, with production estimated at 1,160 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.50 per pound and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Jacob has 5,200 pounds of clay mix in beginning inventory and wants to have 6,000 pounds in ending inventory. What is the total amount to be budgeted in pounds for direct materials to be purchased for the month? a. 51,040 b. 50,240 c. 51,840 d. 53,600
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
95.
Widmeyer Products plans to sell 320 potted plants during April and 240 units in May. Widmeyer Products keeps 15% of the next month’s sales as ending inventory. How many units should Widmeyer produce during April? a. 308 b. 332 c. 320 d. 356
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
96.
Damask Industries makes and sells widgets. The company is in the process of preparing its Selling and Administrative Expense Budget for the month. The following budget data are available: Item Variable Cost Per Unit Sold Sales commissions $1 Shipping $3 Advertising $4 Executive salaries Depreciation on office equipment Other $2
Monthly Fixed Cost $10,000
$120,000 $4,000 $6,000
Expenses are paid in the month incurred. If the company has budgeted to sell 80,000 widgets in October, how much is the total budgeted selling and administrative expenses for October? a. $940,000 b. $140,000 c. $930,000 d. $800,000 Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 97.
23 - 19
Crumine Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels are planned for the fiscal year of July 1, 2012 to June 30, 2013: June 30, 2013 June 30, 2012 Raw Materials 3,000 kilos 2,000 kilos Three kilos of raw materials are needed to produce each unit of finished product. If Crumine plans to produce 560,000 units during the 2012-2013 fiscal year, how many kilos of materials will the company need to purchase for its production during the year? a. 1,681,000 b. 1,686,000 c. 1,680,000 d. 1,678,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
98.
The following information is taken from the production budget for the first quarter: Beginning inventory in units Sales budgeted for the quarter Production capacity in units
1,200 456,000 472,000
How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter? a. 458,000 b. 454,000 c. 474,000 d. 459,200 Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
99.
Davis Company has 12,000 units in beginning finished goods. The sales budget shows expected sales to be 48,000 units. If the production budget shows that 56,000 units are required for production, what was the desired ending finished goods? a. 4,000. b. 12,000. c. 20,000. d. 36,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
100.
Begley Manufacturing’s required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material NG are required. Actual beginning and desired ending inventories of direct material NG are 300,000 and 330,000 pounds, respectively. How many pounds of direct material NG must be purchased? a. 378,000. b. 396,000. c. 408,000. d. 426,000.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 20 Test Bank for Accounting Principles, Tenth Edition 101.
Hastings, Inc. determines that 54,000 pounds of direct materials are needed for production in July. There are 3,200 pounds of direct materials on hand at July 1 and the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases? a. $158,400. b. $160,800. c. $163,200. d. $165,600.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
102.
Hackett Industries is preparing its direct labor budget for May. Projections for the month are that 33,400 units are to be produced and that direct labor time is three hours per unit. If the labor cost per hour is $12, what is the total budgeted direct labor cost for May? a. $1,159,200. b. $1,180,800. c. $1,202,400. d. $1,296,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
103.
Novak Co. estimates its sales at 240,000 units in the first quarter and that sales will increase by 24,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale. Production in units for the third quarter should be budgeted at a. 294,000. b. 276,000. c. 366,000. d. 288,000.
Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
104.
Novak Co. estimates its sales at 240,000 units in the first quarter and that sales will increase by 24,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale. Cash collections for the third quarter are budgeted at a. $4,068,000. b. $5,904,000. c. $7,092,000. d. $8,208,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 105.
23 - 21
Maddux Manufacturing estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale. Production in units for the third quarter should be budgeted at a. 245,000. b. 230,000. c. 305,000. d. 240,000.
Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
106.
Maddux Manufacturing estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale. Cash collections for the third quarter are budgeted at a. $4,746,000. b. $6,888,000. c. $8,274,000. d. $9,576,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
107.
A company determined that the budgeted cost of producing a product is $30 per unit. On June 1, there were 80,000 units on hand, the sales department budgeted sales of 300,000 units in June, and the company desires to have 120,000 units on hand on June 30. The budgeted cost of goods manufactured for June would be a. $7,800,000. b. $11,400,000. c. $9,000,000. d. $10,200,000.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
108.
Of the following items, which one is not obtained from an individual operating budget? a. Selling and administrative expenses b. Accounts receivable c. Cost of goods sold d. Sales
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
109.
Which of the following statements about a budgeted income statement is not true? a. The budgeted income statement is prepared after the financial budgets are prepared. b. The budgeted income statement is prepared on the accrual basis of accounting. c. The budgeted income statement can be prepared in a multiple-step format. d. The budgeted income statement is prepared using the individual operating budgets.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 22 Test Bank for Accounting Principles, Tenth Edition 110.
A company has budgeted direct materials purchases of $400,000 in March and $640,000 in April. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. During April, the following items were budgeted: Wages Expense Purchase of office equipment Selling and Administrative Expenses Depreciation Expense
$200,000 96,000 64,000 48,000
The budgeted cash disbursements for April are a. $864,000. b. $568,000. c. $928,000. d. $976,000. Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
111.
Blake Co. has the following budgeted sales: January $160,000, February $240,000, and March $200,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during March are: a. $224,000. b. $212,000. c. $210,000. d. $200,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
112.
Rachel Industries expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. How much will August's cash disbursements for materials purchases be? a. $135,000 b. $157,500 c. $202,500 d. $210,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
113.
The single most important output in preparing financial budgets is the a. sales forecast. b. determination of the unit cost of the product. c. cash budget. d. budgeted income statement.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
114.
Which of the following does not appear as a separate section on the cash budget? a. Cash receipts b. Cash disbursements c. Capital expenditures d. Financing
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 115.
23 - 23
The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than a. the prior years. b. management's minimum required balance. c. the amount needed to avoid a service charge at the bank. d. the industry average.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
116.
Beginning cash balance plus total receipts a. equals ending cash balance. b. must equal total disbursements. c. equals total available cash. d. is the excess of available cash over disbursements.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
117.
The projection of financial position at the end of the budget period is found on the a. budgeted income statement. b. cash budget. c. budgeted balance sheet. d. sales budget.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
118.
What is the proper preparation sequencing of the following budgets? 1. Budgeted Balance Sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted Income Statement a. 1, 2, 3, 4 b. 2, 3, 1, 4 c. 2, 3, 4, 1 d. 2, 4, 1, 3
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
119.
Porath Manufacturing Co. reported the following information for 2012: October Budgeted sales $1,240,000 • •
November $1,160,000
December $1,440,000
All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
How much cash will Porath receive in November? a. $580,000 b. $1,300,000 c. $1,200,000 d. $1,160,000 Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 24 Test Bank for Accounting Principles, Tenth Edition 120.
The following information was taken from Yang Company’s cash budget for the month of July: Beginning cash balance $480,000 Cash receipts 304,000 Cash disbursements 544,000 If the company has a policy of maintaining a minimum end of the month cash balance of $400,000, the amount the company would have to borrow is a. $160,000. b. $80,000. c. $240,000. d. $96,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
121.
The cash budget reflects a. all revenues and all expenses for a period. b. expected cash receipts and cash disbursements from all sources. c. all the items that appear on a budgeted income statement. d. all the items that appear on a budgeted balance sheet.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
122.
The following credit sales are budgeted by McNaughton Industries: January February March April
$204,000 300,000 420,000 360,000
The company's past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of April is a. $370,320. b. $336,000. c. $360,000. d. $352,800. Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
123.
Peterman Merchandising Company’s cash budget showed total available cash less cash disbursements. What does this amount equal? a. Ending cash balance b. Total cash receipts c. The excess of available cash over cash disbursements d. The amount of financing required
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
124.
Which one of the following sections would not appear on a cash budget? a. Cash receipts b. Financing c. Investing d. Cash disbursements
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 125.
23 - 25
A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were: January $360,000 February 216,000 March 540,000 The cash inflow in the month of March is expected to be a. $406,800. b. $307,800. c. $324,000. d. $388,800.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
126.
Which one of the following items would never appear on a cash budget? a. Office salaries expense b. Interest expense c. Depreciation expense d. Travel expense
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
127.
Blake Taylor Co. reported the following information for 2012: October November December Budgeted sales $460,000 $440,000 $540,000 Budgeted purchases $240,000 $256,000 $288,000 • • • • •
All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month. Cost of goods sold is 35% of sales. Blake Taylor purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month. Accounts payable is used only for inventory acquisitions.
How much cash will Blake Taylor receive during November? a. $220,000 b. $490,000 c. $450,000 d. $440,000 Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 26 Test Bank for Accounting Principles, Tenth Edition 128.
Blake Taylor Co. reported the following information for 2012: October November December Budgeted sales $460,000 $440,000 $540,000 Budgeted purchases $240,000 $256,000 $288,000 • All sales are on credit. • Customer amounts on account are collected 50% in the month of sale and 50% in the following month. • Cost of goods sold is 35% of sales. • Blake Taylor purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month. • Accounts payable is used only for inventory acquisitions. How much is the budgeted balance for Accounts Payable at October 31, 2012? a. $96,000 b. $144,000 c. $204,000 d. $102,400
Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
129.
Samuel, Inc. reported the following information for 2012:
• •
October November December Budgeted sales $620,000 $580,000 $720,000 All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
How much is the November 30, 2012 budgeted Accounts Receivable? a. $600,000 b. $360,000 c. $310,000 d. $290,000 Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
130.
Westover Industries reported the following information for 2012: Budgeted purchases • • •
October $240,000
November $256,000
December $288,000
Operating expenses are: Salaries, $100,000; Depreciation, $40,000; Rent, $20,000; Utilities, $28,000 Operating expenses are paid during the month incurred. Accounts payable is used only for inventory acquisitions.
How much is the budgeted amount of cash to be paid for operating expenses in November? a. $404,000 b. $148,000 c. $188,000 d. $444,000 Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 131.
23 - 27
During September, the capital expenditure budget indicates a $280,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $40,000. The company wants to maintain a minimum cash balance of $20,000. What is the minimum cash loan that must be planned to be borrowed from the bank during September? a. $220,000 b. $240,000 c. $260,000 d. $300,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
132.
Turner Merchandising has budgeted its activity for December according to the following information: 1. 2. 4. 5.
Sales at $800,000, all for cash. Budgeted depreciation for December is $20,000. The cash balance at December 1 was $20,000. Selling and administrative expenses are budgeted at $80,000 for December and are paid for in cash. 6. The planned merchandise inventory on December 31 and December 1 is $24,000. 7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid in cash. How much are the budgeted cash disbursements for December? a. $460,000 b. $680,000 c. $700,000 d. $656,000 Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
133.
Tram Industries expects to purchase $120,000 of materials in March and $140,000 of materials in April. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. How much will April's cash disbursements for materials purchases be? a. $88,200 b. $108,200 c. $132,900 d. $120,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
134.
On January 1, Mendez Manufacturing has a beginning cash balance of $126,000. During the year, the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If Mendez requires an ending cash balance of $120,000, Mendez Manufacturing must borrow a. $96,000. b. $120,000. c. $144,000. d. $276,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 28 Test Bank for Accounting Principles, Tenth Edition 135.
Robertson, Inc. has the following budgeted sales: July $200,000, August $300,000, and September $250,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during September are a. $280,000. b. $265,000. c. $262,500. d. $250,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
136.
Crosse Inc.’s direct materials budget shows total cost of direct materials purchases for April $400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for June are a. $528,000. b. $512,000. c. $480,000. d. $416,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
137.
Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser? a. Direct labor budget b. Cash budget c. Sales budget d. Budgeted income statement
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
138.
The formula for determining budgeted merchandise purchases is budgeted a. production + desired ending inventory – beginning inventory. b. sales + beginning inventory – desired ending inventory. c. cost of goods sold + desired ending inventory – beginning inventory. d. cost of goods sold + beginning inventory – desired ending inventory.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
139.
Which one of the following is a problem resulting from a service company being overstaffed? a. Labor costs will be disproportionately low. b. Profits will be higher because of the additional salaries. c. Staff turnover may increase. d. Revenue may be lost.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
140.
The master budget for a service enterprise a. will have the same types of budgets as a merchandiser. b. may include a sales budget for sales revenue. c. will not include a budgeted income statement. d. includes a service revenue budget based on expected client billings.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 141.
23 - 29
Budgeting in not-for-profit organizations a. is not important because they are not profit-oriented. b. usually starts with budgeting expenditures, rather than receipts. c. is necessary only if some product is produced and sold. d. consists entirely of budgeted contributions.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
142.
For a merchandiser, the starting point in the development of the master budget is the a. cash budget. b. sales budget. c. selling and administrative expenses budget. d. budgeted income statement.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
143.
Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget. b. merchandise purchases budget. c. master time sheet. d. sales forecast.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
144.
Company A is a manufacturer and Company B is a merchandiser. What is the difference in the budgets the two entities will prepare? a. Company A will prepare a production budget, and Company B will prepare a merchandise purchases budget. b. Company A will prepare a sales forecast, and Company B will prepare a sales budget. c. Company B will prepare a production budget, and Company A will prepare a merchandise purchases budget. d. Both companies will prepare the same types of budgets.
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
145.
An appropriate activity index for a college or university for budgeting faculty positions would be the a. faculty hours worked. b. number of administrators. c. credit hours taught by a department. d. number of days in the school term.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
146.
A critical factor in budgeting for a service firm is to a. hire professional staff to perform the budgeting work. b. coordinate professional staff needs with anticipated services. c. classify all personnel as either variable or fixed. d. budget expenditures before anticipated receipts.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 30 Test Bank for Accounting Principles, Tenth Edition 147.
The primary benefits of budgeting include all of the following except it a. requires only top management to plan ahead and formalize their future goals. b. provides definite objectives for evaluating performance. c. creates an early warning system for potential problems. d. motivates personnel throughout the organization.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
148.
The responsibility for expressing management's budgeting goals in financial terms is performed by the a. accounting department. b. top management. c. lower level of management. d. budget committee.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
149.
Coordinating the preparation of the budget is the responsibility of the a. treasurer. b. president. c. chief accountant. d. budget committee.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
150.
For better management acceptance, the flow of input data for budgeting should begin with the a. accounting department. b. top management. c. lower levels of management. d. budget committee.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
151.
In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production to a. desired ending direct materials. b. beginning direct materials. c. desired ending direct materials less beginning direct materials. d. beginning direct materials less desired ending direct materials.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
152.
Baliff Co. has 24,000 units in beginning finished goods. If sales are expected to be 120,000 units for the year and Baliff desires ending finished goods of 30,000 units, how many units must the company produce? a. 114,000 b. 120,000 c. 126,000 d. 150,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning 153.
23 - 31
The important end-product of the operating budgets is the a. budgeted income statement. b. cash budget. c. production budget. d. budgeted balance sheet.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
154.
On January 1, Benko Co. has a beginning cash balance of $42,000. During the year, the company expects cash disbursements of $340,000 and cash receipts of $290,000. If Benko requires an ending cash balance of $40,000, the company must borrow a. $32,000. b. $40,000. c. $48,000. d. $92,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
155.
The budget that is often considered to be the most important financial budget is the a. cash budget. b. capital expenditure budget. c. budgeted income statement. d. budgeted balance sheet.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
156.
Lane Company's direct materials budget shows total cost of direct materials purchases for January $250,000, February $300,000 and March $350,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for March are a. $330,000. b. $320,000. c. $300,000. d. $260,000.
Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
157.
A purchases budget is used instead of a production budget by a. merchandising companies. b. service enterprises. c. not-for-profit organizations. d. manufacturing companies.
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
158.
Which of the following statements is incorrect? a. A continuous twelve-month budget results from dropping the month just ended and adding a future month. b. The production budget is derived from the direct materials and direct labor budgets. c. The cash budget shows anticipated cash flows. d. In the budget process for not-for-profit organizations, the emphasis is on cash flow rather than on revenue and expenses.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 32 Test Bank for Accounting Principles, Tenth Edition
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
b b b c a d d b c c d d b a d d d b
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
d c d d b c d a d b d c d c a b d a
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.
d d c d b d b a c d d a c b b a c a
91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
c a a c a a a a c d b c a c a c d b
109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.
a c b c c c b c c c c a b c c c a c
127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144.
c a d b c b c c b a a c c d b b b a
145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158.
c b a a d c c c a c a a a b
BRIEF EXERCISES BE 159 Boyd Company manufactures sweaters. The budgeted units to be produced and sold are below: August September
Expected Production 6,200 5,600
Expected Sales 5,800 7,800
It takes 24 yards of yarn to produce a sweater. The company's policy is to maintain yarn at the end of each month equal to 5% of next month's production needs and to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated production needs. The cost of yarn is $0.20 a yard. At August 1, 7,440 yards of yarn were on hand. Instructions Compute the budgeted cost of purchases for August. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 159
(5 min.)
Units to be produced Yards needed per unit Yards needed for production Add: Desired materials ending inventory (yards) (5% × 5,600 × 24) Less: Beginning inventory on hand (yards) (5% × 6,200 × 24) Yards needed to purchase Cost per yard Budgeted cost of purchases For Instructor Use Only
6,200 24 148,800 6,720 (7,440) 148,080 $0.20 $29,616
Budgetary Planning
23 - 33
BE 160 The budget components for Curran Industries for the quarter ended June 30 appear below. Curran sells coffee makers for $12 each. Budgeted production for the next four months is: April May June
52,000 units 92,000 units 58,000 units
Curran desires to have coffee makers on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Curran had 8,000 completed units on hand. The number of coffee makers to be produced in April and May are 52,000 and 92,000, respectively. Seven pounds of plastic are required for each coffee maker. At the end of each month, Curran desires to have 10 percent of the following month’s production material needs on hand. At March 31, Curran had 36,400 pounds of plastic on hand. The materials used in production costs $0.60 per pound. Each coffee maker produced requires 0.10 hours of direct labor. Instructions Compute the cost of the plastic inventory at the end of May. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 160
(4 min.)
Cost of ending inventory = (10% × 58,000) × 7 × $0.60 per pound = $24,360 BE 161 Shawn Manufacturing makes and sells toasters. Each toaster uses 3/4 pound of plastic. Budgeted production of toasters in units for the next three months is as follows: Budgeted production
April 42,000
May 40,000
June 48,000
The company wants to maintain monthly ending inventories of plastic equal to 25% of the following month's budgeted production needs. The cost of plastic is $2.12 per pound. Instructions Prepare a direct materials purchases budget for the month of May. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 161
(5 min.)
Toasters to be produced during May Pounds of plastic needed for each toaster Total pounds of plastic needed for production Add ending inventory, pounds of plastic desired (25% × 48,000 × 3/4) Less beginning inventory, pounds of plastic (25% × 40,000 × 3/4) Pounds of plastic needed to purchase Cost per pound Estimated cost of purchases for May
For Instructor Use Only
40,000 3/4 30,000 9,000 (7,500) 31,500 $2.12 $66,780
23 - 34 Test Bank for Accounting Principles, Tenth Edition BE 162 The budget components for Chapa Company for the quarter ended June 30 appear below. Chapa sells speakers for $12 each. Budgeted sales and production for the next three months are: Sales Production April 40,000 units 52,000 units May 100,000 units 92,000 units June 60,000 units 58,000 units Chapa desires to have speakers on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Chapa had 8,000 completed units on hand. The number of speakers to be produced in April and May are 52,000 and 92,000, respectively. Seven pounds of plastic are required for each speaker. At the end of each month, Chapa desires to have 10 percent of the following month’s production material needs on hand. At March 31, Chapa had 36,400 pounds of plastic on hand. The materials used in production cost $0.60 per pound. Each speaker produced requires 0.10 hours of direct labor. Instructions Determine how much the materials purchases budget will be for the month ending April 30. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 162
(5 min.)
Production of speakers expected during April (given) Pounds of plastic per speaker Total pounds of plastic needed for sales production Add ending plastic inventory desired (10% × 92,000 × 7) Total pounds of plastic needed Less beginning inventory of plastic on hand (given) Pounds of plastic to be purchased Cost per pound of plastic Cost of direct materials purchases
52,000 7 364,000 64,400 428,400 (36,400) 392,000 $0.60 $235,200
BE 163 Delgado Company reported the following information for 2012: Budgeted sales Budgeted purchases • •
October $300,000 $120,000
November $320,000 $128,000
December $360,000 $144,000
All sales are on credit. Customer amounts on account are collected 60% in the month of sale and 40% in the following month.
Instructions Compute the amount of cash Delgado will receive during November. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 163
23 - 35
(3 min.)
From November sales: $320,000 × 60% = $192,000 From October sales: $300,000 × 40% = $120,000 Total = $192,000 + $120,000 = $312,000 BE 164 Eaton Company budgeted the following information for 2012: Budgeted purchases • • • •
May $104,000
June $110,000
July $102,000
Cost of goods sold is 40% of sales. Accounts payable is used only for inventory acquisitions. Eaton purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month. Selling and administrative expenses are budgeted at $40,000 for May and are expected to increase 5% per month. They are paid during the month of acquisition. In addition, budgeted depreciation is $10,000 per month. Income taxes are $38,400 for July and are paid in the month incurred.
Instructions Compute the amount of budgeted cash disbursements for July. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 164
(5 min.)
Cash disbursements: Cash paid for July purchases (60% × $102,000) Cash paid for June purchases (40% * $110,000) Cash paid for July selling and admin ($40,000 × 1.05 × 1.05) Cash paid for income taxes Total cash disbursements
$ 61,200 44,000 44,100 38,400 $187,700
BE 165 Foos Manufacturing Company has budgeted direct materials purchases of $400,000 in March and $600,000 in April. Past experience indicates that the company pays for 65% of its purchases in the month of purchase and the remaining 35% in the next month. Other costs are all paid during the month incurred. During April, the following items were budgeted: Wages expense Purchase of office equipment Selling and administrative expenses Depreciation expense
$120,000 200,000 126,000 18,000
Instructions Compute the amount of budgeted cash disbursements for April. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 36 Test Bank for Accounting Principles, Tenth Edition Solution 165
(4 min.)
Payment of March purchases ($400,000 × 35%) Payment of April purchases ($600,000 × 65%) Wages expense Purchase of office equipment Selling and administrative expenses Total budgeted cash disbursements
$140,000 390,000 120,000 200,000 126,000 $976,000
BE 166 Hoover Inc. provided the following information: Projected merchandise purchases • • •
April $184,000
May $156,000
June $132,000
Hoover pays 40% of merchandise purchases in the month purchased and 60% in the following month. General operating expenses are budgeted to be $62,000 per month of which depreciation is $6,000 of this amount. Hoover pays operating expenses in the month incurred. Hoover makes loan payments of $8,000 per month of which $900 is interest and the remainder is principal.
Instructions Calculate budgeted cash disbursements for May. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 166
(5 min.)
Budgeted cash disbursements for purchases: Cash paid for May purchases ($156,000 × 40%) Cash paid for April purchases ($184,000 × 60%) Budgeted cash paid for purchases Budgeted cash payments for operating expenses ($62,000 – $6,000) Budgeted cash payments for loan ($8,000 – $900) Budgeted cash payments for interest Total budgeted cash disbursements for May
$ 62,400 110,400 172,800 56,000 7,100 900 $236,800
BE 167 Gledhill, Inc. provided the following information: Projected merchandise purchases • •
March $76,000
April $65,000
May $70,000
Gledhill pays 40% of merchandise purchases in the month purchased and 60% in the following month. General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Gledhill pays operating expenses in the month incurred.
Instructions Calculate Gledhill’s budgeted cash disbursements for May. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 167
23 - 37
(4 min.)
Cash paid for merchandise purchases: May purchases: $70,000 × 40% = April purchases: $65,000 × 60% = Cash paid for operating expenses ($20,000 − $2,000) Budgeted cash disbursements for May
$28,000 39,000 18,000 $85,000
BE 168 The beginning cash balance is $30,000. Sales are forecasted at $1,200,000 of which 80% will be on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $750,000. Accounts Receivable from previous accounting periods totaling $18,000 will be collected in the current year. The company is required to make a $30,000 loan payment and an annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $180,000, and the annual interest rate is 10%. Instructions Compute the excess of cash receipts over cash disbursements. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 168
(5 min.)
Cash collections: Accounts receivable collected Cash sales: 20% × $1,200,000 Credit sales: (80% × $1,200,000) × 70% Cash expenditures Loan payment Interest payment (10% × $180,000) Net increase in cash
$
18,000 240,000 672,000 (750,000) (30,000) (18,000) $ 132,000
EXERCISES Ex. 169 Goff Industries has budgeted the following unit sales: 2012 April May June July
Units 50,000 100,000 150,000 90,000
Of the units budgeted, 40% are sold by the Northern Division at an average price of $15 per unit and the remainder are sold by the Western Division at an average price of $12 per unit. Instructions Prepare separate sales budgets for each division and for the company in total for the second quarter of 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 38 Test Bank for Accounting Principles, Tenth Edition Solution 169
(15–20 min.) GOFF INDUSTRIES Sales Budget For the Quarter Ended June 30, 2012
Northern Division Expected unit sales Unit selling price Total sales
April 20,000 $15 $300,000
May 40,000 $15 $600,000
June 60,000 $15 $900,000
Total 120,000 $15 $1,800,000
Western Division Expected unit sales Unit selling price Total sales
30,000 $12 $360,000
60,000 $12 $720,000
90,000 $12 $1,080,000
180,000 $12 $2,160,000
Total Company Expected unit sales Total sales
50,000 $660,000
100,000 $1,320,000
150,000 $1,980,000
300,000 $3,960,000
Ex. 170 Larsen Company makes and sells a single product, widgets. Three pounds of clay are needed to make one widget. Budgeted production of widgets for the next few months follows: September October
58,000 units 62,000 units
The company wants to maintain monthly ending inventories of clay equal to 20% of the following month's production needs. On August 31, 18,000 pounds of clay were on hand. Instructions How much clay should be purchased in September? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 170
(8 min.)
Expected sales in units during September Pounds of clay needed per widget Pounds of clay needed for September sales units Add: ending inventory desired (20% × 62,000 units × 3 pounds) Less: beginning inventory on hand Pounds of clay needed to be purchased
For Instructor Use Only
58,000 × 3 174,000 37,200 (18,000) 193,200
Budgetary Planning
23 - 39
Ex. 171 Delgado Manufacturing Company manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows: Units of Product 2012 Regular Deluxe Total July 10,000 15,000 25,000 August 6,000 10,000 16,000 September 9,000 14,000 23,000 October 8,000 12,000 20,000 It takes 3 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on hand at the end of each month equal to 30% of the next month's production needs for the Regular product and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on hand at June 30 were 9,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5 Regular and $7 Deluxe. Instructions Prepare separate direct materials budgets for each product for the third quarter of 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 171
(25–30 min.) DELGADO MANUFACTURING COMPANY Direct Materials Budget—Regular For the Quarter Ended September 30, 2012
July Units to be produced 10,000 Direct materials per unit × 3 Total pounds needed for production 30,000 Add: Desired ending direct materials (pounds) 5,400 Total materials required 35,400 Less: Beginning direct materials (pounds) 9,000 Direct materials purchases 26,400 Cost per pound × $5 Total cost of direct materials purchases $132,000 *30% × (8,000 × 3)
August 6,000 × 3 18,000 8,100 26,100 5,400 20,700 × $5 $103,500
For Instructor Use Only
September Total 9,000 × 3 27,000 7,200* 34,200 8,100 26,100 × $5 $130,500 $366,000
23 - 40 Test Bank for Accounting Principles, Tenth Edition Solution Ex. 171 (Cont.) DELGADO MANUFACTURING COMPANY Direct Materials Budget—Deluxe For the Quarter Ended September 30, 2012 July Units to be produced 15,000 Direct materials per unit × 5 Total pounds needed for production 75,000 Add: Desired ending direct materials (pounds) 10,000 Total materials required 85,000 Less: Beginning direct materials (pounds) 15,000 Direct materials purchases 70,000 Cost per pound × $7 Total cost of direct materials purchases $490,000 *20% × (12,000 × 5)
August 10,000 × 5 50,000 14,000 64,000 10,000 54,000 × $7 $378,000
September Total 14,000 × 5 70,000 12,000* 82,000 14,000 68,000 × $7 $476,000 $1,344,000
Ex. 172 Martin Company has budgeted the following unit sales: 2013 January February March April May
Units 10,000 8,000 9,000 11,000 15,000
The finished goods units on hand on December 31, 2012, was 2,000 units. Each unit requires 2 pounds of raw materials that are estimated to cost an average of $4 per pound. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 10% of next month's anticipated sales. They also have a policy of maintaining a raw materials inventory at the end of each month equal to 20% of the pounds needed for the following month's production. There were 3,920 pounds of raw materials on hand at December 31, 2012. Instructions For the first quarter of 2013, prepare (1) a production budget and (2) a direct materials budget. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 172
(25–30 min.)
(1)
MARTIN COMPANY Production Budget For the Quarter Ended March 31, 2013
Expected unit sales Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units
January 10,000 800 10,800 1,000 9,800
February 8,000 900 8,900 800 8,100
*April units: 11,000 × 10%.
For Instructor Use Only
March 9,000 1,100* 10,100 900 9,200
Total
27,100
Budgetary Planning Solution Ex. 172 (Cont.) (2)
23 - 41
MARTIN COMPANY Direct Materials Budget For the Quarter Ended March 31, 2013
Units to be produced Direct materials per unit Total pounds needed for production Desired ending direct materials (pounds) Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials purchases
January 9,800 × 2 19,600 3,240 22,840 3,920 18,920 × $4 $75,680
February 8,100 × 2 16,200 3,680 19,880 3,240 16,640 × $4 $66,560
March 9,200 × 2 18,400 4,560** 22,960 3,680 19,280 × $4 $77,120
Total
$219,360
**April units: 11,400 × 2 = 22,800 × 20%. Ex. 173 Topham Company has budgeted the following unit sales: 2012 Quarter 1 2 3 4
2013 Units 140,000 80,000 100,000 160,000
Quarter 1
Units 120,000
The finished goods inventory on hand on December 31, 2011 was 28,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's anticipated sales. Instructions Prepare a production budget for 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 173
(15–20 min.) TOPHAM COMPANY Production Budget For the Year Ended December 31, 2012
1 Expected unit sales 140,000 Desired ending finished goods units 16,000 Total required units 156,000 Less: Beginning finished goods units 28,000 Required production units 128,000
Quarter 2 3 80,000 100,000 20,000 32,000 100,000 132,000 16,000 20,000 84,000 112,000
*2013 Q1: 120,000 units × 20% = 24,000.
For Instructor Use Only
4 160,000 24,000* 184,000 32,000 152,000
Total
476,000
23 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 174 The following facts are known: •
The total pounds needed for production are 2 times the units to be produced.
•
The desired ending direct materials inventory is 20% of the total pounds needed for production.
•
The beginning direct materials inventory is equal in number to 10% of the units to be produced.
•
Cost per pound is $10.
•
Total cost of the direct materials purchases is $1,610,000.
Instructions Prepare a direct materials budget for the period. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 174
(12–17 min.)
Let X = total units to be produced. Then total pounds needed equals 2X. Desired ending inventory is .20 × 2X. The beginning inventory is .10X. The direct materials budget is: Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials .2(2X) Total materials required Less: Beginning direct materials Direct materials purchases Cost per pound Total cost of direct materials purchases
X 2 2X .4X 2.4X .10X 2.3X $10
70,000* × 2 140,000 28,000 168,000 7,000 161,000 × 10 $1,610,000
*2X + .2(2X) – .1X = 161,000 2X + .4X – .1X = 161,000 2.3X = 161,000 X = 70,000 Ex. 175 Ruiz Company produces chairs from plastic resin. Ruiz has estimated production and sales of chairs in units for the next 2 months as: May June Estimated production 56,000 64,000 Estimated sales 66,000 48,000 Each chair requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Ruiz wants to have 20% of the next month's materials requirements on hand at the end of each month. Instructions Prepare a direct materials purchases budget for the month of May. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 175
23 - 43
(10 min.) RUIZ COMPANY Direct Materials Purchases Budget Month of May
Estimated production in units for May Pounds needed per unit Total pounds needed for production Less: beginning inventory (20% × 56,000 × .25 lbs.) Add: ending inventory desired (20% × 64,000 × .25 lbs.) Pounds needed for production in May Cost per pound Total cost of purchases of materials
56,000 × .25 14,000 (2,800) + 3,200 14,400 × $4.50 $64,800
Ex. 176 Sugar Company is preparing its direct labor budget for 2012 from the following production budget based on a calendar year: Quarter 1 2 3 4
Units 80,000 40,000 60,000 100,000
Each unit requires 1.5 hours of direct labor. The union contract provides for a 10% increase in wage rate to $11 per hour on October 1. Instructions Prepare a direct labor budget for 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 176
(15–20 min.) SUGAR COMPANY Direct Labor Budget For the Year Ended December 31, 2012 Quarter
1 2 Units to be produced 80,000 40,000 Direct labor time (hours) per unit × 1.5 × 1.5 Total required direct labor hours 120,000 60,000 Direct labor cost per hour × $10* × $10 Total direct labor cost $1,200,000 $600,000
3 4 60,000 100,000 × 1.5 × 1.5 90,000 150,000 × $10 × $11 $900,000 $1,650,000
*$11 ÷ 110% = $10.
For Instructor Use Only
Total
$4,350,000
23 - 44 Test Bank for Accounting Principles, Tenth Edition Ex. 177 For each item given, identify the budget in which it will appear. If an item will appear on more than one budget, then indicate as many budgets as are relevant. Budget Code: DM DL P S C BBS BIS SA MOH
Direct Materials Budget Direct Labor Budget Production Budget Sales Budget Cash Budget Budgeted Balance Sheet Budgeted Income Statement Selling and Administrative Expense Budget Manufacturing Overhead Budget
___________
1. Ending cash balance
___________
2. Total selling and administrative expenses
___________
3. Total sales (in dollars)
___________
4. Interest expense
___________
5. Ending raw materials inventory (in dollars)
___________
6. Ending finished goods inventory (in dollars)
Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 177 BBS, C SA, BIS S, BIS C, BIS BBS, DM BBS, BIS
(10–13 min.) 1. Ending cash balance 2. Total selling and administrative expenses 3. Total sales (in dollars) 4. Interest expense 5. Ending raw materials inventory (in dollars) 6. Ending finished goods inventory (in dollars)
Ex. 178 Planto Company is preparing its master budget for 2012. Relevant data pertaining to its sales budget are as follows: Sales for the year are expected to total 12,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.30 per unit in the second quarter. Instructions Prepare a sales budget for 2012 for Planto Company. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning
23 - 45
Solution 178 (9–14 min.) PLANTO COMPANY Sales Budget For the Year Ended December 31, 2012
Unit sales Unit selling price Total sales
1 3,000,000 × $2.00 $6,000,000
Quarter 2 3 3,600,000 1,800,000 × $2.30 × $2.30 $8,280,000 $4,140,000
4 3,600,000 × $2.30 $8,280,000
Year 12,000,000 Var. $26,700,000
Ex. 179 Ventura Manufacturing Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2012, the following data are developed: 1. Sales: 20,000 units; unit selling price: 2. Variable costs per dollar of sales: Sales commissions Delivery expense Advertising 3. Fixed costs per quarter: Sales salaries Office salaries Depreciation Insurance Utilities
$35 6% 2% 4% $24,000 17,000 6,000 2,000 1,000
Instructions Prepare a selling and administrative expense budget for the first quarter of 2012. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 179
(12–17 min.) VENTURA MANUFACTURING COMPANY Selling and Administrative Expense Budget For the Quarter Ended March 31, 2012
Variable expenses Sales commissions ($700,000 × 6%) Delivery expense ($700,000 × 2%) Advertising ($700,000 × 4%) Total variable Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Total fixed Total selling and administrative expenses
For Instructor Use Only
$ 42,000 14,000 28,000 84,000 $ 24,000 17,000 6,000 2,000 1,000 50,000 $134,000
23 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 180 Walk Company is preparing its manufacturing overhead budget for 2012. Relevant data consist of the following. Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000. Direct labor: Time is 1 hour per unit. Variable overhead costs per direct labor hour: Indirect materials $0.90; indirect labor $1.20; and maintenance $0.50. Fixed overhead costs per quarter: Supervisory salaries $40,000; depreciation $16,000; and maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year, showing quarterly data. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 180
(15 min.) WALK COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2012 1
Variable costs Indirect materials ($.90/hour) Indirect labor($1.20/hour) Maintenance($.50/hour) Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead Direct labor hours Manufacturing overhead rate per direct labor hour ($407,200 52,000)
Quarter 2
3
4
Year
$9,000 12,000 5,000 26,000
$10,800 14,400 6,000 31,200
$12,600 16,800 7,000 36,400
$14,400 19,200 8,000 41,600
$46,800 62,400 26,000 135,200
40,000 16,000 12,000 68,000 $94,000
40,000 16,000 12,000 68,000 $99,200
40,000 16,000 12,000 68,000 $104,400
40,000 16,000 12,000 68,000 $109,600
160,000 64,000 48,000 272,000 $407,200
10,000
12,000
14,000
16,000
52,000 $7.83
Ex. 181 Zhao Company has accumulated the following budget data for the year 2012. 1. Sales: 60,000 units, unit selling price $50. 2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5 hours at $12 per hour, and manufacturing overhead $6 per direct labor hour. 3. Inventories (raw materials only): Beginning, 20,000 pounds; ending, 30,000 pounds. 4. Raw materials cost: $5 per pound. 5. Selling and administrative expenses: $320,000. 6. Income taxes: 30% of income before income taxes.
For Instructor Use Only
Budgetary Planning
23 - 47
Ex. 181 (Cont.) Instructions (a) Prepare a schedule showing the computation of cost of goods sold for 2012. (b) Prepare a budgeted income statement for 2012. Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 16, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 181
(16 min.)
(a) ZHAO COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2012 Cost of one unit of finished goods: Direct materials (2 × $5) ................................................................. ......................... Direct labor (1.5 × $12) .................................................................. ......................... Manufacturing overhead (1.5 × $6) ................................................ ......................... Total ......................................................................................... ................ .......
$10 18 9 $37
60,000 units × $37 = $2,220,000. (b) ZHAO COMPANY Budgeted Income Statement For the Year Ending December 31, 2012 Sales (60,000 × $50)............................................................................ Cost of goods sold (see part (a)) .......................................................... Gross profit .......................................................................................... Selling and administrative expenses .................................................... Income before income taxes ................................................................ Income tax expense ($460,000 × 30%) ................................................ Net income...........................................................................................
$3,000,000 2,220,000 780,000 320,000 460,000 138,000 $ 322,000
Ex. 182 The Northeast Regional Division of Payne Wholesale Corporation has been requested to prepare a quarterly budgeted income statement for 2013. The regional manager expects that sales in the first quarter of 2013 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2013. The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales. Budgeted ending inventory on December 31, 2012 is $132,000. Quarterly salaries are $15,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows: Rent expense Depreciation on office equipment Utilities expense Miscellaneous expenses
$18,000 $9,000 $2,700 2% of sales
For Instructor Use Only
23 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 182 (Cont.) The income statement for the first quarter of 2012 was as follows: Income Statement For the Quarter Ended March 31, 2012 Sales .................................................................................................... Cost of goods sold................................................................................ Gross profit........................................................................................... Operating expenses Sales salaries................................................................................ Rent expense ................................................................................ Depreciation .................................................................................. Utilities .......................................................................................... Miscellaneous ............................................................................... Total operating expenses ....................................................... Net income ...........................................................................................
$480,000 264,000 216,000 $39,000 18,000 9,000 2,700 9,600 78,300 $137,700
Instructions Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2013. (Show computations.) Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 18, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 182
(18–23 min.)
PAYNE WHOLESALE CORPORATION Northeast Regional Division Budgeted Income Statement For the Quarter Ended March 31, 2013 Sales (1) ............................................................................................................ Cost of goods sold (2) ........................................................................................ Gross profit......................................................................................................... Operating expenses Sales salaries (3) ........................................................................................ Rent expense .............................................................................................. Depreciation ................................................................................................ Utilities ........................................................................................................ Miscellaneous (4) ........................................................................................ Total operating expenses ..................................................................... Net income ......................................................................................................... (1) (2)
(3) (4)
Sales Qtr. 1 $480,000 × 110% = $528,000 Cost of goods sold Beginning inventory Purchases ($528,000 × 55% = $290,400) Cost of goods available Ending inventory ($528,000 × 105% = $554,400 × 25% = $138,600) Cost of goods sold Sales salaries: $15,000 + ($528,000 × .05) = $41,400. Miscellaneous expenses: $528,000 × .02 = $10,560.
For Instructor Use Only
$528,000 283,800 244,200 41,400 18,000 9,000 2,700 10,560 81,660 $162,540
$132,000 290,400 422,400 138,600 $283,800
Budgetary Planning
23 - 49
Ex. 183 In September 2012, the budget committee of Scoles Company assembles the following data: 1. Expected Sales October $1,800,000 November 1,700,000 December 1,600,000 2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 183
(16–21 min.) SCOLES COMPANY Budgeted Income Statement For the Month Ended October 31, 2012
Sales Cost of goods sold Inventory, October 1 Purchases Cost of goods available for sale Less: Inventory, October 31 Cost of goods sold Gross profit
$1,800,000 $216,000 1,068,000 1,284,000 204,000 1,080,000 $720,000
Supporting Computations: Budgeted cost of goods sold (1) Desired ending merchandise inventory (2) Total Less: Beginning merchandise inventory (3) Budgeted merchandise purchases
$1,080,000 204,000 1,284,000 216,000 $1,068,000
October (1) $1,800,000 × 60% = $1,080,000. (2) ($1,700,000 × 60%) × 20% = $204,000. (3) $1,080,000 × 20% = $216,000. Ex. 184 Ventura, Inc. provided the following information: Projected sales Projected merchandise purchases •
July $220,000 $150,000
August $260,000 $180,000
Ventura estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts. For Instructor Use Only
23 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 184 (Cont.) • Ventura pays 30% of merchandise purchases in the month purchased and 70% in the following month. •
General operating expenses are budgeted to be $40,000 per month of which depreciation is $4,000 of this amount. Ventura pays operating expenses in the month incurred.
•
Ventura makes loan payments of $6,000 per month of which $800 is interest and the remainder is principal.
Instructions Calculate Ventura's budgeted cash disbursements for August. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 184
(8 min.)
Cash paid for merchandise purchases: August purchases: $180,000 × 30% July purchases: $150,000 × 70% Cash paid for operating expenses ($40,000 – $4,000) Cash paid for loan ($6,000 – $800) Cash paid for interest Budgeted cash disbursements for August
$ 54,000 105,000 36,000 5,200 800 $201,000
Ex. 185 Kohl Company has budgeted sales revenues as follows: January February March April May June
Budgeted Sales Revenues $55,000 75,000 90,000 60,000 45,000 35,000
Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible. Instructions Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 185
23 - 51
(20–25 min.) KOHL COMPANY Expected Cash Receipts from Sales For the Quarter Ended June 30 April
February sales Credit sales: ($75,000 × .80 × .05)
May
June
$ 3,000
March sales Credit sales: ($90,000 × .80 × .30) ($90,000 × .80 × .05)
21,600 $ 3,600
April sales Credit sales: ($60,000 × .80 × .60) ($60,000 × .80 × .30) ($60,000 × .80 × .05) Cash sales: ($60,000 × .20)
28,800 14,400 $ 2,400 12,000
May sales Credit sales: ($45,000 × .80 × .60) ($45,000 × .80 × .30) Cash sales: ($45,000 × .20)
21,600 10,800 9,000
June sales Credit sales: ($35,000 × .80 × .60) Cash sales: ($35,000 × .20) Total cash receipts
$65,400
$48,600
16,800 7,000 $37,000
Ex. 186 Rodie Company has budgeted sales revenues as follows: June $135,000 90,000 $225,000
Credit sales Cash sales Total sales
July $145,000 255,000 $400,000
August $ 90,000 195,000 $285,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are: June July August
$300,000 250,000 105,000
Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash. For Instructor Use Only
23 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 186
(Cont.)
The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. The company borrows money from the bank at 8% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 186
(25–35 min.) RODIE COMPANY Cash Budget For the Two Months of July and August
Beginning cash balance Add: Receipts Collections from customers Cash sales Total receipts Total available cash Less: Disbursements Purchases Selling and administrative expenses Dividends Equipment purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance
July $ 50,000
August $ 50,000
141,000 255,000 396,000 446,000
112,000 195,000 307,000 357,000
275,000 48,000 103,000
177,500 48,000
426,000 20,000
30,000 255,500 101,500
30,000 $ 50,000
(30,200)* $ 71,300
*30,000 × 8% × 1/12 = $200 + $30,000 = $30,200. Schedule of Expected Collections from Customers Credit sales June (135,000 × 40%) July ($145,000 x 60%)/ (145,000 x 40%) August ($90,000 x 60%) Total collections
For Instructor Use Only
July $ 54,000 87,000 $141,000
August $ 58,000 54,000 $112,000
Budgetary Planning
23 - 53
Solution 186 (Cont.) Schedule of Expected Payments for Purchases of Inventory Inventory purchases June ($300,000) July ($250,000) August ($105,000) Total payments
July $150,000 125,000 $275,000
August $125,000 52,500 $177,500
Ex. 187 O’Brien Company’s projected sales are as follows: August September October
$480,000 $540,000 $660,000
O’Brien estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. Instructions How much are O’Brien Company’s budgeted cash receipts for October? Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 187
(8 min.)
Collections from October sales: $660,000 × 30% Collections from September sales: $540,000 × 50% Collections from August sales: 480,000 × 18% Total budgeted cash receipts for October
$ 198,000 270,000 86,400 $554,400
Ex. 188 The Park County Credit Union has asked Volas, Inc. for a budgeted balance sheet for the year ended December 31, 2012. The following information is available: 1. The cash budget shows an expected cash balance of $75,000 at December 31, 2012. 2. The 2012 sales budget shows total annual sales of $900,000. All sales are made on account and accounts receivable at December 31, 2012 are expected to be 10% of annual sales. 3. The merchandise purchases budget shows budgeted cost of goods sold for 2012 of $600,000 and ending merchandise inventory of $105,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2012. 4. The December 31, 2011 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $120,000, Common Stock $270,000, and Retained Earnings $48,000. 5. The budgeted income statement for 2012 includes the following: depreciation on equipment $15,000, federal income taxes $24,000, and net income $66,000. The income taxes will not be paid until 2013. 6. In 2012, management does not expect to purchase additional equipment or to declare any dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
For Instructor Use Only
23 - 54 Test Bank for Accounting Principles, Tenth Edition Ex. 188 (Cont.) Instructions Prepare an unclassified budgeted balance sheet at December 31, 2012. Ans: N/A, SO: 5, Bloom: C, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 188
(20–25 min.) VOLAS, INC. Budgeted Balance Sheet December 31, 2012
Assets Cash..................................................................................................... Accounts receivable ............................................................................. Merchandise inventory ......................................................................... Equipment ............................................................................................ $294,000 Less: Accumulated depreciation ($120,000 + $15,000) ........................ 135,000 Total assets................................................................................... Liabilities and Stockholders' Equity Accounts payable ................................................................................. Income taxes payable .......................................................................... Common stock ..................................................................................... Retained earnings ($48,000 + $66,000) ............................................... Total liabilities and stockholders' equity .........................................
$ 75,000 90,000 105,000 159,000 $429,000 $ 21,000 24,000 270,000 114,000 $429,000
Ex. 189 The management of Vincent Industries estimates that credit sales for August, September, October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale
25% 60% 10%
Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 189
23 - 55
(13–18 min.)
Collections from Customers August Sales ($540,000 × .10) September Sales ($750,000 × .60) ($750,000 × .10) October Sales ($840,000 × .25) ($840,000 × .60) November Sales ($480,000 × .25) Total collections
October
November
$ 54,000
$
-0-
450,000 75,000 210,000 504,000 -0$714,000
120,000 $699,000
Ex. 190 The beginning cash balance is $20,000. Sales are forecasted at $800,000 of which 80% will be on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $500,000. Accounts receivable from previous accounting periods totaling $12,000 will be collected in the current year. The company is required to make a $20,000 loan payment and an annual interest payment on the last day of the year. The loan balance as of the beginning of the year is $120,000, and the annual interest rate is 10%. Instructions How much will be reported as 'cash' on the budgeted balance sheet? Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 190
(12 min.)
Cash collections: Accounts receivable collected Cash sales: 20% × $800,000 Credit sales: (80% × $800,000) × 70% Cash expenditures Loan payment Interest payment (10% × $120,000) Net increase in cash Add: beginning cash balance Ending cash balance
$ 12,000 160,000 448,000 (500,000) (20,000) (12,000) 88,000 20,000 $108,000
Ex. 191 Cameron Company has budgeted sales revenue as follows for the next 4 months: February March April May
$300,000 240,000 210,000 330,000
Past experience indicates that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible.
For Instructor Use Only
23 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 191 (Cont.) Instructions Prepare a schedule which shows expected cash receipts from sales for the month of May. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 191
(7–9 min.) CAMERON COMPANY Expected Cash Receipts from Sales For the Month Ended May 31
March sales Credit sales: ($240,000 × .80 × .03)
$
5,760
April sales Credit sales: ($210,000 × .80 × .35)
58,800
May sales Credit sales: ($330,000 × .80 × .60) Cash sales: ($330,000 × .20) Total cash receipts
158,400 66,000 $288,960
Ex. 192 Graham Company's budgeted sales and direct materials purchases are as follows. January February March
Budgeted Sales $300,000 330,000 400,000
Budgeted D.M. Purchases $60,000 70,000 82,000
Graham's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Graham's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of purchase, and 60% in the month following purchase. Instructions (a) Prepare a schedule of expected collections from customers for March. (b) Prepare a schedule of expected payments for direct materials for March. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning Solution 192
23 - 57
(10 min.)
(a) GRAHAM COMPANY Expected Collections from Customers March March cash sales (40% × $400,000) ................................................................... $160,000 Collection of March credit sales [(60% × $400,000) × 10%]............................................................................. 24,000 Collection of February credit sales [(60% × $330,000) × 50%]............................................................................. 99,000 Collection of January credit sales [(60% × $300,000) × 36%]............................................................................. 64,800 Total collections ................................................................................... $347,800 (b) GRAHAM COMPANY Expected Payments for Direct Materials March March cash purchases (50% × $82,000) ............................................................. $41,000 Payment of March credit purchases [(50% × $82,000) × 40%] .............................................................................. 16,400 Payment of February credit purchases [(50% × $70,000) × 60%] .............................................................................. 21,000 Total payments ..................................................................................... $78,400 Ex. 193 Lincoln Landscaping Inc. is preparing its budget for the first quarter of 2012. The next step in the budgeting process is to prepare a cash receipts schedule and a cash payments schedule. To that end the following information has been collected. Clients usually pay 60% of their fee in the month that service is provided, 30% the month after, and 10% the second month after receiving service. Actual service revenue for 2011 and expected service revenues for 2012 are: November 2011, $120,000; December 2011, $110,000; January 2012, $130,000; February 2012, $160,000; March 2012, $170,000. Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase and 60% the following month. Actual purchases for 2011 and expected purchases for 2012 are: December 2011, $21,000; January 2012, $18,000; February 2012, $22,000; March 2012, $27,000. Instructions (a) Prepare the following schedules for each month in the first quarter of 2012 and for the quarter in total: (1) Expected collections from clients. (2) Expected payments for landscaping supplies.
For Instructor Use Only
23 - 58 Test Bank for Accounting Principles, Tenth Edition Ex. 193 (Cont.) (b) Determine the following balances at March 31, 2012: (1) Accounts receivable. (2) Accounts payable. Ans: N/A, SO: 5,6, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 193
(12 min.)
(a) (1) LINCOLN LANDSCAPING INC. Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2012 January February March November ($120,000) ........ $12,000 December ($110,000) ........ 33,000 $11,000 January ($130,000) ............ 78,000 39,000 $13,000 February ($160,000)........... 96,000 48,000 March ($170,000) ........................ 102,000 Total collections ............ $123,000 $146,000 $163,000
Quarter $ 12,000 44,000 130,000 144,000 102,000 $432,000
(2) LINCOLN LANDSCAPING INC. Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2012 January February March December ($21,000) .......... $12,600 January ($18,000) .............. 7,200 $10,800 February ($22,000)............. 8,800 $13,200 March ($27,000) ................. 10,800 Total payments ............. $19,800 $19,600 $24,000
Quarter $12,600 18,000 22,000 10,800 $63,400
(b) (1) Accounts receivable at March 31, 2012: ($160,000 × 10%) + ($170,000 × 40%) = $84,000 (2) Accounts payable at March 31, 2012: ($27,000 × 60%) = $16,200 Ex. 194 In May 2012, the budget committee of Dunker Stores assembles the following data in preparation of budgeted merchandise purchases for the month of June. 1. Expected sales: June $1,500,000, July $1,800,000. 2. Cost of goods sold is expected to be 70% of sales. 3. Desired ending merchandise inventory is 40% of the following (next) month's cost of goods sold. 4. The beginning inventory at June 1 will be the desired amount. Instructions (a) Compute the budgeted merchandise purchases for June. (b) Prepare the budgeted income statement for June through gross profit. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning
23 - 59
Solution 194 (12 min.) (a) DUNKER STORES Merchandise Purchases Budget For the Month Ending June 30, 2012 Budgeted cost of goods sold ($1,500,000 × 70%) ........................................ Add: Desired ending merchandise inventory ($1,800,000 × 70% × 40%) ..................................................................... Total ............................................................................................................. Less: Beginning merchandise inventory ($1,050,000 × 40%) ................................................................................ Required merchandise purchases ................................................................
$1,050,000 504,000 1,554,000 420,000 $1,134,000
(b) DUNKER STORES Budgeted Income Statement For the Month Ending June 30, 2012 Sales ............................................................................................................ Cost of goods sold (70% × $1,500,000) ........................................................ Gross profit ...................................................................................................
$1,500,000 1,050,000 $450,000
Ex. 195 In September 2012, the management of Kilian Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November. 1. Expected Sales October November December
$1,500,000 2,100,000 2,700,000
2. Cost of goods sold is expected to be 68% of sales. 3. Desired ending merchandise inventory is 25% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month. Ans: N/A, SO: 6, Bloom: C, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 195
(12–17 min.) KILIAN COMPANY Merchandise Purchases Budget For the Months of October and November, 2012
Budgeted cost of goods sold Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchase For Instructor Use Only
October $1,020,000 357,000 1,377,000 255,000 $1,122,000
November $1,428,000 459,000 1,887,000 357,000 $1,530,000
23 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 195 (Cont.) October $1,500,000 × 68% = $1,020,000 $1,428,000 × 25% = $357,000 $1,020,000 × 25% = $255,000
November $2,100,000 × 68% = $1,428,000 $2,700,000 × 68% × 25% = $459,000
COMPLETION STATEMENTS 196. A _________________ is a formal written statement of management's plans expressed in financial terms. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
197. A budget is a primary means of ________________ agreed upon objectives throughout the business organization. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
198. Effective budgeting is dependent on an _________________________ in which authority and responsibility are clearly defined. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
199. The budget should have the support of _________________ and should be an important basis for _________________________ by comparing actual results to expected results. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
200. Many companies use ____________________________ budgets by dropping the month just ending and adding a future month. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
201. A __________________ is responsible for coordinating the preparation of the budget in many companies. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
202. A major difference between the annual budget and long-range planning is the ____________________ over which the data pertain. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
203. The ____________________ is the starting point in preparing the master budget. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
204. The formula for developing a production budget is ___________________ plus ______________________ minus _______________________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Planning
23 - 61
205. The ________________ is a set of interrelated budgets that constitutes a plan of action for a specified period of time. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
206. Three major sections of a cash budget are (1) ___________________, (2) ____________________, and (3) ______________________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
207. The two major differences between the master budgets of a merchandiser and a manufacturer are that the merchandiser will have a ______________________ budget and will not have __________________ budgets. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Answers to Completion Statements 196. 197. 198. 199.
budget communicating organizational structure top management, evaluating performance 200. continuous twelve-month 201. budget committee 202. time period
203. sales budget 204. budgeted sales units, desired ending finished goods units, beginning finished goods units 205. master budget 206. cash receipts, cash disbursements, financing 207. merchandise purchases, manufacturing
MATCHING 208. Match the items below by entering the appropriate code letter in the space provided. A. Budget B. Financial budgets C. Budget committee D. Master budget E. Sales forecast
F. G. H. I. J.
Production budget Cash budget Long-range planning Direct materials budget Sales budget
____ 1. A selection of strategies to achieve long-term goals. ____ 2. An estimate of expected sales for the budget period. ____ 3. Budgets that indicate the cash resources needed for expected operations and planned capital expenditures. ____ 4. The projection of potential sales for the industry and the company's expected share of such sales. ____ 5. Management's plans expressed in financial terms for a specified future time period. ____ 6. A projection of anticipated cash flows. For Instructor Use Only
23 - 62 Test Bank for Accounting Principles, Tenth Edition Matching 208 (Cont.) ____ 7. A group responsible for coordinating the preparation of the budget. ____ 8. A projection of production requirements to meet expected sales. ____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period. ____ 10. An estimate of the quantity and cost of direct materials to be purchased. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Answers to Matching 1. 2. 3. 4. 5.
H J B E A
6. 7. 8. 9. 10.
G C F D I
SHORT-ANSWER ESSAY QUESTIONS S-A E 209 (a) What is a budget? (b) How does a budget contribute to good management? Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 209 (a) A budget is a formal written statement of management's plans for a specified future time period, expressed in financial terms. (b) A budget aids management in planning because it represents the primary means of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance. S-A E 210 Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly. Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 210 When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behavior patterns by motivating personnel to meet planned objectives. However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals. For Instructor Use Only
Budgetary Planning
23 - 63
S-A E 211 Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions. Ans: N/A, SO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 211 Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms. Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies. Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented. Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning. S-A E 212 What is participative budgeting? What are its potential benefits? What are its potential shortcomings? Ans: N/A, SO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 212 Participative budgeting involves the use of a "bottom to top" approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack. S-A E 213 (Ethics) Dustin Fuller is a new production manager. After a great deal of effort, including considerable market research, he completes his budget and submits it to his boss, Alexandra Bricker. Without even looking at it, she asks him what his "fudge factor" was, and which items contained the most slack. Dustin, very surprised, responds that he doesn't use any "fudge factor," and that all his figures are honest. Ms. Bricker counters by asking him how he would respond if he had to cut about 20% from his budget, as it is. She tells him that most budgets are trimmed in committee, and he had better be ready. She returns the budget to him, and tells him to come back with something reasonable. Required: 1. Is it ethical to build slack into a budget? Explain. 2. Was it ethical for Ms. Bricker to refuse to accept a budget without slack? Briefly explain. Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
23 - 64 Test Bank for Accounting Principles, Tenth Edition Solution 213 1. Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical. 2. As Dustin Fuller's superior, Ms. Bricker has the obligation to correct his mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Dustin must continue to be honest. One way to do that would be for Dustin to submit his trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Ms. Bricker the ability to intelligently defend his budget while in committee. S-A E 214 (Communication) At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Ed Klinger, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process. Required: You are the accounting manager. Write a memo to Mr. Klinger. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible. Ans: N/A, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 214 TO: Ed Klinger FROM: Mary Barnes SUBJECT: Budgets At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well. Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use. I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible. (signed)
For Instructor Use Only
CHAPTER 24 BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
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33. 34. sg 35. sg 36. sg 37.
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113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
C C AP C AP C C AP AP AP AN AP AN AP AP AP AP AP AP AP AN AP AP C C
138. 139. 140. 141. 142. 143. 144. 145. 146. 147. sg 148. sg 149. st 150. sg 151. st 152. sg 153. st 154. sg 155. st 156. sg 157. st 158. sg 159.
7 7 7 7 7 7 7 7 7 7 1 2 2 3 3 3 3 4 4 6 7 7
K C K AP K K AP C AP C C K K AP K K K K K K K AP
166. 167.
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AP AP
168. 169.
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AP AN
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 2 2 2 2 2
K C K K C C K C
9. 10. 11. 12. 13. 14. 15. 16.
3 3 3 3 3 3 3 3
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2,3 3 3 3 3 3 3 3 3 3
K C K C K K K C C C C C C C C C C AP AP AP C C K C C
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
C K K C C C K K
17. 18. 19. 20. 21. 22. 23. 24.
3 3 4 4 4 4 4 4
K K C C C C C K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions K C K C C K K AP C C C AP AP AP AP AP AP AP AP AP AP AP AP AP AP
88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.
3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 6 6 6
AP K AP C C C K C C C C K C C C C K C C C C C K C K
Brief Exercises 160. 161.
3 3
AP AP
162. 163.
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164. 165.
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AP AP
24 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 170. 171. 172. 173. 174.
2 2,3 3 3 3
AP AP AP AP AP
175. 176. 177. 178. 179.
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180. 181. 182. 183. 184.
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185. 186. 187. 188. 189.
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190. 191. 192. 193. 194.
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Completion Statements 195. 196. 197.
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198. 199. 200.
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Matching 207
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Short-Answer Essay
sg st
210. 211.
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212. 213.
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This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
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31. 38. 39.
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TF MC MC MC MC MC MC MC MC MC
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Study Objective 1 MC 43. MC 195. MC 44. MC 196. MC 148. MC 197. Study Objective 2 MC 48. MC 51. MC 49. MC 52. MC 50. MC 53. Study Objective 3 MC 72. MC 82. MC 73. MC 83. MC 74. MC 84. MC 75. MC 85. MC 76. MC 86. MC 77. MC 87. MC 78. MC 88. MC 79. MC 151. MC 80. MC 152. MC 81. MC 153.
For Instructor Use Only
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207. 208.
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149. 150. 170.
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171.
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MC MC MC MC MC MC MC MC MC MC
154. 160. 161. 162. 163. 171. 172. 173. 174. 175.
MC BE BE BE BE Ex Ex Ex Ex Ex
176. 177. 178. 179. 180. 181. 198. 199. 209.
Ex Ex Ex Ex Ex Ex C C S-A
Budgetary Control and Responsibility Accounting
19. 20. 21. 22. 23.
TF TF TF TF TF
24. 25. 34. 89. 90.
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91. 92. 93. 94. 95.
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35. 105.
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106. 107.
28. 110. 111.
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112. 113. 114.
MC MC MC
115. 116. 117.
29. 30. 36. 37. 121. 122. 123. 124.
TF TF TF TF MC MC MC MC
125. 126. 127. 128. 129. 130. 131. 132.
MC MC MC MC MC MC MC MC
133. 134. 135. 136. 137. 138. 139. 140.
Note: TF = True-False MC = Multiple Choice
Study Objective 4 MC 96. MC 101. MC 97. MC 102. MC 98. MC 103. MC 99. MC 104. MC 100. MC 155. Study Objective 5 MC 108. MC 182. MC 109. MC 183. Study Objective 6 MC 118. MC 157. MC 119. MC 165. MC 120. MC 181. Study Objective 7 MC 141. MC 159. MC 142. MC 166. MC 143. MC 167. MC 144. MC 168. MC 145. MC 169. MC 146. MC 187. MC 147. MC 188. MC 158. MC 189.
MC MC MC MC MC
156. 164. 182. 200. 201.
MC BE Ex C C
Ex Ex
184.
Ex
MC BE Ex
183. 184. 185.
MC BE BE BE BE Ex Ex Ex
190. 191. 192. 193. 194. 204. 205. 206.
BE = Brief Exercise Ex = Exercise
24 - 3
202. 203. 210. 211.
C C S-A S-A
Ex Ex Ex
186. 187.
Ex Ex
Ex Ex Ex Ex Ex C C C
212. 213.
K K
C = Completion S-A = Short-Answer
CHAPTER STUDY OBJECTIVES 1. Describe the concept of budgetary control. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analyzing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, if necessary. 2. Evaluate the usefulness of static budget reports. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. They are also appropriate in assessing a manager's effectiveness in controlling costs when (a) actual activity closely approximates the master budget activity level, and/or (b) the behavior of the costs in response to changes in activity is fixed. 3. Explain the development of flexible budgets and the usefulness of flexible budget reports. To develop the flexible budget, it is necessary to: (a) Identify the activity index and the relevant range of activity; (b) Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost; (c) Identify the fixed costs, and determine the budgeted amount for each cost; (d) Prepare the budget for selected increments of activity within the relevant range. Flexible budget reports permit an evaluation of a manager's performance in controlling production and costs.
For Instructor Use Only
24 - 4 4
Test Bank for Accounting Principles, Tenth Edition
Describe the concept of responsibility accounting. Responsibility accounting involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items. The evaluation of a manager's performance is based on the matters directly under the manager's control. In responsibility accounting, it is necessary to distinguish between controllable and noncontrollable fixed costs and to identify three types of responsibility centers: cost, profit, and investment.
5. Indicate the features of responsibility reports for cost centers. Responsibility reports for cost centers compare actual costs with flexible budget data. The reports show only controllable costs, and no distinction is made between variable and fixed costs. 6. Identify the content of responsibility reports for profit centers. Responsibility reports show contribution margin, controllable fixed costs, and controllable margin for each profit center. 7. Explain the basis and formula used in evaluating performance in investment centers. The primary basis for evaluating performance in investment centers is return on investment (ROI). The formula for computing ROI for investment centers is: Controllable margin ÷ Average operating assets.
TRUE-FALSE STATEMENTS 1.
Budget reports comparing actual results with planned objectives should be prepared only once a year.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
2.
If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.
Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
3.
Certain budget reports are prepared monthly, whereas others are prepared more frequently depending on the activities being monitored.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
4.
The master budget is not used in the budgetary control process.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
5.
A master budget is most useful in evaluating a manager's performance in controlling costs.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
6.
A static budget is one that is geared to one level of activity.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 7.
24 - 5
A static budget is changed only when actual activity is different from the level of activity expected.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
8.
A static budget is most useful for evaluating a manager's performance in controlling variable costs.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
9.
A flexible budget can be prepared for each of the types of budgets included in the master budget.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
10.
A flexible budget is a series of static budgets at different levels of activities.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
11.
Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12.
Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
13.
A flexible budget is prepared before the master budget.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
14.
The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
15.
A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit × activity level).
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
16.
Flexible budgets are widely used in production and service departments.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
17.
A flexible budget report will show both actual and budget cost based on the actual activity level achieved.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
18.
Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls.
For Instructor Use Only
24 - 6 19.
Test Bank for Accounting Principles, Tenth Edition Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls
20.
A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls
21.
Cost centers, profit centers, and investment centers can all be classified as responsibility centers.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
22.
More costs become controllable as one moves down to each lower level of managerial responsibility.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
23.
In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization, the responsibility reports become more summarized and show less detailed information.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
24.
Decentralization means that the control of operations is delegated by top management to many individuals throughout the organization.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
25.
A cost item is considered to be controllable if there is not a large difference between actual cost and budgeted cost for that item.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
26.
A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
27.
The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
28.
Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
29.
The denominator in the formula for calculating the return on investment includes operating and nonoperating assets.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
Budgetary Control and Responsibility Accounting 30.
24 - 7
The formula for computing return on investment is controllable margin divided by average operating assets.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
31.
Budget reports provide the feedback needed by management to see whether actual operations are on course.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
32.
A static budget is an effective means to evaluate a manager's ability to control costs, regardless of the actual activity level.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
33.
The flexible budget report evaluates a manager's performance in two areas: production and (2) costs.
(1)
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
34.
The terms controllable costs and noncontrollable costs are synonymous with variable costs and fixed costs, respectively.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
35.
Most direct fixed costs are not controllable by the profit center manager.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
36.
The manager of an investment center can improve ROI by reducing average operating assets.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
37.
An advantage of the return on investment ratio is that no judgmental factors are involved.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
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Ans.
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F F T F F T
7. 8. 9. 10. 11. 12.
F F T T T T
13. 14. 15. 16. 17. 18.
F F T T T T
19. 20. 21. 22. 23. 24.
F T T F T T
25. 26. 27. 28. 29. 30.
F F T F F T
31. 32. 33. 34. 35. 36.
T F T F F T
37.
F
For Instructor Use Only
24 - 8
Test Bank for Accounting Principles, Tenth Edition
MULTIPLE CHOICE QUESTIONS 38.
What is budgetary control? a. Another name for a flexible budget b. The degree to which the CFO controls the budget c. The use of budgets in controlling operations d. The process of providing information on budget differences to lower level managers
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
39.
A major element in budgetary control is a. the preparation of long-term plans. b. the comparison of actual results with planned objectives. c. the valuation of inventories. d. approval of the budget by the stockholders.
Ans: B, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
40.
Budget reports should be prepared a. daily. b. monthly. c. weekly. d. as frequently as needed.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
41.
On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. all of these.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
42.
The purpose of the departmental overhead cost report is to a. control indirect labor costs. b. control selling expense. c. determine the efficient use of materials. d. control overhead costs.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
43.
The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Budgetary Control and Responsibility Accounting 44.
24 - 9
The comparison of differences between actual and planned results a. is done by the external auditors. b. appears on the company's external financial statements. c. is usually done orally in departmental meetings. d. appears on periodic budget reports.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
45.
A static budget a. should not be prepared in a company. b. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. c. shows planned results at the original budgeted activity level. d. is changed only if the actual level of activity is different than originally budgeted.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
46.
A static budget report a. shows costs at only 2 or 3 different levels of activity. b. is appropriate in evaluating a manager's effectiveness in controlling variable costs. c. should be used when the actual level of activity is materially different from the master budget activity level. d. may be appropriate in evaluating a manager's effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
47.
A static budget is appropriate in evaluating a manager's performance if a. actual activity closely approximates the master budget activity. b. actual activity is less than the master budget activity. c. the company prepares reports on an annual basis. d. the company is a not-for-profit organization
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
48.
When budgeted and actual results are not the same amount, there is a budget a. error. b. difference. c. anomaly. d. by-product.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
49.
Top management's reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
24 - 10 Test Bank for Accounting Principles, Tenth Edition 50.
If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
51.
Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true? a. The year-to-date results will show a favorable difference. b. The year-to-date results will show an unfavorable difference. c. The difference for the first quarter can be ignored. d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
52.
A static budget is appropriate for a. variable overhead costs. b. direct materials costs. c. fixed overhead costs. d. none of these.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
53.
What is the primary difference between a static budget and a flexible budget? a. The static budget contains only fixed costs, while the flexible budget contains only variable costs. b. The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels. c. The static budget is constructed using input from only upper level management, while a flexible budget obtains input from all levels of management. d. The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.
Ans: B, SO: 2,3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
54.
A flexible budget a. is prepared when management cannot agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Budgetary Control and Responsibility Accounting 55.
24 - 11
The master budget of Carpenter Company shows that the planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labor Machine supplies Indirect materials Depreciation on factory building Total manufacturing overhead
$480,000 120,000 140,000 100,000 $840,000
A flexible budget for a level of activity of 120,000 machine hours would show total manufacturing overhead costs of a. b. c. d.
$988,000. $840,000. $1,008,000. $908,000.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
56.
Cartee, Inc. prepared a 2012 budget for 120,000 units of product. Actual production in 2012 was 130,000 units. To be most useful, what amounts should a performance report for this company compare? a. The actual results for 130,000 units with the original budget for 120,000 units b. The actual results for 130,000 units with a new budget for 130,000 units. c. The actual results for 130,000 units with last year's actual results for 134,000 units d. It doesn't matter. All of these choices are equally useful.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
57.
A department has budgeted monthly manufacturing overhead cost of $540,000 plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was a. 528,000 direct labor hours. b. 168,000 direct labor hours. c. 348,000 direct labor hours. d. Cannot be determined from the information provided.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
58.
Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct materials cost b. Direct labor cost c. Variable manufacturing overhead d. Fixed manufacturing overhead
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
24 - 12 Test Bank for Accounting Principles, Tenth Edition 59.
In developing a flexible budget within a relevant range of activity, a. only fixed costs are included. b. it is necessary to relate variable cost data to the activity index chosen. c. it is necessary to prepare a budget at 1,000 unit increments. d. variable and fixed costs are combined and are reported as a total cost.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
60.
What budgeted amounts appear on the flexible budget? a. Original budgeted amounts at the static budget activity level b. Actual costs for the budgeted activity level c. Budgeted amounts for the actual activity level achieved d. Actual costs for the estimated activity level
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
61.
The flexible budget a. is prepared before the master budget. b. is relevant both within and outside the relevant range. c. eliminates the need for a master budget. d. is a series of static budgets at different levels of activity.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62.
A flexible budget can be prepared for which of the following budgets comprising the master budget? a. Sales b. Overhead c. Direct materials d. All of these
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
63.
Another name for the static budget is a. master budget. b. overhead budget. c. permanent budget. d. flexible budget.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
64.
If a company plans to sell 48,000 units of product but sells 60,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based on a. the original planned level of activity. b. 54,000 units of activity. c. 60,000 units of activity. d. 48,000 units of activity.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
Budgetary Control and Responsibility Accounting 65.
24 - 13
Within the relevant range of activity, the behavior of total costs is assumed to be a. linear and upward sloping. b. linear and downward sloping. c. curvilinear and upward sloping. d. linear to a point and then level off.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66.
Sales results that are evaluated by a static budget might show 1. favorable differences that are not justified. 2. unfavorable differences that are not justified. a. b. c. d.
1 2 both 1 and 2. neither 1 nor 2.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
67.
The selection of levels of activity to depict a flexible budget 1. will be within the relevant range. 2. is largely a matter of expediency. 3. is governed by generally accepted accounting principles. a. b. c. d.
1 2 3 1 and 2
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
68.
Management by exception a. causes managers to be buried under voluminous paperwork. b. means that all differences will be investigated. c. means that only unfavorable differences will be investigated. d. means that material differences will be investigated.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
69.
Under management by exception, which differences between planned and actual results should be investigated? a. Material and noncontrollable b. Controllable and noncontrollable c. Material and controllable d. All differences should be investigated
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 14 Test Bank for Accounting Principles, Tenth Edition 70.
Anthony Roofing's budgeted manufacturing costs for 50,000 squares of shingles are: Fixed manufacturing costs Variable manufacturing costs
$30,000 $20.00 per square
Anthony produced 40,000 squares of shingles during March. How much are budgeted total manufacturing costs in March? a. $800,000 b. $1,030,000 c. $1,000,000 d. $830,000 Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
71.
A flexible budget depicted graphically a. is identical to a CVP graph. b. differs from a CVP graph in the way that fixed costs are shown. c. differs from a CVP graph in the way that variable costs are shown. d. differs from a CVP graph in that sales revenue is not shown.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
72.
The activity index used in preparing the flexible budget a. is prescribed by generally accepted accounting principles. b. is only applicable to fixed manufacturing costs. c. is the same for all departments. d. should significantly influence the costs that are being budgeted.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
73.
A static budget is not appropriate in evaluating a manager's effectiveness if a company has a. substantial fixed costs. b. substantial variable costs. c. planned activity levels that match actual activity levels. d. no variable costs.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
74.
Cunningham Manufacturing Company prepared a fixed budget of 80,000 direct labor hours, with estimated overhead costs of $400,000 for variable overhead and $120,000 for fixed overhead. Cunningham then prepared a flexible budget at 76,000 labor hours. How much is total overhead costs at this level of activity? a. $380,000 b. $500,000 c. $494,000 d. $520,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
Budgetary Control and Responsibility Accounting 75.
24 - 15
For June, Devin Manufacturing estimated sales revenue at $400,000. It pays sales commissions that are 4% of sales. The sales manager's salary is $190,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $10,000. How much are budgeted selling expenses for the month of July if sales are expected to be $360,000? a. $28,000 b. $218,000 c. $18,000 d. $220,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
76.
Edward Industries budgeted manufacturing costs for 50,000 sip-its are: Fixed manufacturing costs Variable manufacturing costs
$50,000 per month $12.00 per sip-it
Edward produced 40,000 sip-its during March. How much is the flexible budget for total manufacturing costs for March? a. $520,000 b. $650,000 c. $480,000 d. $530,000 Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
77.
Crowell Manufacturing budgeted costs for 50,000 linear feet of block are: Fixed manufacturing costs Variable manufacturing costs
$24,000 per month $16.00 per linear
Crowell installed 40,000 linear feet of block during March. How much is budgeted total manufacturing costs in March? a. $640,000 b. $824,000 c. $800,000 d. $664,000 Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
78.
In the Patrick Company, indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is a. $96,000. b. $108,000. c. $105,000. d. $99,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
24 - 16 Test Bank for Accounting Principles, Tenth Edition 79.
Groom Company uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $48,000 variable and $270,000 fixed. If Groom had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $3,000 unfavorable b. $3,000 favorable c. $9,000 unfavorable d. $12,000 favorable
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
80.
A company's planned activity level for next year is expected to be 200,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $280,000 Depreciation $120,000 Indirect labor 400,000 Taxes 20,000 Factory supplies 40,000 Supervision 100,000 A flexible budget prepared at the 160,000 machine hours level of activity would show total manufacturing overhead costs of a. $576,000. b. $720,000. c. $768,000. d. $816,000.
Ans: D, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
81.
In the Shrub Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is: a. $144,000. b. $162,000. c. $157,500. d. $148,500.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
82.
Kessler Company uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $64,000 variable and $180,000 fixed. If Kessler had actual overhead costs of $250,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $2,000 unfavorable. b. $2,000 favorable. c. $6,000 unfavorable. d. $8,000 favorable.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
Budgetary Control and Responsibility Accounting 83.
24 - 17
A company's planned activity level for next year is expected to be 200,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $240,000 Depreciation $100,000 Indirect labor 320,000 Taxes 20,000 Factory supplies 40,000 Supervision 80,000 A flexible budget prepared at the 180,000 machine hours level of activity would show total manufacturing overhead costs of a. $540,000. b. $720,000. c. $740,000. d. $600,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
84.
Carly Industries produced 256,000 units in 120,000 direct labor hours. Production for the period was estimated at 264,000 units and 132,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 128,000 hours and 132,000 hours. b. 132,000 hours and 120,000 hours. c. 128,000 hours and 120,000 hours. d. 120,000 hours and 120,000 hours.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
85.
A company's planned activity level for next year is expected to be 200,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $180,000 Depreciation $75,000 Indirect labor 240,000 Taxes 15,000 Factory supplies 30,000 Supervision 60,000 A flexible budget prepared at the 180,000 machine hours level of activity would show total manufacturing overhead costs of a. $405,000. b. $540,000. c. $555,000. d. $450,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
86.
Limpia Industries produced 320,000 units in 150,000 direct labor hours. Production for the period was estimated at 330,000 units and 165,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 160,000 hours and 165,000 hours. b. 165,000 hours and 150,000 hours. c. 160,000 hours and 150,000 hours. d. 150,000 hours and 150,000 hours.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
24 - 18 Test Bank for Accounting Principles, Tenth Edition 87.
At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $40,000. At 20,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $120,000. Fixed and variable costs may be expressed as: a. $40,000 fixed plus $4 per direct labor hour variable. b. $40,000 fixed plus $6 per direct labor hour variable. c. $80,000 fixed plus $2 per direct labor hour variable. d. $80,000 fixed plus $4 per direct labor hour variable.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
88.
At 18,000 direct labor hours, the flexible budget for indirect materials is $36,000. If $37,400 are incurred at 18,400 direct labor hours, the flexible budget report should show the following difference for indirect materials: a. $1,400 unfavorable. b. $1,400 favorable. c. $600 favorable. d. $600 unfavorable.
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
89.
The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called a. static reporting. b. flexible accounting. c. responsibility accounting. d. master budgeting.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
90.
Thomas Company recorded operating data for its shoe division for the year. Sales Contribution margin Controllable fixed costs Average total operating assets
$1,500,000 300,000 180,000 600,000
How much is controllable margin for the year? a. 20% b. 50% c. $300,000 d. $120,000 Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
91.
A cost is considered controllable at a given level of managerial responsibility if a. the manager has the power to incur the cost within a given time period. b. the cost has not exceeded the budget amount in the master budget. c. it is a variable cost, but it is uncontrollable if it is a fixed cost. d. it changes in magnitude in a flexible budget.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 92.
24 - 19
As one moves up to each higher level of managerial responsibility, a. fewer costs are controllable. b. the responsibility for cost incurrence diminishes. c. a greater number of costs are controllable. d. performance evaluation becomes less important.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
93.
A responsibility report should a. be prepared in accordance with generally accepted accounting principles. b. show only those costs that a manager can control. c. only show variable costs. d. only be prepared at the highest level of managerial responsibility.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
94.
Top management can control a. only controllable costs. b. only noncontrollable costs. c. all costs. d. some noncontrollable costs and all controllable costs.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
95.
Not-for-profit entities a. do not use responsibility accounting. b. utilize responsibility accounting in trying to maximize net income. c. utilize responsibility accounting in trying to minimize the cost of providing services. d. have only noncontrollable costs.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
96.
Which of the following is not a true statement? a. All costs are controllable at some level within a company. b. Responsibility accounting applies to both profit and not-for-profit entities. c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
97.
Costs incurred indirectly and allocated to a responsibility level are considered to be a. nonmaterial. b. mixed. c. controllable. d. noncontrollable.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 20 Test Bank for Accounting Principles, Tenth Edition 98.
Management by exception a. is most effective at top levels of management. b. can be implemented at each level of responsibility within an organization. c. can only be applied when comparing actual results with the master budget. d. is the opposite of goal congruence.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
99.
Which responsibility centers generate both revenues and costs? a. Investment and profit centers b. Profit and cost centers c. Cost and investment centers d. Only profit centers
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
100.
The linens department of a large department store is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
101.
The foreign subsidiary of a large corporation is a. not a responsibility center. b. a profit center. c. a cost center. d. an investment center.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
102.
The maintenance department of a manufacturing company is a(n) a. segment. b. profit center. c. cost center. d. investment center.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
103.
Which of the following is not a correct match? 1. Incurs costs 2. Generates revenue 3. Controls investment funds a. Investment Center 1, 2, 3 b. Cost Center 1 c. Profit Center 1, 2, 3 d. All are correct matches.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 104.
24 - 21
A cost center a. only incurs costs and does not directly generate revenues. b. incurs costs and generates revenues. c. is a responsibility center of a company which incurs losses. d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
105.
A manager of a cost center is evaluated mainly on a. the profit that the center generates. b. his or her ability to control costs. c. the amount of investment it takes to support the cost center. d. the amount of revenue that can be generated.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
106.
Performance reports for cost centers compare actual a. total costs with static budget data. b. total costs with flexible budget data. c. controllable costs with static budget data. d. controllable costs with flexible budget data.
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
107.
In the performance report for cost centers, a. controllable and noncontrollable costs are reported. b. fixed costs are not reported. c. no distinction is made between fixed and variable costs. d. only materials and controllable costs are reported.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
Of the following choices, which contain both a traceable fixed cost and a common fixed cost? a. Profit center manager's salary and timekeeping costs for a responsibility center's employees. b. Company president's salary and company personnel department costs. c. Company personnel department costs and timekeeping costs for a responsibility center's employees. d. Depreciation on a responsibility center's equipment and supervisory salaries for the center.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
109.
Which of the following is not an indirect fixed cost? a. Company president's salary b. Depreciation on the company building housing several profit centers c. Company personnel department costs d. Profit center supervisory salaries
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 22 Test Bank for Accounting Principles, Tenth Edition 110.
A profit center is a. a responsibility center that always reports a profit. b. a responsibility center that incurs costs and generates revenues. c. evaluated by the rate of return earned on the investment allocated to the center. d. referred to as a loss center when operations do not meet the company's objectives.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
The best measure of the performance of the manager of a profit center is the a. rate of return on investment. b. success in meeting budgeted goals for controllable costs. c. amount of controllable margin generated by the profit center. d. amount of contribution margin generated by the profit center.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
112.
Controllable margin is defined as a. sales minus variable costs. b. sales minus contribution margin. c. contribution margin less controllable fixed costs. d. contribution margin less noncontrollable fixed costs.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
113.
Controllable margin is most useful for a. external financial reporting. b. preparing the master budget. c. performance evaluation of profit centers. d. break-even analysis.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
114.
Which of the following will not result in an unfavorable controllable margin difference? a. Sales exceeding budget; costs under budget b. Sales exceeding budget; costs over budget c. Sales under budget; costs under budget d. Sales under budget; costs over budget
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
115.
Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs
Budget $2,000,000 $1,000,000
Actual $2,100,000 $ 900,000
Difference $100,000 $100,000
The manager's overall performance a. is 20% below expectations. b. is 20% above expectations. c. is equal to expectations. d. cannot be determined from information given. Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 116.
24 - 23
Which of the following are financial measures of performance? 1. Controllable margin 2. Product quality 3. Labor productivity a. b. c. d.
1 2 3 1 and 3
Ans: A, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
117.
Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs
Budget $1,200,000 $400,000
Actual $1,160,000 $440,000
Difference $40,000 U $40,000 U
The manager's overall performance a. is 10% above expectations. b. is 10% below expectations. c. is equal to expectations. d. cannot be determined from the information provided. Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
118.
A responsibility report for a profit center will a. not show controllable fixed costs. b. not show indirect fixed costs. c. show noncontrollable fixed costs. d. not show cumulative year-to-date results.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
The dollar amount of the controllable margin a. is usually higher than the contribution margin. b. is usually lower than the contribution margin. c. is always equal to the contribution margin. d. cannot be a negative figure.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120.
Gilbert Company recorded operating data for its shoe division for the year. The company’s desired return is 5%. Sales Contribution margin Total direct fixed costs Average total operating assets
$1,000,000 200,000 120,000 400,000
Which one of the following reflects the controllable margin for the year? a. 20% b. 50% c. $60,000 d. $80,000 Ans: D, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 24 Test Bank for Accounting Principles, Tenth Edition 121.
Center Industries had average operating assets of $4,000,000 and sales of $2,000,000 in 2012. If the controllable margin was $600,000, the ROI was a. 60% b. 50% c. 30% d. 15%
Ans: D, SO: 7, Bloom: A, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
122.
Lundquist Manufacturing had average operating assets of $8,000,000 and sales of $4,000,000 in 2012. If the controllable margin was $800,000, the ROI was a. 50% b. 40% c. 20% d. 10%
Ans: D, SO: 7, Bloom: A, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
123.
The area manager of the Nandos Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: Project Portland Seattle
Investment $240,000 $1,080,000
Controllable Margin $60,000 $100,000
ROI 25% 9.25%
The Nandos segment has currently $4,000,000 in invested capital and a controllable margin of $500,000. Which one of following projects will increase Nandos division’s ROI? a. Both the Portland and Seattle options b. Only the Portland option c. Only the Seattle option d. Neither the Portland nor the Seattle options Ans: B, SO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
124.
Higley Industries recorded operating data for its Southern division for the year. Higley requires its return to be 10%. Sales Controllable margin Total average assets Fixed costs
$1,400,000 160,000 4,000,000 100,000
What is the ROI for the year? a. 4% b. 35% c. –6% d. 1.5% Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 125.
24 - 25
Noel Division’s operating results include: controllable margin of $300,000, sales totaling $2,400,000, and average operating assets of $1,000,000. Noel is considering a project with sales of $200,000, expenses of $172,000, and an investment of average operating assets of $400,000. Noel’s required rate of return is 9%. Should Noel accept this project? a. Yes, ROI will drop by 6.6% which is still above the required rate of return. b. No, the return is less than the required rate of 9%. c. Yes, ROI still exceeds the cost of capital. d. No, ROI will decrease to 7%.
Ans: B, SO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
126.
Cooper Industries reported the following items for 2012: Income tax expense Contribution margin Controllable fixed costs Interest expense Total operating assets
$ 60,000 200,000 80,000 40,000 650,000
How much is controllable margin? a. $200,000 b. $120,000 c. $60,000 d. $20,000 Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
127.
Kessler Industries is evaluating its Mountain division, an investment center. The division has a $90,000 controllable margin and $600,000 of sales. How much will Kessler’s average operating assets be when its return on investment is 10%? a. $900,000 b. $990,000 c. $600,000 d. $510,000
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
128.
An investment center generated a contribution margin of $400,000, fixed costs of $200,000 and sales of $2,000,000. The center’s average operating assets were $800,000. How much is the return on investment? a. 25% b. 175% c. 50% d. 75%
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 26 Test Bank for Accounting Principles, Tenth Edition 129.
Alma Manufacturing recorded operating data for its auto accessories division for the year. Sales $750,000 Contribution margin 150,000 Total direct fixed costs 90,000 Average total operating assets 400,000 How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant? a. 45.0% b. 22.5% c. 15.0% d. 12.0%
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
130.
The current controllable margin for Stern Division is $124,000. Its current operating assets are $400,000. The division is considering purchasing equipment for $120,000 that will increase annual controllable margin by an estimated $20,000. If the equipment is purchased, what will happen to the return on investment for Stern Division? a. An increase of 16.1% b. A decrease of 13.3% c. A decrease of 3.3% d. A decrease of 7.2%
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
131.
Ashton Industries recorded operating data for its Leather division for the year. Ashton requires its return to be 9%. Sales Controllable margin Total average assets Fixed costs
$1,000,000 180,000 600,000 60,000
How much is ROI for the year? a. 10% b. 16.7% c. 20% d. 30% Ans: D, SO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
132.
Casey Stetson is the Bottle Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Bottle Division is $92,000. Its current operating assets total $420,000. The division is considering purchasing equipment for $80,000 that will increase sales by an estimated $20,000, with annual depreciation of $20,000. If the equipment is purchased, what will happen to the return on investment for the division? a. An increase of 0.5% b. A decrease of 0.5% c. A decrease of 3.5% d. It will remain unchanged.
Ans: C, SO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 133.
24 - 27
Sloot Division of Taylor Company’s operating results include: controllable margin, $400,000; sales $4,400,000; and operating assets, $1,600,000. The Sloot Division’s ROI is 25%. Management is considering a project with sales of $200,000, variable expenses of $120,000, fixed costs of $80,000; and an asset investment of $300,000. Should management accept this new project? a. No, since ROI will be lowered. b. Yes, since ROI will increase. c. Yes, since additional sales always mean more customers. d. No, since a loss will be incurred.
Ans: A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
134.
The City Division of Worldwide Industries had an ROI of 25% when sales were $2 million and controllable margin was $400,000. What were the average operating assets? a. $100,000 b. $500,000 c. $1,600,000 d. $8,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
135.
Cocoa Industries recorded operating data for its chocolate division for the year. Sales Contribution margin Total fixed costs Average total operating assets
$1,000,000 180,000 120,000 400,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $40,000, assuming fixed costs are held constant? a. 25% b. 18% c. 45% d. 12% Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
136.
A distinguishing characteristic of an investment center is that a. revenues are generated by selling and buying stocks and bonds. b. interest revenue is the major source of revenues. c. the profitability of the center is related to the funds invested in the center. d. it is a responsibility center which only generates revenues.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Budget Preparation
137.
A measure frequently used to evaluate the performance of the manager of an investment center is a. the amount of profit generated. b. the rate of return on funds invested in the center. c. the percentage increase in profit over the previous year. d. departmental gross profit.
Ans: B, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
For Instructor Use Only
24 - 28 Test Bank for Accounting Principles, Tenth Edition 138.
Return on investment is calculated by dividing a. contribution margin by sales. b. controllable margin by sales. c. contribution margin by average operating assets. d. controllable margin by average operating assets.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
139.
Which one of the following will not increase return on investment? a. Variable costs are increased b. An increase in sales c. Average operating assets are decreased d. Variable costs are decreased
Ans: A, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
140.
If an investment center has generated a controllable margin of $150,000 and sales of $600,000, what is the return on investment for the investment center if average operating assets were $1,000,000 during the period? a. 15% b. 25% c. 45% d. 60%
Ans: A, SO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
141.
Which statement is true? a. An investment center is responsible for revenues and expenses, as well as earning a return on assets. b. An investment center is only responsible for its investments. c. An investment center is only responsible for revenues and expenses. d. A profit center is evaluated using contribution margin, while an investment center is evaluated using ROI.
Ans: A, SO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
142.
The denominator in the formula for return on investment calculation is a. investment center controllable margin. b. dependent on the specific type of profit center. c. average investment center operating assets. d. sales for the period.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
143.
In the formula for ROI, idle plant assets are a. included in the calculation of controllable margin. b. included in the calculation of operating assets. c. excluded in the calculation of operating assets. d. excluded from total assets.
Ans: C, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 144.
24 - 29
In computing ROI, land held for future use a. will hurt the performance measurement of an investment center's manager. b. is important in evaluating the performance of a profit center manager. c. is included in the calculation of operating assets. d. is considered a nonoperating asset.
Ans: D, SO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
145.
Stetson Parts has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available, for which the following estimates have been made: Project A - Annual controllable margin = $48,000, operating assets = $800,000 Project B - Annual controllable margin = $120,000, operating assets = $1,100,000 Which project should be funded? a. Both projects b. Project A c. Project B d. Neither project
Ans: C, SO: 7, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
146.
If an investment center has a $90,000 controllable margin and $1,200,000 of sales, what average operating assets are needed to have a return on investment of 10%? a. $120,000 b. $210,000 c. $900,000 d. $1,200,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
147.
Which of the following valuations of operating assets is not readily available from the accounting records? a. Cost b. Book value c. Market value d. Both cost and market value
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
148.
Which of the following would not be considered an aspect of budgetary control? a. It assists in the determination of differences between actual and planned results. b. It provides feedback value needed by management to see whether actual operations are on course. c. It assists management in controlling operations. d. It provides a guarantee for favorable results.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 30 Test Bank for Accounting Principles, Tenth Edition 149.
A static budget is usually appropriate in evaluating a manager's effectiveness in controlling a. fixed manufacturing costs and fixed selling and administrative expenses. b. variable manufacturing costs and variable selling and administrative expenses. c. fixed manufacturing costs and variable selling and administrative expenses. d. variable manufacturing costs and fixed selling and administrative expenses.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
150.
A static budget report is appropriate for a. fixed manufacturing costs. b. fixed selling and administrative expenses. c. variable selling and administrative expenses. d. both fixed manufacturing costs and fixed selling and administrative expenses.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
151.
Watson Industries uses flexible budgets. At normal capacity of 18,000 units, budgeted manufacturing overhead is $128,000 variable and $360,000 fixed. If Watson had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $4,000 unfavorable b. $4,000 favorable c. $12,000 unfavorable d. $16,000 favorable
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
152.
To develop the flexible budget, management takes all of the following steps except identify the a. activity index and the relevant range of activity. b. variable costs and determine the budgeted variable cost per unit. c. fixed costs and determine the budgeted fixed cost per unit. d. All of these options are steps in developing the flexible budget.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
153.
A flexible budget is appropriate for a. b. c. d.
Direct Labor Costs No Yes Yes No
Manufacturing Overhead Costs No Yes No Yes
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
154.
All of the following statements are correct about management by exception except it a. enables top management to focus on problem areas that need attention. b. means that management has to investigate every budget difference. c. requires that there must be some guidelines for identifying an exception. d. means that top management's review of a budget report is focused primarily on differences between actual results and planned objectives.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting 155.
24 - 31
Controllable costs for responsibility accounting purposes are those costs that are directly influenced by a. a given manager within a given period of time. b. a change in activity. c. production volume. d. sales volume.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
156.
All of the following statements are correct about controllable costs except a. all costs are controllable at some level of responsibility within a company. b. all costs are controllable by top management. c. fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. costs incurred directly by a level of responsibility are controllable at that level.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
157.
Which of the following will cause an increase in ROI? a. An increase in variable costs b. An increase in average operating assets c. An increase in sales d. An increase in controllable fixed costs
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
158.
Costs that relate specifically to one center and are incurred for the sole benefit of that center are a. common fixed costs. b. direct fixed costs. c. indirect fixed costs. d. noncontrollable fixed costs.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
159.
If controllable margin is $600,000 and the average investment center operating assets are $2,000,000, the return on investment is a. .33%. b. 3.33%. c. 10%. d. 30%.
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 32 Test Bank for Accounting Principles, Tenth Edition
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
c b d d d c d c d a b c d a c b b a
56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.
b b d b c d d a c a c d d c d d d b
74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
b b d d c b d c b c d c d a d c d a
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
c b c c c d b a b d c c a b d c c d
110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127.
b c c c a b a b b b d d d b a b b a
128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145.
a b c d c a c a c b d a a a c c d c
146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159.
c c d a d c c b b a c c b d
BRIEF EXERCISES BE 160 Burbank Manufacturing makes a single product. Expected manufacturing costs are as follows: Variable costs Direct materials Direct labor Manufacturing overhead Fixed costs per month Supervisory salaries Depreciation Other fixed costs
$6.50 per unit 2.40 per unit 1.10 per unit $25,200 7,000 4,400
Instructions Determine the amount of manufacturing costs for a flexible budget level of 6,400 units per month. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 160
(4 min.)
6,400 × ($6.50 + $2.40 + $1.10) + ($25,200 + $7,000 + $4,400) = $100,600
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 33
BE 161 Hunter Company uses flexible budgets. Items from the budget for March in which 4,000 units were produced and sold appear below: Direct materials Indirect materials - variable Supervisor salaries Depreciation on factory equipment Direct labor Property taxes on factory
$36,000 4,000 30,000 8,000 20,000 2,000
Instructions If Hunter prepares a flexible budget at 6,000 units, compute its total variable cost. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 161
(4 min.)
Variable cost per unit: ($36,000 + $4,000 + $20,000) ÷ 4,000 = $15 per unit Variable cost at 6,000 units: $15 × 6,000 = $90,000 BE 162 Haley Company’s manufacturing costs for August when production was 2,000 units appear below: Direct material Direct labor Variable overhead Factory depreciation Factory supervisory salaries Other fixed factory costs
$12 per unit $13,000 10,000 18,000 15,600 5,000
Instructions Compute the flexible budget manufacturing cost amount for a month when 1,600 units are produced. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 162
(5 min.)
Direct material ($12 × 1,600) $ 19,200 Direct labor [($13,000 ÷ 2,000) × 1,600] 10,400 Variable overhead [($10,000 ÷ 2,000) × 1,600] 8,000 Factory depreciation—fixed 18,000 Factory supervisory salaries—fixed 15,600 Other fixed factory costs—fixed 5,000 Total $ 76,200 BE 163 Janet Company’s budgeted sales for April were estimated at $1,000,000, sales commissions at 4% of sales, and the sales manager's salary at $160,000. Shipping expenses were estimated at 1% of sales and miscellaneous selling expenses were estimated at $2,000, plus 0.5% of sales.
For Instructor Use Only
24 - 34 Test Bank for Accounting Principles, Tenth Edition BE 163
(Cont.)
Instructions Determine the budgeted selling expenses on a flexible budget for April. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 163
(5 min.)
Sales commissions 4% × $1,000,000 Sales manager’s salary Shipping expenses 1% × $1,000,000 Miscellaneous selling: Fixed portion Variable: 0.5% × $1,000,000 Budgeted selling expenses
$ 40,000 160,000 10,000 2,000 5,000 $217,000
BE 164 Hazel Company produces men’s shirts. The following budgeted and actual amounts are for 2012: Cost Budget at 2,500 units Actual Amounts at 2,900 units Direct materials $110,000 $131,000 Direct labor 140,000 162,000 Fixed overhead 70,000 69,000 Instructions Prepare a performance report for Hazel Company for the year. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164
(5 min.) HAZEL COMPANY Manufacturing Performance Budget Report For the Year Ended December 31, 2012
Direct materials Direct labor Fixed overhead Total costs
Budget $ 127,600 162,400 70,000 $360,000
Actual $ 131,000 162,000 69,000 $362,000
Differences $3,400 U 400 F 1,000 F $2,000 U
BE 165 Silver Company reported the following items for 2012: Controllable fixed costs Contribution margin Interest expense Variable costs Total assets
$ 154,000 284,000 40,000 160,000 $1,850,000
Instructions Compute the controllable margin for 2012. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting Solution 165
24 - 35
(2 min.)
$284,000 – $154,000 = $130,000 BE 166 The data for an investment center is given below. January 1, 2012 Current Assets $ 800,000 Plant Assets 6,000,000
December 31, 2012 $ 1,600,000 8,000,000
The controllable margin is $1,230,000. Instructions Compute the return on investment for the center for 2012. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 166
(4 min.)
Average current assets ($800,000 + $1,600,000) ÷ 2 = $1,200,000 Plant assets ($6,000,000 + $8,000,000) ÷ 2 = $7,000,000 ROI = Controllable Margin ÷ Average Operating Assets = $1,230,000 ÷ $8,200,000 = 15% BE 167 Data for the Motor Division of Higgins Manufacturing which is operated as an investment center follows: Sales $12,000,000 Contribution Margin 1,600,000 Controllable Fixed Costs 1,000,000 Return on Investment 12% Instructions Calculate controllable margin and average operating assets. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 167
(3 min.)
Controllable Margin ($1,600,000 – $1,000,000) = $600,000 Average Operating Assets ($600,000 ÷ .12) = $5,000,000 BE 168 Travis Division’s operating results include: • • •
Controllable margin, $300,000 Sales revenue, $2,400,000 Operating assets, $1,000,000
Travis is considering a project with sales of $240,000, expenses of $168,000, and an investment of $360,000. Travis’ required rate of return is 15%.
For Instructor Use Only
24 - 36 Test Bank for Accounting Principles, Tenth Edition BE 168
(Cont.)
Instructions Determine whether Travis should accept this project. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 168
(5 min.)
Current ROI = $300,000 ÷ $1,000,000 = 30% ROI of new project = $72,000 ÷ $360,000 = 20% New ROI with project = [$300,000 + $72,000] ÷ [$1,000,000 + $360,000] = 27.4% While ROI decreases, that does not make this a bad investment, since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted. BE 169 An investment center manager is considering three possible investments. The company’s required return is 10%. The required asset investment, controllable margins, and the ROIs of each investment are as follows: Project AA BB CC
Average Investment $320,000 280,000 440,000
Controllable Margin $64,000 32,000 132,000
ROI 20.0% 11.4% 30%
The investment center is currently generating an ROI of 25% based on $2,400,000 in operating assets and a controllable margin of $600,000. Instructions If the manager can select only one project, determine which one is the best choice to increase the investment center's ROI. Compute how much the investment center’s ROI will be if the manager selects your recommendation. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 169
(4 min.)
CC is the best choice because it increases the ROI (30% is greater than 25%). Project AA BB CC
New ROI ($600,000 + $64,000) ÷ ($2,400,000 + $320,000) = 24.4% ($600,000 + $32,000) ÷ ($2,400,000 + $280,000) = 23.6% ($600,000 + $132,000) ÷ ($2,400,000 + $440,000) = 25.8%
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 37
EXERCISES Ex. 170 Metcalf Manufacturing's master budget reflects budgeted sales information for the month of June, 2012, as follows: Budgeted Quantity Budgeted Unit Sales Price Product A 40,000 $7 Product B 48,000 $9 During June, the company actually sold 39,000 units of Product A at an average unit price of $7.10 and 49,600 units of Product B at an average unit price of $8.90. Instructions Prepare a Sales Budget Report for the month of June for Metcalf Manufacturing which shows whether the company achieved its planned objectives. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 170
(10–15 min.) METCALF MANUFACTURING Sales Budget Report For the Month Ended June 30, 2012
Product Line Product A Product B Total sales
Budget $280,000 432,000 $712,000
Actual $276,900 441,440 $718,340
Difference $3,100 U 9,440 F $6,340 F
Ex. 171 Chan Manufacturing Co.'s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000. Instructions a. Determine how much would appear on Chan's flexible budget for 2012 if 18,000 units are produced and sold. b. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation? Ans: N/A, SO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 171
(8–10 min.)
a. Variable costs: Direct labor Direct materials Fixed costs Total costs b.
12,000 Units
Unit Variable Cost
18,000 Units
$72,000 12,000 84,000 48,000 $132,000
$6.00 1.00
$108,000 18,000 126,000 48,000 $174,000
If a static budget were used, budgeted variable costs would be only $84,000 because they would be based on the static budget level of 12,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of activity. For Instructor Use Only
24 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 172 Stock Company developed its annual manufacturing overhead budget for its master budget for 2012 as follows: Expected annual operating capacity Variable overhead costs Indirect labor Indirect materials Factory supplies Total variable Fixed overhead costs Depreciation Supervision Property taxes Total fixed Total costs
240,000 Direct Labor Hours $840,000 180,000 60,000 1,080,000 360,000 240,000 192,000 792,000 $1,872,000
The relevant range for monthly activity is expected to be between 16,000 and 24,000 direct labor hours. Instructions Prepare a flexible budget for a monthly activity level of 16,000 and 18,000 direct labor hours. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 172
(15–20 min.) STOCK COMPANY Monthly Flexible Manufacturing Overhead Budget
Activity level Direct labor hours Variable costs Indirect labor Indirect materials Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs
16,000
18,000
$56,000 12,000 4,000 72,000
$63,000 13,500 4,500 81,000
30,000 20,000 16,000 66,000 $138,000
30,000 20,000 16,000 66,000 $147,000
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 39
Ex. 173 Waldman Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department: WALDMAN COMPANY Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs
6,000
8,000
$ 3,000 30,000 9,000 42,000
$ 4,000 40,000 12,000 56,000
40,000 20,000 30,000 90,000 $132,000
40,000 20,000 30,000 90,000 $146,000
Instructions Prepare a flexible budget at the 10,000 direct labor hours of activity. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 173
(15–20 min.) WALDMAN COMPANY Monthly Flexible Manufacturing Overhead Budget Mixing Department
Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs
10,000 $ 5,000 50,000 15,000 70,000 40,000 20,000 30,000 90,000 $160,000
For Instructor Use Only
24 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 174 Leigh Company uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor Indirect materials Maintenance Utilities
$5.00 2.50 .50 .30
Fixed overhead costs per month are: Supervision $1,200 Insurance 400 Property taxes 600 Depreciation 1,800 The company believes it will normally operate in a range of 4,000 to 8,000 machine hours per month. Instructions Prepare a flexible manufacturing overhead budget for the expected range of activity, using increments of 2,000 machine hours. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 174
(15–20 min.) LEIGH COMPANY Monthly Flexible Manufacturing Overhead Budget
Activity level Machine hours
4,000
6,000
8,000
Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable
$20,000 10,000 2,000 1,200 33,200
$30,000 15,000 3,000 1,800 49,800
$40,000 20,000 4,000 2,400 66,400
Fixed costs Supervision Insurance Property taxes Depreciation Total fixed Total costs
1,200 400 600 1,800 4,000 $37,200
1,200 400 600 1,800 4,000 $53,800
1,200 400 600 1,800 4,000 $70,400
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 41
Ex. 175 Redfield Corporation's manufacturing costs for July when production was 2,000 units appears below: Direct materials $10 per unit Factory depreciation $16,000 Variable overhead 10,000 Direct labor 4,000 Factory supervisory salaries 11,600 Other fixed factory costs 3,000 Instructions How much is the flexible budget manufacturing cost amount for a month when 2,200 units are produced? Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 175
(8–10 min.)
Direct materials ($10 × 2,200) Direct labor [($4,000 ÷ 2,000) × 2,200] Variable overhead [($10,000 ÷ 2,000) × 2,200] Factory depreciation—fixed Factory supervisory salaries—fixed Other fixed factory costs Total
$22,000 4,400 11,000 16,000 11,600 3,000 $68,000
Ex. 176 Webb Manufacturing uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor $5.00 Indirect materials 2.50 Maintenance .50 Utilities .30 Fixed overhead costs per month are: Supervision Insurance Property taxes Depreciation
$1,200 400 600 1,800
The company believes it will normally operate in a range of 4,000 to 8,000 machine hours per month. During the month of August, 2012, the company incurs the following manufacturing overhead costs: Indirect labor $28,000 Indirect materials 16,200 Maintenance 2,800 Utilities 1,900 Supervision 1,440 Insurance 400 Property taxes 600 Depreciation 1,860
For Instructor Use Only
24 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 176
(Cont.)
Instructions Prepare a flexible budget report, assuming that the company used 6,000 machine hours during August. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 176
(20–25 min.) WEBB COMPANY Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 2012 Budget at 6,000 hrs.
Actual at 6,000 hrs.
Difference Favorable F Unfavorable U
Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable
$30,000 15,000 3,000 1,800 49,800
$28,000 16,200 2,800 1,900 48,900
$2,000 1,200 200 100 900
F U F U F
Fixed Costs Supervision Insurance Property taxes Depreciation Total fixed Total costs
1,200 400 600 1,800 4,000 $53,800
1,440 400 600 1,860 4,300 $53,200
240 — — 60 300 $ 600
U
U U F
Ex. 177 Bailey Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $480,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery
6% 4% 5% 1%
Fixed selling expenses consist of sales salaries $80,000 and depreciation on delivery equipment $20,000. Instructions Prepare a flexible budget for increments of $40,000 of sales within the relevant range. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Budgetary Control and Responsibility Accounting Solution 177
24 - 43
(17–22 min.) BAILEY COMPANY Monthly Flexible Selling Expense Budget
Activity level Sales Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total costs
$400,000
$440,000
$480,000
$24,000 16,000 20,000 4,000 64,000
$26,400 17,600 22,000 4,400 70,400
$28,800 19,200 24,000 4,800 76,800
80,000 20,000 100,000 $164,000
80,000 20,000 100,000 $170,400
80,000 20,000 100,000 $176,800
Ex. 178 Goodwin Industries uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $200,000 to $240,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery
6% 4% 5% 1%
Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000. The actual selling expenses incurred in February, 2012, by Goodwin Industries are as follows: Sales commissions Advertising Traveling Delivery
$13,700 8,000 11,300 1,600
Fixed selling expenses consist of sales salaries $41,000 and depreciation on delivery equipment $10,000. Instructions Prepare a flexible budget performance report, assuming that February sales were $220,000. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
24 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 178
(17–22 min.) GOODWIN COMPANY Selling Expense Budget Report (Flexible) For the Month Ended February 29, 2012
Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total expenses
Difference Favorable F Unfavorable U
Budget $220,000
Actual $220,000
$13,200 8,800 11,000 2,200 35,200
$13,700 8,000 11,300 1,600 34,600
$ 500 800 300 600 600
40,000 10,000 50,000 $85,200
41,000 10,000 51,000 $85,600
1,000 U — 1,000 U $ 400 U
U F U F F
Ex. 179 A flexible budget graph for the Assembly Department shows the following: 1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $120,000. 2. At normal capacity of 100,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000. Instructions Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 179
(5 min.)
Budgeted Costs: Assembly $120,000 + $2.40. Fixed costs are $120,000. Variable costs are $2.40 per labor hour. ($360,000 – $120,000) ÷ 100,000. Ex. 180 Jordan Company has two production departments, Fabricating and Assembling. At a department managers' meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following. 1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $100,000 in the Fabricating Department, and $80,000 in the Assembling Department. For Instructor Use Only
Budgetary Control and Responsibility Accounting Ex. 180
24 - 45
(Cont.)
2. At normal capacity of 100,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000 in the Fabricating Department, and $290,000 in the Assembling Department. Instructions (a) State the total budgeted cost formula for each department. (b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 106,000 and 94,000, in the Fabricating and Assembling Departments, respectively. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 180
(5 min.)
(a) Fabricating Department = $100,000 fixed costs plus total variable costs of $2.60 per direct labor hour [($360,000 – $100,000) 100,000]. Assembling Department = $80,000 fixed costs plus total variable costs of $2.10 per direct labor hour [($290,000 – $80,000) 100,000]. (b) Fabricating Department = $100,000 + ($2.60 106,000) = $375,600 Assembling Department = $80,000 + ($2.10 94,000) = $277,400 Ex. 181 Hamilton Company's static budget at 4,000 units of production includes $16,000 for direct labor, $4,000 for utilities (variable), and total fixed costs of $32,000. Actual production and sales for the year was 12,000 units, with an actual cost of $94,400. Instructions Determine if Hamilton is over or under budget. Ans: N/A, SO: 3,6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 181
(8–10 min.) 4,000 Units
Variable costs: Direct labor Utilities Fixed costs Total costs
$ 16,000 4,000 20,000 32,000 $52,000
Unit Variable Cost 12,000 Units $4.00 1.00
$48,000 12,000 60,000 32,000 $92,000
The company is over budget by $2,400. The flexible budget amount allowed was $92,000, and the company incurred $94,400 of actual costs.
For Instructor Use Only
24 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 182 Drake Manufacturing produces men's ties. The following budgeted and actual amounts are for 2012: Cost Direct materials Direct labor Equipment depreciation Indirect labor Indirect materials Rent and insurance
Budget at 5,000 Units $60,000 75,000 5,000 7,500 9,000 12,000
Actual Amounts at 5,800 Units $71,000 86,500 5,000 8,600 9,600 13,000
Instructions Prepare a performance budget report for Drake Manufacturing for the year. Ans: N/A, SO: 4,5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 182
(8–10 min.) DRAKE MANUFACTURING Manufacturing Performance Budget Report For the Year Ended December 31, 2012
Direct materials Direct labor Equipment depreciation Indirect labor Indirect materials Rent and insurance Total costs
Budget $ 69,600 87,000 5,000 8,700 10,440 12,000 $192,740
Actual $ 71,000 86,500 5,000 8,600 9,600 13,000 $193,700
Differences $1,400 U 500 F 0 100 F 840 F 1,000 U $ 960 U
Ex. 183 Data concerning manufacturing overhead for Amelia Industries are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level.
For Instructor Use Only
Budgetary Control and Responsibility Accounting Ex. 183
24 - 47
(Cont.)
The flexible budget formula and the cost and activity for the months of July and August are as follows: Flexible Budget Per Direct Labor Hour Actual Costs and Activity July August Direct labor hours 6,000 7,000 Overhead costs Variable Indirect materials $3.50 $ 20,500 $ 25,100 Indirect labor 6.00 39,500 40,700 Factory supplies 1.00 7,600 8,200 Fixed Depreciation $20,000 15,000 15,000 Supervision 25,000 23,000 26,000 Property taxes 10,000 12,000 12,000 Total costs $117,600 $127,000 Instructions (a) Prepare the responsibility reports for the Mixing Department for each month. (b) Comment on the manager's performance in controlling costs during the two month period. Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(20–25 min.)
(a)
AMELIA INDUSTRIES Mixing Department Manufacturing Overhead Cost Responsibility Report For the Months of July and August
Controllable Cost Indirect materials Indirect labor Factory supplies Supervision Total costs (b)
Budget 21,000 36,000 6,000 12,500 75,500
July Actual 20,500 39,500 7,600 11,500 79,100
Difference 500 F 3,500 U 1,600 U 1,000 F 3,600 U
Budget 24,500 42,000 7,000 12,500 86,000
August Actual Difference 25,100 600 U 40,700 1,300 F 8,200 1,200 U 13,000 500 U 87,000 1,000 U
The manager did a better job of controlling costs in August ($1,000 U) than in July ($3,600 U).
Ex. 184 Wilkin Company's manufacturing overhead budget for the first quarter of 2012 contained the following data: Variable Costs Indirect materials Indirect labor Utilities Maintenance
$40,000 24,000 20,000 12,000 For Instructor Use Only
24 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 184
(Cont.)
Fixed Costs Supervisor's salary Depreciation Property taxes
$80,000 16,000 8,000
Actual variable costs for the first quarter were: Indirect materials Indirect labor Utilities Maintenance
$37,200 26,400 21,000 10,600
Actual fixed costs were as expected except for property taxes which were $9,000. All costs are considered controllable by the department manager except for the supervisor's salary. Instructions Prepare a manufacturing overhead responsibility performance report for the first quarter. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(15–20 min.) WILKIN COMPANY Manufacturing Overhead Cost Responsibility Report For the Quarter Ended March 31, 2012
Controllable Costs Indirect materials Indirect labor Utilities Maintenance Depreciation Property taxes Total costs
Budget $40,000 24,000 20,000 12,000 16,000 8,000 $120,000
Actual $37,200 26,400 21,000 10,600 16,000 9,000 $120,200
Difference $2,800 F 2,400 U 1,000 U 1,400 F — 1,000 U $ 200 U
Ex. 185 The Holiday Division, a profit center of Velez Company, reported the following data for the first quarter of 2012: Sales $12,000,000 Variable costs 8,400,000 Controllable direct fixed costs 1,600,000 Noncontrollable direct fixed costs 1,060,000 Indirect fixed costs 400,000 Instructions (a) Prepare a performance report for the manager of the Holiday Division. (b) What is the best measure of the manager's performance? Why? (c) How would the responsibility report differ if the division was an investment center? Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Budgetary Control and Responsibility Accounting Solution 185
24 - 49
(15–20 min.)
(a)
VELEZ COMPANY Holiday Division Management Performance Report For the Quarter Ended March 31, 2012 Sales ........................................................................................... Variable costs.............................................................................. Contribution margin ..................................................................... Controllable fixed costs ............................................................... Controllable margin .....................................................................
$12,000,000 8,400,000 3,600,000 1,600,000 $2,000,000
(b)
Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable revenues over controllable costs.
(c)
For an investment center, the responsibility report would also show the return on investment for the period.
Ex. 186 Keatley Manufacturing Inc. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows. Operating Data
Women's Shoes
Men's Shoes
Children's Shoes
Contribution margin
$210,000
(3)
$200,000
Controllable fixed costs
100,000
(4)
(5)
(1)
$ 90,000
96,000
600,000
480,000
(6)
(2)
330,000
250,000
Controllable margin Sales Variable costs Instructions
(a) Compute the missing amounts. Show computations. (b) Prepare a responsibility report for the Women's Shoe Division assuming (1) the data are for the month ended June 30, 2010, and (2) all data equal budget except variable costs which are $15,000 over budget. Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 186
(10 min.)
(a) (1) Controllable margin ($210,000 – $100,000)
$110,000
(2) Variable costs ($600,000 – $210,000)
390,000
(3) Contribution margin ($480,000 – $330,000)
150,000
(4) Controllable fixed costs ($150,000 – $90,000)
60,000
(5) Controllable fixed costs ($200,000 – $96,000)
104,000
(6) Sales ($250,000 + $200,000)
450,000
For Instructor Use Only
24 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 186
(Cont.)
(b)
KEATLEY MANUFACTURING INC. Women's Shoe Division Responsibility Report For the Month Ended June 30, 2010 _____________________________________________________________________________ Difference Favorable F Budget Actual Unfavorable U Sales $600,000 $600,000 $ 0 Variable costs 375,000 390,000 15,000 U Contribution margin 225,000 210,000 15,000 U Controllable fixed costs 100,000 100,000 0 Controllable margin $125,000 $110,000 $15,000 U Ex. 187 The Asphalt Division of Herrera Industries is operated as a profit center. Sales for the division were budgeted for 2012 at $1,200,000. The only variable costs budgeted for the division were cost of goods sold ($590,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative and $95,000 for noncontrollable fixed costs. Actual results for these items were: Sales Cost of goods sold Variable Fixed Selling and administrative Variable Fixed Noncontrollable fixed
$1,175,000 545,000 140,000 82,000 90,000 105,000
Instructions (a) Prepare a responsibility report for the Asphalt Division for 2012. (b) Assume the division is an investment center, and average operating assets were $1,200,000. Compute ROI. Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187
(15 min.)
(a) HERRERA INDUSTRIES Asphalt Division Responsibility Report 2012 _____________________________________________________________________________ Budget Actual Difference Sales $1,200,000 $1,175,000 $25,000 U Variable costs Cost of goods sold 590,000 545,000 45,000 F Selling and administrative 80,000 82,000 2,000 U Total 670,000 627,000 43,000 F Contribution margin 530,000 548,000 18,000 F For Instructor Use Only
Budgetary Control and Responsibility Accounting Solution 187
(Cont.)
Controllable fixed costs Cost of goods sold Selling and administrative Total Controllable margin (b)
24 - 51
130,000 120,000 250,000 $280,000
140,000 90,000 230,000 $318,000
10,000 U 30,000 F 20,000 F $38,000 F
$318,000/$1,200,000 = 26.5%
Ex. 188 The Tool Division of Terrani Company reported the following data for the current year. Sales $4,000,000 Variable costs 2,600,000 Controllable fixed costs 800,000 Average operating assets 6,000,000 Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the Tool Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $420,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $120,000. 3. Reduce average operating assets by 4% Instructions (a) Compute the return on investment (ROI) for the current year. (b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round to one decimal.) Ans: N/A, SO: 7, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 188
(10 min.)
(a) Controllable margin = ($4,000,000 – $2,600,000 – $800,000) = $600,000 ROI = $600,000 ÷ $6,000,000 = 10% (b)
1. Contribution margin percentage is 35%, or ($1,400,000 ÷ $4,000,000) Increase in controllable margin = $420,000 × 35% = $147,000 ROI = ($600,000 + $147,000) ÷ $6,000,000 = 12.5% 2. ($600,000 + $120,000) ÷ $6,000,000 = 12% 3. $600,000 ÷ ($6,000,000 – $240,000) = 10.4%
For Instructor Use Only
24 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 189 The National Transportation Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers' bonuses are based in part on the results shown in these reports. Recently, the company was the victim of a computer virus that deleted portions of the company's accounting records. This was discovered when the current period's responsibility reports were being prepared. The printout of the actual operating results appeared as follows.
Service revenue Variable costs Contribution margin Controllable fixed costs Controllable margin Average operating assets Return on investment
Planes $ ? 5,000,000 ? 1,500,000 ? 20,000,000 12%
Taxis $450,000 ? 180,000 ? 70,000 ? 10%
Limos $ ? 320,000 380,000 ? 160,000 1,600,000 ?
Instructions Determine the missing pieces of information above. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 189
(10 min.)
Planes: ROI = Controllable margin ÷ Average operating assets 12% = Controllable margin ÷ $20,000,000 Controllable margin = $20,000,000 × 12% = $2,400,000 Contribution margin = Controllable margin + controllable fixed costs = $2,400,000 + $1,500,000 = $3,900,000 Service revenue = Contribution margin + Variable costs = $3,900,000 + $5,000,000 = $8,900.000
For Instructor Use Only
Budgetary Control and Responsibility Accounting Solution 189
24 - 53
(Cont.)
Taxis: ROI = Controllable margin ÷ Average operating assets 10%= $70,000 ÷ Average operating assets Average operating assets = $70,000 ÷ 10% = $700,000 Controllable margin = Contribution margin – Controllable fixed costs $70,000 = $180,000 – Controllable fixed costs Controllable fixed costs = $180,000 – $70,000 = $110,000 Contribution margin = Service revenue – Variable costs $180,000 = $450,000 – Variable costs Variable costs = $450,000 – $180,000 = 270,000 Limos: ROI = Controllable margin ÷ Average operating assets = 160,000 ÷ $1,600,000 = 10% Controllable margin = Contribution margin – Controllable fixed costs $160,000 = $380,000 – Controllable fixed costs Controllable fixed costs = $380,000 – $160,000 = $220,000 Contribution margin = Service revenue – Variable costs $380,000 Service revenue
= Service revenue – $320,000 = $380,000 + $320,000 = $700,000
Ex. 190 Bricker Company reported the following: Beginning of year operating assets End of year operating assets Contribution margin Sales Controllable fixed costs
$4,400,000 4,000,000 2,000,000 10,000,000 1,286,000
Its required return is 10%. Instructions Compute the company’s ROI. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 190
(3 min.)
($2,000,000 – $1,286,000) ÷ [($4,400,000 + $4,000,000) ÷ 2] = 17% Ex. 191 Moorehouse Manufacturing Company has two investment centers and has developed the following information: Department A $120,000 ? 800,000 10%
Departmental controllable margin Average operating assets Sales ROI
Department B ? $400,000 250,000 12%
Instructions Answer the following questions about Department A and Department B. 1.
What was the amount of Department A's average operating assets? $____________.
2.
What was the amount of Department B's controllable margin? $____________.
3.
If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.
4.
If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A's new ROI would be _________________.
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 191 1. 2. 3. 4.
(8–12 min.)
$1,200,000 ($120,000 ÷ .10) $48,000 ($400,000 × .12) 16% [$48,000 ÷ ($400,000 – $100,000)] 15% [($120,000 + $60,000) ÷ $1,200,000]
Ex. 192 The Western Division of Pulley Industries reported the following results for 2012: Sales $4,000,000 Variable costs 3,200,000 Controllable fixed costs 300,000 Average operating assets 2,000,000 Management is considering the following independent alternative courses of action in 2013 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 20% with no change in sales or variable costs. 2. Reduce average operating assets by 20% with no change in controllable margin. 3. Increase sales $400,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2012. (b) Compute the expected return on investment for each of the alternative courses of action. For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 55
Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
24 - 56 Test Bank for Accounting Principles, Tenth Edition Solution 192 (a)
(15–20 min.)
Controllable margin Return on investment = ———————————— Average operating assets $500,000 2010 ROI = —————— = 25% $2,000,000
(b)
$560,000 (a) 1. ——————— = 28% $2,000,000 $500,000 2. ———————— = 31.3% $1,600,000 (b) $580,000 (c) 3. ——————— = 29% $2,000,000 (a)
$500,000 + ($300,000 × 20%) = $560,000.
(b)
$2,000,000 – ($2,000,000 × .20) = $1,600,000.
(c)
$4,000,000 – $3,200,000 Contribution margin 20% (————————————); $4,000,000 $500,000 + ($400,000 × 20%) = $580,000.
Ex. 193 Data for the following subsidiaries of Ortiz Manufacturing, which are operated as investment centers, are as follows: Rooks Company McDonald, Inc. Sales $3,000,000 $2,000,000 Controllable margin (1) (3) Average operating assets (2) 4,000,000 Contribution margin 1,200,000 800,000 Controllable fixed costs 500,000 200,000 Return on Investment 10% (4) Instructions Compute the missing amounts using the ROI formula. Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193 (1) (2) (3) (4)
(9–14 min.)
Controllable margin ($1,200,000 – $500,000) = $700,000 Average operating assets ($700,000 ÷ .10) = $7,000,000 Controllable margin ($800,000 – $200,000) = $600,000 ROI ($600,000 ÷ $4,000,000) = 15% For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 57
Ex. 194 The data for an investment center is given below. 1/1/12 $ 300,000 3,000,000 250,000 1,200,000
Current assets Plant assets Idle plant assets Land held for future use
12/31/12 $ 500,000 4,000,000 330,000 1,200,000
The controllable margin is $780,000. Instructions What is the return on investment for the center for 2012? Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 194
(4–5 min.)
ROI = Controllable margin ÷ Average operating assets Plant assets Average current assets
($3,000,000 + $4,000,000) ÷ 2 = $3,500,000 ($300,000 + $500,000) ÷ 2 = 400,000 $3,900,000
Note: Idle plant assets and land held for future use are not included in average operating assets. ROI = $780,000 ÷ $3,900,000 = 20%
COMPLETION STATEMENTS 195. The use of budgets in controlling operations is known as ________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
196. A major aspect of budgeting control is the use of budget reports that compare _____________________ with _______________________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
197. In analyzing differences from planned objectives, management may ___________________, or it could decide to modify ___________________.
take
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
198. The master budget is a __________________ budget which is based on operating at one budgeted activity level. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
199. A __________________ budget projects budget data for various levels of activity. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
For Instructor Use Only
24 - 58 Test Bank for Accounting Principles, Tenth Edition 200. Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
201. Under ___________________ accounting, the evaluation of a manager's performance is based on the costs and revenues directly under that manager's control. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
202. A cost is __________________ at a given level of managerial responsibility if a manager has the authority to incur the cost in a given time period. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
203. In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are ____________________ to the responsibility level are __________________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
204. Responsibility centers may be classified into three types: (1)____________________, (2)___________________ and, (3)____________________. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Budget Preparation
205. The primary basis for evaluating the performance of a manager of an investment center is _________________. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
206. Return on investment is calculated by dividing _________________________ by ________________________. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Answers to Completion Statements 195. 196. 197. 198. 199. 200. 201.
budgetary control actual results, planned objectives corrective action, future plans static flexible fixed responsibility
202. controllable 203. incurred, controllable, allocated, noncontrollable 204. cost centers, profit centers, investment centers 205. return on investment (ROI) 206. controllable margin, average operating assets
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 59
MATCHING 207. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception
G. H. I. J. K. L.
Responsibility reporting system Return on Investment Profit center Investment center Indirect fixed costs Direct fixed costs
____
1. The review of budget reports by top management directed entirely or primarily to differences between actual results and planned objectives.
____
2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items.
____
3. The preparation of reports for each level of responsibility shown in the company's organization chart.
____
4. A projection of budget data at one level of activity.
____
5. Costs that a manager has the authority to incur within a given period of time.
____
6. The use of budgets to control operations.
____
7. A projection of budget data for various levels of activity.
____
8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use.
____
9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center.
____ 10. A responsibility center that incurs costs and also generates revenues. ____ 11. Costs which are incurred for the benefit of more than one profit center. ____ 12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average operating assets. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5. 6.
F D G B E A
7. 8. 9. 10. 11. 12.
C J L I K H
For Instructor Use Only
24 - 60 Test Bank for Accounting Principles, Tenth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 208 The master budget and flexible budgets are important aids to management in performing the management functions of planning and control. Briefly describe how planning and control are facilitated by preparing a master budget and flexible budgets. How are these two types of budgets interrelated with planning and control? Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
Solution 208 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments. Management by exception is possible in such a system because, if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary. S-A E 209 Jane Olney is confused about how a flexible budget is prepared. Identify the steps for Jane. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
Solution 209 The steps in preparing a flexible budget are: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (3) Identify the fixed costs and determine the budgeted amount for each cost. (4) Prepare the budget for selected increments of activity within the relevant range. S-A E 210 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
For Instructor Use Only
Budgetary Control and Responsibility Accounting
24 - 61
Solution 210 Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager, it is necessary to use different bases for evaluation. An investment center manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit center. Similarly, because only costs are controllable for a cost center, such a center is evaluated only on the basis of its controllable costs. S-A E 211 What is responsibility accounting? Explain the purpose of responsibility accounting. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
Solution 211 Responsibility accounting is a method of controlling operations that involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. The purpose of responsibility accounting is to evaluate a manager's performance on the basis of matters directly under that manager's control. S-A E 212 (Ethics) Nikolov Corporation evaluates its managers based on return on investment (ROI). Bobbie Franco and Jill Mendoza, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Jill remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result. Back at work, Bobbie continues to mull over Jill's remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing. Required: 1. Who are the stakeholders in this situation? 2. Is Bobbie's action ethical? Briefly explain. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
Solution 212 1. The stakeholders include: Bobbie Franco Jill Mendoza Managers of Nikolov Corporation Shareholders of Nikolov Corporation
For Instructor Use Only
24 - 62 Test Bank for Accounting Principles, Tenth Edition S-A E 212 (Cont.) 2. Bobbie's action is probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one's own benefit at the expense of the company's welfare is unethical. S-A E 213 (Communication) Burris Electronics manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant's capacity, and sometimes depressingly slow. During a recent slow period, Robert Crown, a production supervisor, complained to Kim Maley, accounting manager, about the flexible budget. "I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average month of 10,000 unit sales, I should spend about $82,000. I spend less, and get an unfavorable budget report. What gives?" Required: Write a short memo to respond to Mr. Crown. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation
Solution 213 TO:
Robert Crown
FROM: Kim Maley RE:
Budget results
I appreciate your coming to me with your questions about the budget. I understand that the new procedures can be frustrating, especially when you receive an unfavorable report that you were not expecting. Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control. Please contact the Accounting Department if you have further questions. (signed)
For Instructor Use Only
CHAPTER 25 STANDARD COSTS AND BALANCED SCORECARD SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
5 5 6 9 9 9 1 2
C K C C C C K K
sg
33. 3 34. 4 sg 35. 4 sg 36. 6 sg 37. 7 sg 38. 10
K K C K K K
114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138.
4 4 4 4 4 4 5 5 6 6 6 7 7 7 7 8 8 8 9 9 10 10 10 10 10
AP AP AP AP AP AP K K K K C C K K K K K K AP C AP AP K C C
a
10 10 10 10 10 10 10 10 10 10 2 3 3 4 4 4 4 6 9 10 10
K K K K C C AP AP AP AP K K K K K K C K K K K
a
10 9
AP AP
9 10
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 2 3 3 3
K K C K C C K C
9. 10. 11. 12. 13. 14. 15. 16.
3 3 3 3 3 3 3 3
C K C K K C K K
17. 18. 19. 20. 21. 22. 23. 24.
3 4 4 4 4 4 5 5
C K C K C C K K
25. 26. 27. 28. 29. 30. sg 31. sg 32.
sg
Multiple Choice Questions 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.
1 1 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3
K K C C C K K C C C C C K K K K K K K C K C C K C
64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
C K C AP C C K AP AP C AP AP AP K K C K AP AP K K AP AP AP AP
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
AP AP AP AP C C C C C C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP
139. 140. a 141. a 142. a 143. a 144. a 145. a 146. a 147. a 148. st 149. st 150. st 151. sg 152. sg 153. st 154. sg 155. sg 156. sg,a 157. st,a 158. sg,a 159. a
Brief Exercises 160. 161. sg st a
1 3
AP AP
162. 163.
4 4
AP AP
164. 165.
a
5 10
AP AP
166. 167.
a
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
a
168. 169.
a
25 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 170. 171. 172. 173. 174. 175.
1,3 3 3,4 4 4 4
AP AP AP AP AP AP
176. 177. 178. 179. 180. 181.
4 4 4 4 5 4,5
198. 199.
1 3
K K
200. 201.
4 4
208.
1
K
209. 210.
1 4
K K
182. 4,5,10 AN a188. a 183.. 4,5,10 AP a189. a 184.. 4,5,10 AP a190. a 185.. 4,6,9 AP a191. a 186.. 4,9 AP 192. a 187.. 4,9 AP 193. . Completion Statements K 202. 4 K 204. K 203. 5 K 205.
AP AP AP AP AP AN
a
4,9 5,10 5,10 5,10 6 7
AP AP AP AP AP AP
a
194. 9 195. 9,10 a 196. 10 a 197. 10
AP AP AP AP
5 6
K K
a
10 10
K K
Item
Type
a
206. 207.
a
Matching Short-Answer Essay 211. 212.
4 8
213. 214.
1 4
K K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3.
TF TF TF
4. 31. 39.
TF TF MC
40. 41. 42.
5. 32.
TF TF
46. 47.
MC MC
48. 49.
6. 7. 8. 9. 10. 11.
TF TF TF TF TF TF
12. 13. 14. 15. 16. 17.
TF TF TF TF TF TF
33. 51. 52. 53. 54. 55.
Type
Item
Type
Item
Study Objective 1 MC 43. MC 160. MC 44. MC 170. MC 45. MC 198. Study Objective 2 MC 50. MC 170. MC 149. MC Study Objective 3 TF 56. MC 62. MC 57. MC 63. MC 58. MC 64. MC 59. MC 65. MC 60. MC 66. MC 61. MC 150.
Type
Item
Type
BE Ex C
208. 209. 213.
Ma SA SA
151. 161. 170. 171. 172. 199.
MC BE Ex Ex Ex C
Ex
MC MC MC MC MC MC
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
18. 19. 20. 21. 22.
TF TF TF TF TF
TF TF MC MC MC MC
71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
34. 35. 67. 68. 69. 70. 26. 120. 121.
TF MC MC
164. 180. 181.
BE Ex Ex
182. 183. 184.
27. 36.
TF TF
122. 123.
MC MC
124. 156.
37.
TF
125.
MC
126.
129.
MC
130.
MC
131.
28. 29.
TF TF
30. 132.
TF MC
133. 157.
38. 134. 135. 136. 137.
TF MC MC MC MC
138. 139. 140. 141. 142.
MC MC MC MC MC
143. 144. 145. 146. 147.
Note: TF = True-False MC = Multiple Choice MA = Matching
Study Objective 4 MC 99. MC 113. MC 100. MC 114. MC 101. MC 115. MC 102. MC 116. MC 103. MC 117. MC 104. MC 118. MC 105. MC 119. MC 106. MC 152. MC 107. MC 153. MC 108. MC 154. MC 109. MC 155. MC 110. MC 162. MC 111. MC 163. MC 112. MC 172. Study Objective 5 Ex 189. Ex 195. Ex 190. Ex 196. Ex 191. Ex 197. Study Objective 6 MC 185. Ex 205. MC 192. Ex Study Objective 7 MC 127. MC 128. Study Objective 8 MC 212. K Study Objective 9a MC 167. BE 185. MC 168. BE 186. Study Objective 10a MC 148. MC 169. MC 158. MC 182. MC 159. MC 183. MC 165. BE 184. MC 166. BE 189.
25 - 3
MC MC MC MC MC MC MC MC MC MC MC BE BE Ex
173. 174. 175. 176. 177. 178. 179. 181. 182. 183. 184. 185. 186. 187.
Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex
188. 200. 201. 202. 210. 211. 214.
Ex C C C K K K
Ex Ex Ex
203. 204. 23.
C C TF
24. 25.
TF TF
MC
193.
Ex
Ex Ex
187. 188.
Ex Ex
194. 195.
Ex Ex
BE Ex Ex Ex Ex
190. 191. 195. 196. 197.
Ex Ex Ex Ex Ex
206. 207.
C C
C
BE = Brief Exercise Ex = Exercise
FOR INSTRUCTOR USE ONLY
C = Completion SA = Short Answer
25 - 4
Test Bank for Accounting Principles, Tenth Edition
CHAPTER STUDY OBJECTIVES 1. Distinguish between a standard and a budget. Both standards and budgets are predetermined costs. The primary difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product. 2. Identify the advantages of standard costs. Standard costs offer a number of advantages. They (a) facilitate management planning, (b) promote greater economy and efficiency, (c) are useful in setting selling prices, (d) contribute to management control, (e) permit "management by exception," and (f) simplify the costing of inventories and reduce clerical costs. 3. Describe how companies set standards. The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving and handling. The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage. The direct labor price standard should be based on current wage rates and anticipated adjustments such as COLAs. It also generally includes payroll taxes and fringe benefits. Direct labor quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime. For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard activity index such as standard direct labor hours or standard machine hours. 4. State the formulas for determining direct materials and direct labor variances. The formulas for direct materials variances are: (Actual quantity × Actual price) – (Standard quantity × Standard price) = Total materials variance (Actual quantity × Actual price) – (Actual quantity × Standard price) = Materials price variance (Actual quantity × Standard price) – (Standard quantity × Standard price) = Materials quantity variance The formulas for the direct labor variances are: (Actual hours × Actual rate) – (Standard hours × Standard rate) = Total labor variance (Actual hours × Actual rate) – (Actual hours × Standard rate) = Labor price variance (Actual hours × Standard rate) – (Standard hours × Standard rate) = Labor quantity variance
5. State the formula for determining the total manufacturing overhead variance. The formula for the total manufacturing overhead variance is: (Actual overhead) – (Overhead applied at standard hours allowed) = Total overhead variance
6. Discuss the reporting of variances. Variances are reported to management in variance reports. The reports facilitate management by exception by highlighting significant differences. 7. Prepare an income statement for management under a standard costing system. Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately, 8. Describe the balanced scorecard approach to performance evaluation. The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals. It employs four perspectives: financial, customer, internal processes, and learning and growth. Objectives are set within each of these perspectives that link to objectives within the other perspectives. a
9. Identify the features of a standard cost accounting system. In a standard cost accounting system, companies journalize and post standard costs, and they maintain separate variance accounts in the ledger. FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 5
a
10.Compute overhead controllable and volume variance. The total overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance. The quantity is referred to as the overhead volume variance.
TRUE-FALSE STATEMENTS 1.
Inventories cannot be valued at standard cost in financial statements.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
Standard cost is the industry average cost for a particular item.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
3.
A standard is a unit amount, whereas a budget is a total amount.
Ans: T, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
4.
Standard costs may be incorporated into the accounts in the general ledger.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
5.
An advantage of standard costs is that they simplify costing of inventories and reduce clerical costs.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
6.
Setting standard costs is relatively simple because it is done entirely by accountants.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Cost Management
7.
Normal standards should be rigorous but attainable.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
8.
Actual costs that vary from standard costs always indicate inefficiencies.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
9.
Ideal standards will generally result in favorable variances for the company.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
10.
Normal standards incorporate normal contingencies of production into the standards.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
11.
Once set, normal standards should not be changed during the year.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
12.
In developing a standard cost for direct materials, a price factor and a quantity factor must be considered.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 6 13.
Test Bank for Accounting Principles, Tenth Edition A direct labor price standard is frequently called the direct labor efficiency standard.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
14.
The standard predetermined overhead rate must be based on direct labor hours as the standard activity index.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
15.
Standard cost cards are the subsidiary ledger for the Work in Process account in a standard cost system.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
16.
A variance is the difference between actual costs and standard costs.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
17.
If actual costs are less than standard costs, the variance is favorable.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
18.
A materials quantity variance is calculated as the difference between the standard direct materials price and the actual direct materials price multiplied by the actual quantity of direct materials used.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
19.
An unfavorable labor quantity variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
20.
Standard cost + price variance + quantity variance = Budgeted cost.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
21.
There could be instances where the production department is responsible for a direct materials price variance.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 22.
25 - 7
The starting point for determining the causes of an unfavorable materials price variance is the purchasing department.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
23.
The overhead controllable variance relates primarily to fixed overhead costs.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
24.
The overhead volume variance relates only to fixed overhead costs.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
25.
If production exceeds normal capacity, the overhead volume variance will be favorable.
Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
26.
The total overhead variance is the difference between actual overhead costs and overhead costs applied based on standard hours allowed.
Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
27.
Variance analysis facilitates the principle of "management by exception."
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
28.
A credit to a Materials Quantity Variance account indicates that the actual quantity of direct materials used was greater than the standard quantity of direct materials allowed.
Ans: F, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
29.
A standard cost system may be used with a job order cost system but not with a process cost system.
Ans: F, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
30.
A debit to the Overhead Volume Variance account indicates that the standard hours allowed for the output produced was greater than the standard hours at normal capacity.
Ans: F, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
31.
In concept, standards and budgets are essentially the same.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
32.
Standards may be useful in setting selling prices for finished goods.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
33.
The materials price standard is based on the purchasing department's best estimate of the cost of raw materials.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
34.
The materials price variance is normally caused by the production department. FOR INSTRUCTOR USE ONLY
25 - 8
Test Bank for Accounting Principles, Tenth Edition
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
35.
The use of an inexperienced worker instead of an experienced employee can result in a favorable labor price variance but probably an unfavorable quantity variance.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
36.
In using variance reports, top management normally looks carefully at every variance.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
The use of standard costs in inventory costing is prohibited in financial statements.
Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The overhead controllable variance is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed.
a
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
F F T T T F
7. 8. 9. 10. 11. 12.
T F F T F T
13. 14. 15. 16. 17. 18.
F F F T T F
19. 20. 21. 22. 23. 24.
T F T T F T
25. 26. 27. 28. 29. 30.
T T T F F F
31. 32. 33. 34. 35. 36.
T T T F T F
37. a 38.
F T
MULTIPLE CHOICE QUESTIONS 39.
What is a standard cost? a. The total number of units times the budgeted amount expected b. Any amount that appears on a budget c. The total amount that appears on the budget for product costs d. The amount management thinks should be incurred to produce a good or service
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
40.
A standard cost is a. a cost which is paid for a group of similar products. b. the average cost in an industry. c. a predetermined cost. d. the historical cost of producing a product last year.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 41.
25 - 9
The difference between a budget and a standard is that a. a budget expresses what costs were, while a standard expresses what costs should be. b. a budget expresses management's plans, while a standard reflects what actually happened. c. a budget expresses a total amount, while a standard expresses a unit amount. d. standards are excluded from the cost accounting system, whereas budgets are generally incorporated into the cost accounting system.
Ans: C, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
42.
Standard costs may be used by a. universities. b. governmental agencies. c. charitable organizations. d. all of these.
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
43.
Which of the following statements is false? a. A standard cost is more accurate than a budgeted cost. b. A standard is a unit amount. c. In concept, standards and budgets are essentially the same. d. The standard cost of a product is equivalent to the budgeted cost per unit of product.
Ans: A, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
44.
Budget data are not journalized in cost accounting systems with the exception of a. the application of manufacturing overhead. b. direct labor budgets. c. direct materials budgets. d. cash budget data.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
45.
It is possible that a company's financial statements may report inventories at a. budgeted costs. b. standard costs. c. both budgeted and standard costs. d. none of these.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
If standard costs are incorporated into the accounting system, a. it may simplify the costing of inventories and reduce clerical costs. b. it can eliminate the need for the budgeting process. c. the accounting system will produce information which is less relevant than the historical cost accounting system. d. approval of the shareholders is required.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 10 Test Bank for Accounting Principles, Tenth Edition 47.
Standard costs a. may show past cost experience. b. help establish expected future costs. c. are the budgeted cost per unit in the present. d. all of these.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
48.
Which of the following statements about standard costs is false? a. Properly set standards should promote efficiency. b. Standard costs facilitate management planning. c. Standards should not be used in "management by exception." d. Standard costs can simplify the costing of inventories.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
49.
Which of the following is not considered an advantage of using standard costs? a. Standard costs can reduce clerical costs. b. Standard costs can be useful in setting prices for finished goods. c. Standard costs can be used as a means of finding fault with performance. d. Standard costs can make employees "cost-conscious."
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
50.
If a company is concerned with the potential negative effects of establishing standards, it should a. set loose standards that are easy to fulfill. b. offer wage incentives to those meeting standards. c. not employ any standards. d. set tight standards in order to motivate people.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
51.
A standard which represents an efficient level of performance that is attainable under expected operating conditions is called a(n) a. ideal standard. b. loose standard. c. tight standard. d. normal standard.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
52.
Ideal standards a. are rigorous but attainable. b. are the standards generally used in a master budget. c. reflect optimal performance under perfect operating conditions. d. will always motivate employees to achieve the maximum output.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 53.
25 - 11
The final decision as to what standard costs should be is the responsibility of a. the quality control engineer. b. the managerial accountants. c. the purchasing agent. d. management.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
54.
The labor time requirements for standards may be determined by the a. sales manager. b. product manager. c. industrial engineers. d. payroll department manager.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
55.
The two levels that standards may be set at are a. normal and fully efficient. b. normal and ideal. c. ideal and less efficient. d. fully efficient and fully effective.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
56.
The most rigorous of all standards is the a. normal standard. b. realistic standard. c. ideal standard. d. conceivable standard.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
57.
Most companies that use standards set them at a. the normal level. b. a conceivable level. c. the ideal level. d. last year's level.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
58.
A managerial accountant 1. does not participate in the standard setting process. 2. provides knowledge of cost behaviors in the standard setting process. 3. provides input of historical costs to the standard setting process. a. b. c. d.
1 2 3 2 and 3
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 12 Test Bank for Accounting Principles, Tenth Edition 59.
The cost of freight-in a. is to be included in the standard cost of direct materials. b. is considered a selling expense. c. should have a separate standard apart from direct materials. d. should not be included in a standard cost system.
Ans: A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
60.
The direct materials quantity standard would not be expressed in a. pounds. b. barrels. c. dollars. d. board feet.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
61.
The direct materials quantity standard should a. exclude unavoidable waste. b. exclude quality considerations. c. allow for normal spoilage. d. always be expressed as an ideal standard.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
62.
The direct labor quantity standard is sometimes called the direct labor a. volume standard. b. effectiveness standard. c. efficiency standard. d. quality standard.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
63.
A manufacturing company would include setup and downtime in their direct a. materials price standard. b. materials quantity standard. c. labor price standard. d. labor quantity standard.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
64.
Allowance for spoilage is part of the direct a. materials price standard. b. materials quantity standard. c. labor price standard. d. labor quantity standard.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 65.
25 - 13
The total standard cost to produce one unit of product is shown a. at the bottom of the income statement. b. at the bottom of the balance sheet. c. on the standard cost card. d. in the Work in Process Inventory account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
66.
An unfavorable materials quantity variance would occur if a. more materials were purchased than were used. b. actual pounds of materials used were less than the standard pounds allowed. c. actual labor hours used were greater than the standard labor hours allowed. d. actual pounds of materials used were greater than the standard pounds allowed.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
67.
Fugate Company planned to use 1 yard of plastic per unit budgeted at $81 a yard. However, the plastic actually cost $80 per yard. The company actually made 3,900 units, although it had planned to make only 3,300 units. Total yards used for production were 3,960. How much is the total materials variance? a. $48,600 U b. $4,860 U c. $3,960 F d. $900 U
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
68.
If actual direct materials costs are greater than standard direct materials costs, it means that a. actual costs were calculated incorrectly. b. the actual unit price of direct materials was greater than the standard unit price of direct materials. c. the actual unit price of raw materials or the actual quantities of raw materials used was greater than the standard unit price or standard quantities of raw materials expected. d. the purchasing agent or the production foreman is inefficient.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
69.
If actual costs are greater than standard costs, there is a(n) a. normal variance. b. unfavorable variance. c. favorable variance. d. error in the accounting system.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
70.
A total materials variance is analyzed in terms of a. price and quantity variances. b. buy and sell variances. c. quantity and quality variances. d. tight and loose variances.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 14 Test Bank for Accounting Principles, Tenth Edition 71.
A company developed the following per-unit standards for its product: 2 pounds of direct materials at $4 per pound. Last month, 1,500 pounds of direct materials were purchased for $5,700. The direct materials price variance for last month was a. $5,700 favorable. b. $300 favorable. c. $150 favorable. d. $300 unfavorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
72.
The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 5,600 gallons of direct materials that actually cost $21,200 were used to produce 3,000 units of product. The direct materials quantity variance for last month was a. $1,600 favorable. b. $1,200 favorable. c. $1,600 unfavorable. d. $2,800 unfavorable.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
73.
The purchasing agent of the Aldrich Company ordered materials of lower quality in an effort to economize on price. What variance will most likely result? a. Favorable materials quantity variance b. Favorable total materials variance b. Unfavorable materials price variance d. Unfavorable labor quantity variance
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
74.
The per-unit standards for direct labor are 2 direct labor hours at $15 per hour. If in producing 1,800 units, the actual direct labor cost was $48,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $1,800 unfavorable. b. $6,000 favorable. c. $3,750 unfavorable. d. $6,000 unfavorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
75.
The standard rate of pay is $20 per direct labor hour. If the actual direct labor payroll was $117,600 for 6,000 direct labor hours worked, the direct labor price (rate) variance is a. $2,400 unfavorable. b. $2,400 favorable. c. $3,000 unfavorable. d. $3,000 favorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 76.
25 - 15
The standard number of hours that should have been worked for the output attained is 6,000 direct labor hours and the actual number of direct labor hours worked was 6,300. If the direct labor price variance was $3,150 unfavorable, and the standard rate of pay was $9 per direct labor hour, what was the actual rate of pay for direct labor? a. $8.50 per direct labor hour b. $7.50 per direct labor hour c. $9.50 per direct labor hour d. $9.00 per direct labor hour
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
77.
Which one of the following statements is true? a. If the materials price variance is unfavorable, then the materials quantity variance must also be unfavorable. b. If the materials price variance is unfavorable, then the materials quantity variance must be favorable. c. Price and quantity variances move in the same direction. If one is favorable, the others will be as well. d. There is no correlation of favorable or unfavorable for price and quantity variances.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
78.
Variances from standards are a. expressed in total dollars. b. expressed on a per-unit basis. c. expressed on a percentage basis. d. all of these.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
79.
A favorable variance a. is an indication that the company is not operating in an optimal manner. b. implies a positive result if quality control standards are met. c. implies a positive result if standards are flexible. d. means that standards are too loosely specified.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
80.
The total materials variance is equal to the a. materials price variance. b. difference between the materials price variance and materials quantity variance. c. product of the materials price variance and the materials quantity variance. d. sum of the materials price variance and the materials quantity variance.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
81.
Information on Francona's direct labor costs for the month of August is as follows: Actual rate $10 Standard hours 11,000 Actual hours 10,000 Direct labor price variance—unfavorable $4,000 What was the standard rate for August? a. $9.96 c. $10.40 b. $9.60 d. $10.04 FOR INSTRUCTOR USE ONLY
25 - 16 Test Bank for Accounting Principles, Tenth Edition Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
82.
The total variance is $35,000. The total materials variance is $14,000. The total labor variance is twice the total overhead variance. What is the total overhead variance? a. $3,500 b. $7,000 c. $10,500 d. $14,000
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
83.
The formula for the materials price variance is a. (AQ × SP) – (SQ × SP). b. (AQ × AP) – (AQ × SP). c. (AQ × AP) – (SQ × SP). d. (AQ × SP) – (SQ × AP).
Ans: B, SO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
84.
The formula for the materials quantity variance is a. (SQ × AP) – (SQ × SP). b. (AQ × AP) – (AQ × SP). c. (AQ × SP) – (SQ × SP). d. (AQ × AP) – (SQ × SP).
Ans: C, SO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
85.
A company uses 8,400 pounds of materials and exceeds the standard by 300 pounds. The quantity variance is $1,800 unfavorable. What is the standard price? a. $2 b. $4 c. $6 d. Cannot be determined from the data provided.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
86.
A company purchases 20,000 pounds of materials. The materials price variance is $4,000 favorable. What is the difference between the standard and actual price paid for the materials? a. $1.00 b. $.20 c. $5.00 d. Cannot be determined from the data provided.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
87.
A company uses 20,000 pounds of materials for which it paid $6.00 a pound. The materials price variance was $15,000 unfavorable. What is the standard price per pound? a. $0.75 b. $5.25 c. $6.00 d. $6.75
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 88.
25 - 17
If the materials price variance is $3,600 F and the materials quantity and labor variances are each $2,700 U, what is the total materials variance? a. $3,600 F b. $2,700 U c. $900 F d. $4,050 U
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
89.
Keller Company has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Keller Company's materials price variance is a. $120 U. b. $1,200 U. c. $1,080 U. d. $1,200 F.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
90.
Keller Company has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Keller Company's materials quantity variance is a. $1,200 U. b. $1,200 F. c. $1,320 F. d. $1,320 U.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
91.
Keller Company has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Keller Company's total materials variance is a. $2,400 U. b. $2,400 F. c. $2,520 U. d. $2,520 F.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
92.
The standard quantity allowed for the units produced was 4,500 pounds, the standard price was $2.50 per pound, and the materials quantity variance was $375 favorable. Each unit uses 1 pound of materials. How many units were actually produced? a. 4,350 b. 4,500 c. 11,625 d. 4,650 FOR INSTRUCTOR USE ONLY
25 - 18 Test Bank for Accounting Principles, Tenth Edition Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
93.
The matrix approach to variance analysis a. will yield slightly different variances than the formula approach. b. is more accurate than the formula approach. c. does not separate the price and quantity variance calculations. d. provides a convenient structure for determining each variance.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
94.
Labor efficiency is measured by the a. materials quantity variance. b. total labor variance. c. labor quantity variance. d. labor rate variance.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
95.
An unfavorable labor quantity variance may be caused by a. paying workers higher wages than expected. b. misallocation of workers. c. worker fatigue or carelessness. d. higher pay rates mandated by union contracts.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
96.
The investigation of materials price variance usually begins in the a. first production department. b. purchasing department. c. controller's office. d. accounts payable department.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
97.
The investigation of a materials quantity variance usually begins in the a. production department. b. purchasing department. c. sales department. d. controller's department.
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
98.
If the labor quantity variance is unfavorable and the cause is inefficient use of direct labor, the responsibility rests with the a. sales department. b. production department. c. budget office. d. controller's department.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 99.
25 - 19
Kitselman Inc. produces a product requiring 3 direct labor hours at $16 per hour. During January, 2,000 products are produced using 6,300 direct labor hours. Kitselman’s actual payroll during January was $98,280. What is the labor quantity variance? a. $2,280 U b. $4,800 F c. $2,520 F d. $4,800 U
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
100.
A company developed the following per-unit standards for its product: 2 gallons of direct materials at $8 per gallon. Last month, 3,000 gallons of direct materials were purchased for $22,800. The direct materials price variance for last month was a. $22,800 favorable. b. $600 favorable. c. $1,200 favorable. d. $1,200 unfavorable.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
101.
The per-unit standards for direct materials are 2 pounds at $5 per pound. Last month, 11,200 pounds of direct materials that actually cost $53,000 were used to produce 6,000 units of product. The direct materials quantity variance for last month was a. $4,000 favorable. b. $3,000 favorable. c. $4,000 unfavorable. d. $7,000 unfavorable.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
102.
The per-unit standards for direct labor are 1.5 direct labor hours at $15 per hour. If in producing 2,400 units, the actual direct labor cost was $46,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $2,400 unfavorable. b. $8,000 favorable. c. $5,000 unfavorable. d. $8,000 unfavorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
103.
The standard rate of pay is $12 per direct labor hour. If the actual direct labor payroll was $47,040 for 4,000 direct labor hours worked, the direct labor price (rate) variance is a. $960 unfavorable. b. $960 favorable. c. $1,200 unfavorable. d. $1,200 favorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 20 Test Bank for Accounting Principles, Tenth Edition 104.
The standard number of hours that should have been worked for the output attained is 10,000 direct labor hours and the actual number of direct labor hours worked was 10,500. If the direct labor price variance was $10,500 unfavorable, and the standard rate of pay was $12 per direct labor hour, what was the actual rate of pay for direct labor? a. $11 per direct labor hour b. $9 per direct labor hour c. $13 per direct labor hour d. $12 per direct labor hour
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
105.
A company purchases 12,000 pounds of materials. The materials price variance is $6,000 favorable. What is the difference between the standard and actual price paid for the materials? a. $1.00 b. $.50 c. $2.00 d. $6.00
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
106.
A company uses 40,000 gallons of materials for which they paid $7 a gallon. The materials price variance was $80,000 favorable. What is the standard price per gallon? a. $2 b. $5 c. $7 d. $9
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
107.
LRF, Inc. produces a product requiring 4 pounds of material costing $3.50 per pound. During December, LRF purchased 4,200 pounds of material for $14,112 and used the material to produce 500 products. What was the materials price variance for December? a. $560 F b. $588 F c. $112 U d. $672 U
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
108.
Finney Co. manufactures a product requiring two pounds of direct material. During 2012, Finney purchases 24,000 pounds of material for $99,200 when the standard price per pound is $4. During 2012, Finney uses 22,000 pounds to make 12,000 products. The standard direct material cost per unit of finished product is a. $8.27. b. $9.01. c. $8.00. d. $8.53.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 109.
25 - 21
Gant Co. manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor quantity variance was a. $3,660 F. b. $3,600 U. c. $2,460 U. d. $3,660 U.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
110.
Gant Co. manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor price variance was a. $1,260 U. b. $4,860 U. c. $4,860 F. d. $3,600 U.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
111.
A company developed the following per unit materials standards for its product: 3 pounds of direct materials at $5 per pound. If 12,000 units of product were produced last month and 37,500 pounds of direct materials were used, the direct materials quantity variance was a. $4,500 favorable. b. $7,500 unfavorable. c. $4,500 unfavorable. d. $7,500 favorable.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
112.
The standard direct labor cost for producing one unit of product is 5 direct labor hours at a standard rate of pay of $16. Last month, 15,000 units were produced and 73,500 direct labor hours were actually worked at a total cost of $1,080,000. The direct labor quantity variance was a. $24,000 unfavorable. b. $36,000 unfavorable. c. $36,000 favorable. d. $24,000 favorable.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
113.
Herrera Co. produces a product requiring 8 pounds of material at $1.50 per pound. Herrera produced 10,000 units of this product during 2012 resulting in a $30,000 unfavorable materials quantity variance. How many pounds of direct material did Herrera use during 2012? a. 100,000 pounds b. 80,000 pounds c. 160,000 pounds d. 125,000 pounds
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 22 Test Bank for Accounting Principles, Tenth Edition 114.
ToolTime has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of $18,135. ToolTime's total variance is a. $450 F. b. $135 U. c. $465 U. d. $600 U.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
115.
ToolTime has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of $18,135. ToolTime's materials price variance is a. $135 U. b. $465 F. c. $600 F. d. $1,050 F.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
116.
ToolTime has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, ToolTime used 3,100 pounds of materials at a total cost of $18,135. ToolTime's materials quantity variance is a. $135 F. b. $465 U. c. $600 U. d. $1,050 U.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
117.
ToolTime has a standard of 2 hours of labor per unit, at $18 per hour. In producing 2,000 units, ToolTime used 3,850 hours of labor at a total cost of $70,455. ToolTime's total labor variance is a. $1,155 U. b. $1,200 U. c. $1,545 F. d. $2,895 F.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
118.
ToolTime has a standard of 2 hours of labor per unit, at $18 per hour. In producing 2,000 units, ToolTime used 3,850 hours of labor at a total cost of $70,455. ToolTime's labor price variance is a. $1,155 U. b. $1,200 U. c. $1,545 F. d. $2,895 F.
Ans: A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 119.
25 - 23
ToolTime has a standard of 2 hours of labor per unit, at $18 per hour. In producing 2,000 units, ToolTime used 3,850 hours of labor at a total cost of $70,455. ToolTime's labor quantity variance is a. $1,155 U. b. $1,545 F. c. $2,700 F. d. $2,895 F.
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
120.
Which one of the following describes the total overhead variance? a. The difference between what was actually incurred and the flexible budget amount b. The difference between what was actually incurred and overhead applied c. The difference between the overhead applied and the flexible budget amount d. The difference between what was actually incurred and the total production budget
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
121.
Manufacturing overhead costs are applied to work in process on the basis of a. actual hours worked. b. standard hours allowed. c. ratio of actual variable to fixed costs. d. actual overhead costs incurred.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
122.
When is a variance considered to be 'material'? a. When it is large compared to the actual cost b. When it is infrequent c. When it is unfavorable d. When it could have been controlled more effectively
Ans: A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
123.
Variance reports are a. external financial reports. b. SEC financial reports. c. internal reports for management. d. all of these.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
124.
In using variance reports, management looks for a. total assets invested. b. significant variances. c. competitors’ costs in comparison to the company's costs. d. more efficient ways of valuing inventories.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
25 - 24 Test Bank for Accounting Principles, Tenth Edition 125.
Parnell Company prepared its income statement for internal use. How would amounts for cost of goods sold and variances appear? a. Cost of goods sold would be at actual costs, and variances would be reported separately. b. Cost of goods sold would be combined with the variances, and the net amount reported at standard cost. c. Cost of goods sold would be at standard costs, and variances would be reported separately. d. Cost of goods sold would be combined with the variances, and the net amount reported at actual cost.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
Colt Widgets prepared its income statement for management using a standard cost accounting system. Which of the following appears at the “standard” amount? a. Sales b. Selling expenses c. Gross profit d. Cost of goods sold
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
127.
The costing of inventories at standard cost for external financial statement reporting purposes is a. not permitted. b. preferable to reporting at actual costs. c. in accordance with generally accepted accounting principles if significant differences exist between actual and standard costs. d. in accordance with generally accepted accounting principles if significant differences do not exist between actual and standard costs.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
128.
Income statements prepared internally for management often show cost of goods sold at standard cost and variances are a. separately disclosed. b. deducted as other expenses and revenues. c. added to cost of goods sold. d. closed directly to retained earnings.
Ans: A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
The balanced scorecard approach a. uses only financial measures to evaluate performance. b. uses rather vague, open statements when setting objectives in order to allow managers and employees flexibility. c. normally sets the financial objectives first, and then sets the objectives in the other perspectives to accomplish the financial objectives. d. evaluates performance using about 10 different perspectives in order to effectively incorporate all areas of the organization.
Ans: C, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard 130.
25 - 25
The customer perspective of the balanced scorecard approach a. is the most traditional view of the company. b. evaluates the internal operating processes critical to the success of the organization. c. evaluates how well the company develops and retains its employees. d. evaluates how well the company is performing from the viewpoint of those people who buy its products and services.
Ans: D, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
131.
The perspectives included in the balanced scorecard approach include all of the following except the a. internal process perspective. b. capacity utilization perspective. c. learning and growth perspective. d. customer perspective.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
132. If 10,000 pounds of direct materials are purchased for $9,300 on account and the standard cost is $.90 per pound, the journal entry to record the purchase is a. Raw Materials Inventory ..................................................... 9,300 Accounts Payable ...................................................... 9,300 b. Work In Process Inventory .................................................. 9,300 Accounts Payable ...................................................... 9,000 Materials Quantity Variance ....................................... 300 c. Raw Materials Inventory ..................................................... 9,200 Accounts Payable ...................................................... 9,000 Materials Price Variance ............................................ 300 d. Raw Materials Inventory ..................................................... 9,000 Materials Price Variance ..................................................... 300 Accounts Payable ...................................................... 9,300
Ans: D, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
133. Debit balances in variance accounts represent a. unfavorable variances. b. favorable variances. c. favorable for price variances; unfavorable for quantity variances. d. favorable for quantity variances; unfavorable for price variances.
Ans: A, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
134. Budgeted overhead for Mengotti Company at normal capacity of 30,000 direct labor hours is $6 per hour variable and $4 per hour fixed. In May, $310,000 of overhead was incurred in working 31,500 hours when 32,000 standard hours were allowed. The overhead controllable variance is a. $5,000 favorable. b. $2,000 favorable. c. $10,000 favorable. d. $10,000 unfavorable.
Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 26 Test Bank for Accounting Principles, Tenth Edition a
135. Budgeted overhead for Mengotti Company at normal capacity of 30,000 direct labor hours is $6 per hour variable and $4 per hour fixed. In May, $310,000 of overhead was incurred in working 31,500 hours when 32,000 standard hours were allowed. The overhead volume variance is a. $8,000 favorable. b. $11,000 favorable. c. $5,000 favorable. d. $10,000 favorable.
Ans: A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
136. An overhead volume variance is calculated as the difference between normal capacity hours and standard hours allowed a. times the total predetermined overhead rate. b. times the predetermined variable overhead rate. c. times the predetermined fixed overhead rate. d. divided by actual number of hours worked.
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
137. Which of the following statements is false? a. The overhead volume variance indicates whether plant facilities were used efficiently during the period. b. The costs that cause the overhead volume variance are usually controllable costs. c. The overhead volume variance relates solely to fixed costs. d. The overhead volume variance is favorable if standard hours allowed for output are greater than the standard hours at normal capacity.
Ans: B, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
138. If the standard hours allowed are less than the standard hours at normal capacity, a. the overhead volume variance will be unfavorable. b. variable overhead costs will be underapplied. c. the overhead controllable variance will be favorable. d. variable overhead costs will be overapplied.
Ans: A, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
139. Which of the following statements about overhead variances is false? a. Standard hours allowed are used in calculating the controllable variance. b. Standard hours allowed are used in calculating the volume variance. c. The controllable variance pertains solely to fixed costs. d. The total overhead variance pertains to both variable and fixed costs.
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
140. The overhead volume variance relates only to a. variable overhead costs. b. fixed overhead costs. c. both variable and fixed overhead costs. d. all manufacturing costs.
Ans: B, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 27
a
141. What does the controllable variance measure? a. Whether a company incurred more or less fixed overhead costs compared to the amount of overhead applied b. Whether a company incurred more or less overhead costs than allowed c. The efficiency of using variable overhead resources d. Whether the production manager is able to control the production facility
Ans: B, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
142. The overhead controllable variance is calculated as the difference between actual overhead costs incurred and the budgeted a. overhead costs for the standard hours allowed. b. overhead costs applied to the product. c. overhead costs at the normal level of activity. d. fixed overhead costs.
Ans: A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
143. If the standard hours allowed are less than the standard hours at normal capacity, the volume variance a. cannot be calculated. b. will be favorable. c. will be unfavorable. d. will be greater than the controllable variance.
Ans: C, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
144. The budgeted overhead costs for standard hours allowed and the overhead costs applied to the product are the same amount a. for both variable and fixed overhead costs. b. only when standard hours allowed are less than normal capacity. c. for variable overhead costs. d. for fixed overhead costs.
Ans: C, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
145. The following information was taken from the annual manufacturing overhead cost budget of Coen Company. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit
$69,300 $41,580 23,100 5,775 4
During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $113,400. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Coen's total overhead rate is a. $1.80. b. $3.00. c. $4.80. d. $4.91. Ans: C, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 28 Test Bank for Accounting Principles, Tenth Edition a
146. The following information was taken from the annual manufacturing overhead cost budget of Coen Company. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit
$69,300 $41,580 23,100 5,775 4
During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $113,400. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Coen's total overhead variance is a. b. c. d.
$1,260 U. $4,620 U. $5,880 U. $16,800 U.
Ans: C, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
147. The following information was taken from the annual manufacturing overhead cost budget of Coen Company. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit
$69,300 $41,580 23,100 5,775 4
During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $113,400. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Coen's controllable overhead variance is a. $1,260 U. b. $4,620 U. c. $5,880 U. d. $16,800 U. Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 29
a
148. The following information was taken from the annual manufacturing overhead cost budget of Coen Company. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit
$69,300 $41,580 23,100 5,775 4
During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $113,400. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Coen's volume overhead variance is a. $1,260 U. b. $4,620 U. c. $5,880 U. d. $16,800 U. Ans: A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
149.
All of the following are advantages of standard costs except they a. facilitate management planning. b. are useful in setting selling prices. c. simplify costing in inventories. d. increase net income.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
150.
Standards based on the optimum level of performance under perfect operating conditions are a. attainable standards. b. ideal standards. c. normal standards. d. practical standards.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
151.
The direct materials price standard should include an amount for all of the following except a. receiving costs. b. storing costs. c. handling costs. d. normal spoilage costs.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
152.
The standard unit cost is used in the calculation of which of the following variances? a. b. c. d.
Materials Price Variance No No Yes Yes
Materials Quantity Variance No Yes No Yes
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 30 Test Bank for Accounting Principles, Tenth Edition 153.
The difference between the actual labor rate multiplied by the actual labor hours worked and the standard labor rate multiplied by the standard labor hours is the a. total labor variance. b. labor price variance. c. labor quantity variance. d. labor efficiency variance.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
154.
The formula for the labor price variance is a. (AH) x (SR) less (SH) x (SR). b. (AH) x (AR) less (AH) x (SR). c. (AH) x (AR) less (SH) x (SR). d. (AH) x (SR) less (AH) x (SR).
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
155.
Which department is usually responsible for a labor price variance attributable to misallocation of workers? a. Quality control b. Purchasing c. Engineering d. Production
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
156.
In reporting variances, a. promptness is relatively unimportant. b. management normally investigates all variances. c. the reports should facilitate management by exception. d. the reports are not departmentalized.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
157. A standard cost system may be used in a. b. c. d.
Job Order Costing No Yes No Yes
Process Costing No No Yes Yes
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
158. The formula for computing the overhead volume variance is a. fixed overhead rate times (actual hours less standard hours allowed). b. variable overhead rate times (actual hours less standard hours allowed). c. fixed overhead rate times (normal capacity hours less standard hours allowed). d. variable overhead rate times (normal capacity hours less standard hours allowed).
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 31
a
159. The overhead controllable variance is the difference between the a. budgeted overhead based on standard hours allowed and the overhead applied to production. b. budgeted overhead based on standard hours allowed and budgeted overhead based on actual hours worked. c. actual overhead and the overhead applied to production. d. actual overhead and budgeted overhead based on standard hours allowed.
Ans: D, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Answers to Multiple Choice Questions Item
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39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.
d c c d a a b a d c c b d c d c b c
57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.
a d a c c c d b c d d c b a b a d b
75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.
b c d a b d b b b c c b b c b a a a
93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.
d c c b a b d c a b b c b d b c b a
111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128.
b d a b b c c a c b b a c b c d d a
129. 130. 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145. a 146.
c d b d a b a c b a c b b a c c c c
Item
Ans.
147. a 148. 149. 150. 151. 152. 153. 154. 155. 156. a 157. a 158. a 159.
b a d b d d a b d c d c d
a
BRIEF EXERCISES BE 160 Loomis Company uses both standards and budgets. The company estimates that production for the year will be 200,000 units of Product Fast. To produce these units of Product Fast, the company expects to spend $600,000 for materials and $800,000 for labor. Instructions Compute the estimates for (a) a standard cost and (b) a budgeted cost. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 32 Test Bank for Accounting Principles, Tenth Edition Solution 160
(5 min.)
(a) Standards are stated as a per unit amount. Thus, the standards are materials $3, ($600,000 ÷ 200,000), and labor $4, ($800,000 ÷ 200,000). (b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $600,000 and labor $800,000. BE 161 Labor data for making one pound of finished product in Ortiz Company are as follows: (1) Price— hourly wage rate $11.00, payroll taxes $1.80, and fringe benefits $1.20. (2) Quantity—actual production time 1.1 hours, rest periods and clean up 0.25 hours, and setup and downtime 0.15 hours. Instructions Compute the following. (a) Standard direct labor rate per hour. (b) Standard direct labor hours per pound. (c) Standard labor cost per pound. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 161
(5 min.)
Standard direct labor rate per hour = $14.00 ($11.00 + $1.80 + $1.20). Standard direct labor hours per pound = 1.5 hours (1.1 +.25 +.15). Standard labor cost per pound = $21.00 ($14.00 × 1.5). BE 162 During March, Odle Company purchases and uses 8,800 pounds of materials costing $35,640 to make 4,000 tiles. Odle Company’s standard material cost per tile is $8 (2 pounds of material × $4.00). Instructions Compute the total, price, and quantity material variances for Odle Company for March. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 162
(5 min.)
Total materials variance = $3,640 U, (8,800 × $4.05) – (8,000 × $4.00). Materials price variance = $440 U, (8,800 × $4.05) – (8,800 × $4.00). Materials quantity variance = $3,200 U, (8,800 × $4.00) – (8,000 × $4.00). BE 163 During January, HPA Company incurs 1,850 hours of direct labor at an hourly cost of $11.80 in producing 1,000 units of its finished product. HPA standard labor cost per unit of output is $22 (2 hours x $11.00). Instructions Compute the total, price, and quantity labor variances for HPA Company for January. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Solution 163
25 - 33
(5 min.)
Total labor variance = $170 F, (1,850 × $11.80) – (2,000 × $11.00). Labor price variance = $1,480 U, (1,850 × $11.80) – (1,850 × $11.00). Labor quantity variance = $1,650 F, (1,850 × $11.00) – (2,000 × $11.00 BE 164 In October, Falk Inc. reports 42,000 actual direct labor hours, and it incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the work done is 40,000 hours. Falk’s predetermined overhead rate is $5.00 per direct labor hour. Instructions Compute the total manufacturing overhead variance. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 164
(2 min.)
Actual Overhead – Overhead Applied = Total overhead Variance $194,000 – $200,000* = $6,000 F *40,000 × $5 = $200,000 a
BE 165
In October, Falk Inc. reports 42,000 actual direct labor hours, and it incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the work done is 40,000 hours. Falk’s predetermined overhead rate is $5.00 per direct labor hour. In addition, the flexible manufacturing overhead budget shows that budgeted costs are $3.80 variable per direct labor hour and $60,000 fixed. Instructions Compute the manufacturing overhead controllable variance. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 165
(3 min.)
Actual overhead – Overhead Budgeted = Overhead Controllable Variance $194,000 – $212,000* = $18,000 F *(40,000 × $3.80) + $60,000 = $212,000 a
BE 166
In October, Falk Inc. reports 42,000 actual direct labor hours, and it incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the work done is 40,000 hours. Falk’s predetermined overhead rate is $5.00 per direct labor hour. In addition, the flexible manufacturing overhead budget shows that budgeted costs are $3.80 variable per direct labor hour and $60,000 fixed. Normal capacity was 50,000 direct labor hours. Instructions Compute the manufacturing overhead volume variance. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 34 Test Bank for Accounting Principles, Tenth Edition a
Solution 166
(3 min.)
Fixed Overhead Rate × (Normal Capacity Hours – Standard Hours Allowed) = Overhead Volume Variance
$1.20/hr.
(50,000 – 40,000)
×
=
$12,000 U
a
BE 167 Cinelli Company purchased 6,000 units of raw material on account for $17,600, when the standard cost was $12,800. Later in the month, Cinelli Company issued 5,600 units of raw materials for production, when the standard units were 5,800. Instructions Journalize the transactions for Cinelli Company to account for this activity. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 167
(a)
(b)
(5 min.)
Raw Materials Inventory ............................................................. Materials Price Variance ................................................... Accounts Payable .............................................................
18,000
Work in Process Inventory (5,800 × $3*)..................................... Materials Quantity Variance .............................................. Raw Materials Inventory (5,600 × $3) ................................
17,400
400 17,600
600 16,800
*$3 = $18,000 ÷ 6,000 units a
BE 168 Griffith Co. incurred direct labor costs of $54,000 for 6,000 hours. The standard labor cost was $55,200. During the month, Griffith assigned 6,000 direct labor hours costing $54,000 to production. The standard hours were 6,200. Instructions Journalize the transactions for Griffith Co. to account for this activity. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 168
(a)
(b)
(5 min.)
Factory Labor ........................................................................... Labor Price Variance....................................................... Wages Payable ...............................................................
55,200
Work in Process Inventory (6,200 × $9.20*) .............................. Labor Quantity Variance ................................................. Factory Labor ..................................................................
57,040
*$9.20 = $55,200 ÷ 6,000 hours
FOR INSTRUCTOR USE ONLY
1,200 54,000
1,840 55,200
Standard Costs and Balanced Scorecard
25 - 35
a
BE 169
Manufacturing overhead data for the production of Product B by Elliott Company are as follows. Overhead incurred for 69,000 actual direct labor hours worked Overhead rate (variable $2.00; fixed $1.00) at normal capacity of 72,000 direct labor hours Standard hours allowed for work done
$206,000 $3.00 69,000
Instructions Compute the controllable and volume overhead variances. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 169
(5 min.)
Overhead controllable variance: Actual Overhead – Overhead Budgeted $206,000 – $210,000 [(69,000 × $2) + $72,000]
= $4,000 F
Overhead volume variance: Fixed Overhead Rate × Normal Capacity Hours = Standard Hours Allowed $1.00 × (72,000 – 69,000) = $3,000 U
EXERCISES Ex 170 Greinke Company is planning to produce 2,500 units of product in 2012. Each unit requires 3 pounds of materials at $6 per pound and a half hour of labor at $16 per hour. The overhead rate is 75% of direct labor. Instructions (a) Compute the budgeted amounts for 2012 for direct materials to be used, direct labor, and applied overhead. (b) Compute the standard cost of one unit of product. Ans: N/A, SO: 1,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 170
(5 min.)
(a)
Direct materials: (2,500 3) $6 = $45,000 Direct labor: (2,500 1/2) $16 = $20,000 Overhead: $20,000 75% = $15,000
(b)
Direct materials: 3 $6 Direct labor: 1/2 $16 Overhead: $8 75% Standard cost:
= $18 = 8 = 6 $32
FOR INSTRUCTOR USE ONLY
25 - 36 Test Bank for Accounting Principles, Tenth Edition Ex. 171 Lloyd Inc. manufactures and sells a nutrition drink for children. It wants to develop a standard cost per gallon. The following are required for production of a 100 gallon batch: 1,960 ounces of lime Kool-Drink at $.12 per ounce 40 pounds of granulated sugar at $.60 per pound 63 kiwi fruit at $.50 each 100 protein tablets at $.90 each 4,000 ounces of water at $.003 per ounce Lloyd estimates that 2% of the lime Kool-Drink is wasted, 20% of the sugar is lost, and 10% of the kiwis cannot be used. Instructions Compute the standard cost of the ingredients for one gallon of the nutrition drink. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 171
(15–20 min.)
Ingredient Lime Kool-Drink Sugar Kiwis Protein Tablets Water
Lime Kool-Drink Sugar Kiwis Protein Tablets Water
(a) (b) (c)
Amount Per Gallon 19.6 oz. .40 lb. .63 1 40 oz.
Standard Waste 2% 20% 10% 0% 0%
Standard Usage Standard Price (a) 20.00 oz. $ .12 (b) .50 lb. .60 (c) .70 .50 1 .90 40 oz. .003 Standard Cost per Gallon
.98X = 19.6 ounces .80X = .40 pounds .90X = .63 kiwis
Standard Cost $2.40 .30 .35 .90 .12 $4.07
X = 20.00 X= .50 X= .70
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 37
Ex. 172 Kwik Repair Service, Inc. is trying to establish the standard labor cost of a typical engine tune-up. The following data have been collected from time and motion studies conducted over the past month. Actual time spent on the tune-up 1.0 hour Hourly wage rate $16 Payroll taxes 10% of wage rate Setup and downtime 10% of actual labor time Cleanup and rest periods 20% of actual labor time Fringe benefits 25% of wage rate Instructions (a) Determine the standard direct labor hours per tune-up (b) Determine the standard direct labor hourly rate. (c) Determine the standard direct labor cost per tune-up. (d) If a tune-up took 1.5 hours at the standard hourly rate, what was the direct labor quantity variance? Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 172
(15 min.)
(a)
Actual service time Setup and downtime Cleanup and rest periods Standard direct labor hours per tune-up
1.0 hours 0.1 hours 0.2 hours 1.3 hours
(b)
Hourly wage rate Payroll taxes ($16 10%) Fringe benefits ($16 25%) Standard direct labor hourly rate
(c)
Standard direct labor cost per oil change = 1.30 hours $21.60 per hour = $28.08
(d)
Direct labor quantity variance = (1.50 hours $21.60) – (1.30 hours $21.60) = $32.40 – $28.08 = $4.32 U
$16.00 1.60 4.00 21.60
Ex. 173 Malone, Inc. manufactures one product called tybos. The company uses a standard cost system and sells each tybo for $8. At the start of monthly production, Malone estimated 9,500 tybos would be produced in March. Malone has established the following material and labor standards to produce one tybo: Direct materials Direct labor
Standard Quantity 2.5 pounds 0.6 hours
Standard Price $3 per pound $10 per hour
FOR INSTRUCTOR USE ONLY
25 - 38 Test Bank for Accounting Principles, Tenth Edition Ex. 173 (Cont) During March 2012, the following activity was recorded by the company relating to the production of tybos: 1. 2. 3. 4.
The company produced 9,000 units during the month. A total of 24,000 pounds of materials were purchased at a cost of $66,000. A total of 24,000 pounds of materials were used in production. 5,000 hours of labor were incurred during the month at a total wage cost of $55,000.
Instructions Calculate the following variances for March for Malone, Inc. (a) Materials price variance (b) Materials quantity variance (c) Labor price variance (d) Labor quantity variance Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 173
(10 min.)
(a) Materials price variance = (Actual quantity purchased × Actual price) – (Actual quantity purchased × Standard price) = (24,000 × $2.75) – (24,000 × $3) = $6,000 favorable (b) Materials quantity variance = (Actual quantity used × Standard price) – (Standard quantity × Standard price) = (24,000 × $3) – [(9,000 × 2.5) × $3] = $4,500 unfavorable (c) Labor price variance = (Actual hours x Actual rate) – (Actual hours × Standard rate) = (5,000 × $11) – (5,000 × $10) = $5,000 unfavorable (d) Labor quantity variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (5,000 × $10) – [(0.6 × 9,000) × $10] = $4,000 favorable Ex. 174 The following direct labor data pertain to the operations of Nagel Manufacturing Company for the month of November: Actual labor rate Actual hours used Standard labor rate Standard hours allowed
$12.25 per hr. 18,000 $12.00 per hr. 17,100
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Ex. 174
25 - 39
(Cont.)
Instructions Prepare a matrix and calculate the labor variances.
Price Variance
Quantity Variance
Total Labor Variance
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 174
(15–20 min.)
Actual Hours × Actual Rate 18,000 × $12.25 = $220,500
Actual Hours × Standard Rate 18,000 × $12.00 = $216,000
Standard Hours × Standard Rate 17,100 × $12.00 = $205,200
Price Variance
Quantity Variance
$4,500 U
$10,800 U
Total Labor Variance $15,300 U Ex. 175 The following direct materials data pertain to the operations of Osborn Manufacturing Company for the month of December. Standard materials price $5.00 per pound Actual quantity of materials purchased and used 16,500 pounds FOR INSTRUCTOR USE ONLY
25 - 40 Test Bank for Accounting Principles, Tenth Edition Ex. 175
(Cont.)
The standard cost card shows that a finished product contains 4 pounds of materials. The 16,500 pounds were purchased in December at a discount of 4% from the standard price. In December, 4,000 units of finished product were manufactured. Instructions Prepare a matrix for materials and calculate the materials variances.
Price Variance
Quantity Variance
Total Materials Variance
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 175
(13–18 min.)
Actual Quantity × Actual Rate 16,500 × $4.80 = $79,200
Actual Quantity × Standard Rate 16,500 × $5.00 = $82,500
Standard Quantity × Standard Price 16,000 × $5.00 = $80,000
Price Variance
Quantity Variance
$3,300 F
$2,500 U
Total Materials Variance $800 F
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 41
Ex. 176 Ratliff Industries provided the following information about its standard costing system for 2012: Standard Data Materials Labor Budgeted production
10 lbs. @ $4 per lbs. 3 hrs. @ $21 per hr. 3,500 units
Actual Data Produced 4,000 units Materials purchased 50,000 lbs. for $210,000 Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000
Instructions Calculate the labor price variance and the labor quantity variance. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 176
(8 min.)
Labor price (rate) variance = (Actual hours x Actual rate) – (Actual hours x Standard rate) = (11,000 × $20) – (11,000 × $21) = $11,000 favorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (11,000 × $21) – (3 × 4,000 × $21) = $21,000 favorable Ex. 177 Ratliff Industries provided the following information about its standard costing system for 2012: Standard Data Materials Labor Budgeted production
10 lbs. @ $4 per lbs. 3 hrs. @ $21 per hr. $3,500 units
Actual Data Produced 4,000 units Materials purchased 50,000 lbs. for $210,000 Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000
Instructions Determine the amount of the materials price variance. By how much will the materials price variances differ if the price variance is determined at the time of production? Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 177
(6 min.)
Identification of price variances at the time of purchase: Materials price variance = (Actual quantity purchased × Actual price) – (Actual quantity purchased x Standard price) = (50,000 × $4.20) – (50,000 × $4) = $10,000 Unfavorable Identification of price variances at the time of production: Materials price variance = (Actual quantity used × Actual price) – (Actual quantity used × Standard price) = (41,000 × $4.20) – (41,000 × $4) = $8,200 Unfavorable Difference = $10,000 – $8,200 = $1,800 Unfavorable FOR INSTRUCTOR USE ONLY
25 - 42 Test Bank for Accounting Principles, Tenth Edition Ex. 178 Tebbetts Company estimated it would produce 6,200 buckets, though actual production was 6,000 during August. The standard labor cost is 2 buckets per hour at $18.00 per hour. Actual cost per hour was $18.40 with a total labor cost of $53,360. Instructions Determine the amounts of the labor price and the labor quantity variances for August. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 178
(8 min.)
Labor price (rate) variance = (Actual hours × Actual rate) – (Actual hours × Standard rate) = (2,900 × $18.40) – (2,900 × $18) = $1,160 Unfavorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (2,900 × $18) – [(6,000 × 1/2 × $18) = $1,800 Favorable Ex. 179 Stumfoll Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (6 pounds at $2 per pound) Direct labor (2 hours at $12 per hour)
$12 $24
During the month of April, the company manufactures 300 units and incurs the following actual costs. Direct materials purchased and used (1,850 pounds) Direct labor (620 hours)
$4,070 $7,130
Instructions Compute the total, price, and quantity variances for materials and labor. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 179
(15 min.)
Total materials variance: (AQ AP ) – (SQ SP) (1,850 $2.20*) (1,800** $2) $4,070 – $3,600
= $470 U
Materials price variance: (AQ AP ) – (AQ SP) (1,850 $2.20) (1,850 $2) $4,070 – $3,700 = $370 U *$4,070 1,850 **300 6
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 43
Solution 179 (Cont.) Materials quantity variance: (AQ SP) – (SQ SP) (1,850 $2) (1,800 $2) $3,700 – $3,600
= $100 U
Total labor variance: (AH AR ) – (SH SR) (620 $11.50*) (600** $12) $7,130 – $7,200 = $70 F *$7,130 620 **300 2 Labor price variance: (AH AR) – (AH SR) (620 $11.50) (620 $12) $7,130 – $7,440 = $310 F Labor quantity variance: (AH SR) – (AH SR) (620 $12) (600 $12) $7,440 – $7,200 = $240 U Ex. 180 Benton Company produces one product, a putter called PAR-putter. Benton uses a standard cost system and determines that it should take one hour of direct labor to produce one PAR-putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $500,000 comprised of $200,000 of variable costs and $300,000 of fixed costs. Benton applies overhead on the basis of direct labor hours. During the current year, Benton produced 85,000 putters, worked 89,000 direct labor hours, and incurred variable overhead costs of $160,000 and fixed overhead costs of $300,000. Instructions (a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate. (b) Compute the applied overhead for Benton for the year. (c) Compute the total overhead variance. Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 44 Test Bank for Accounting Principles, Tenth Edition Solution 180
(15 min.)
(a)
Overhead Budget (at normal capacity) $200,000 300,000
Direct Labor Hours (at normal capacity) 100,000 100,000
=
Predetermined Overhead Rate $2 $3
Standard Hours Allowed 85,000
Predetermined Overhead Rate $5
=
Overhead Applied $425,000
– –
Overhead Applied $425,000 (85,000 $5)
= =
Variable Fixed (b)
(c) Actual Overhead $460,000 ($160,000 + $300,000)
Total Overhead Variance $35,000 U
Ex. 181 Vega Company has developed the following standard costs for its product for 2012: VEGA COMPANY Standard Cost Card Product A Cost Element Standard Quantity Direct materials 4 pounds Direct labor 3 hours Manufacturing overhead 3 hours
×
Standard Price $3 8 4
=
Standard Cost $12 24 12 $48
The company expected to produce 30,000 units of Product A in 2012 and work 90,000 direct labor hours. Actual results for 2012 are as follows: • 31,000 units of Product A were produced. • Actual direct labor costs were $746,200 for 91,000 direct labor hours worked. • Actual direct materials purchased and used during the year cost $346,500 for 126,000 pounds. • Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was $205,000. Instructions Compute the following variances showing all computations to support your answers. Indicate whether the variances are favorable or unfavorable. (a) Materials quantity variance. (b) Total direct labor variance. (c) Direct labor quantity variance. (d) Direct materials price variance. (e) Total overhead variance. Ans: N/A, SO: 4,5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Solution 181
25 - 45
(20–25 min.)
(a) Materials quantity variance = $6,000 unfavorable. (AQ × SP) – (SQ × SP) = Materials quantity variance (126,000 × $3) – (124,000 × $3) = $378,000 – $372,000 = $6,000 unfavorable SQ = 31,000 × 4 = 124,000 pounds (b) Total direct labor variance = $2,200 unfavorable. (AH × AR) – (SH × SR) = Total direct labor variance (91,000 × $8.20) – (93,000 × $8) = $746,200 – $744,000 = $2,200 unfavorable SH = 31,000 × 3 = 93,000 direct labor hours (c) Direct labor quantity variance = $16,000 favorable. (AH × SR) – (SH × SR) = Direct labor quantity variance (91,000 × $8) – (93,000 × $8) = $728,000 – $744,000 = $16,000 favorable (d) Direct materials price variance = $31,500 favorable. (AQ × AP) – (AQ × SP) = Direct materials price variance (126,000 × $2.75) – (126,000 × $3) = $346,500 – $378,000 = $31,500 favorable (e) Total overhead variance = $12,000 favorable. (Actual overhead) – (Overhead applied) = Total overhead variance ($155,000 + $205,000) – (93,000 × $4) = $360,000 – $372,000 = $12,000 favorable Standard hours = 31,000 × 3 = 93,000 direct labor hours Ex. 182 Wagner Company developed the following standard costs for its product for 2012: WAGNER COMPANY Standard Cost Card Cost Elements Direct materials Direct labor Variable overhead Fixed overhead
Standard Quantity 4 pounds 2 hours 2 hours 2 hours
×
Standard Price $ 5 10 4 2
=
Standard Cost $20 20 8 4 $52
The company expected to work at the 120,000 direct labor hours level of activity and produce 60,000 units of product. Actual results for 2012 were as follows: • 56,800 units of product were actually produced. • Direct labor costs were $1,092,000 for 112,000 direct labor hours actually worked. • Actual direct materials purchased and used during the year cost $1,108,800 for 231,000 pounds. • Total actual manufacturing overhead costs were $680,000.
FOR INSTRUCTOR USE ONLY
25 - 46 Test Bank for Accounting Principles, Tenth Edition Ex. 182
(cont.)
Instructions Compute the following variances for Wagner Company for 2012 and indicate whether the variance is favorable or unfavorable. 1. Direct materials price variance. 2. Direct materials quantity variance. 3. Direct labor price variance. 4. Direct labor quantity variance. a 5. Overhead controllable variance. a 6. Overhead volume variance. Ans: N/A, SO: 4,5,10, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 182
(20–25 min.)
1. Direct materials price variance = $46,200 favorable. (AQ × AP) – (AQ × SP) = Materials price variance (231,000 × $4.80) – (231,000 × $5) = $1,108,800 – $1,155,000 = $46,200 favorable 2. Direct materials quantity variance = $19,000 unfavorable. (AQ × SP) – (SQ × SP) = Materials quantity variance (231,000 × $5) – (227,200 × $5) = $1,115,000 – $1,136,000 = $19,000 unfavorable SQ = 56,800 products × 4 lbs = 227,200 lbs. 3. Direct labor price variance = $28,000 favorable. (AH × AR) – (AH × SR) = Labor price variance (112,000 × $9.75) – (112,000 × $10) = $1,092,000 – $1,120,000 = $28,000 favorable 4. Direct labor quantity variance = $16,000 favorable. (AH × SR) – (SH × SR) = Labor quantity variance (112,000 × $10) – (113,600 × $10) = $1,120,000 – $1,136,000 = $16,000 favorable SH = 56,800 units × 2 hrs = 113,600 direct labor hours a
5. Overhead controllable variance = $14,400 favorable. Actual overhead – Budgeted overhead for = Controllable overhead variance standard hours allowed $680,000 – $694,400 = $14,400 favorable Budgeted overhead for 113,600 direct labor hours allowed. Variable overhead (113,600 × $4) = $454,400 Fixed overhead = 240,000 $694,400
a
6. Overhead volume variance = $12,800 unfavorable. Volume variance: (120,000 – 113,600) × $2/SH = $12,800 unfavorable
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 47
Ex. 183 Humphreys, Inc. uses standard costing for its one product, baseball bats. The standards call for 3 board-feet of wood at $1.40 per board-foot, and 45 minutes of work at $12 per hour per bat. Total manufacturing overhead costs were estimated at $9,450, of which the variable portion was $0.50 per bat and the fixed portion was $1.00 per bat with an estimate of 6,300 bats to be produced. Humphreys identifies price variances at the earliest possible point in time. During March, the company had the following results: Direct labor used = 4,800 hours at a cost of $56,400 Actual manufacturing overhead fixed costs = $6,000 Actual manufacturing overhead variable costs = $3,100 Bats produced = 6,000 Instructions Compute the following variances for March. 1. Labor quantity variance 2. Total labor variance a 3. Overhead controllable variance a 4. Overhead volume variance Ans: N/A, SO: 4,5,10, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 183
(12 min.)
1. Labor quantity variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (4,800 × $12) – [(3/4 × 6,000) × $12] = $3,600 Unfavorable 2. Total labor variance = (Actual hours × Actual rate) – (Standard hours × Standard rate) = (4,800 × $11.75) – [(3/4 × 6,000) × $12] = $2,400 Unfavorable 3. Overhead controllable variance = Actual overhead – Overhead budgeted = ($3,100 + $6,000) – [($0.50 × 6,000) + $6,300] = $200 Favorable
a
4. Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(6,300 × 3/4) – 4,500] × $1.00*= $225 Unfavorable *$.75 ÷ 3/4 hr./bat
a
Ex. 184 Hurley, Inc. manufactures widgets for distribution. The standard costs for the manufacture of widgets follow: Standard Costs Actual Costs Direct materials 3 lbs. per widget at 31,000 lbs. at $34 $35 per pound per pound Direct labor
Factory overhead
2.5 hours per widget at $11 per hour
22,500 hours at $11.80 per hour
Variable cost, $24/widget Fixed cost, $40/widget
$241,500 variable cost $381,250 fixed cost
FOR INSTRUCTOR USE ONLY
25 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 184
(Cont.)
Budgeted factory overhead was $640,000. Overhead applied is based on widgets produced. The company estimated that 10,000 widgets would be produced; however, only 9,600 were produced. Instructions Calculate the following amounts. 1. Rate at which total factory overhead is applied 2. Materials price variance 3. Total materials variance a 4. Overhead volume variance a 5. Overhead controllable variance Ans: N/A, SO: 4,5,10, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 184
(12 min.)
1. Budgeted overhead cost/budgeted activity = $640,000 ÷ 10,000 = $64 per widget 2. Materials price variance = (Actual quantity × Actual price) – (Actual quantity × Standard price) = (31,000 × $34) – (31,000 × $35) = $31,000 Favorable 3. Total materials variance = (Actual quantity × Actual price ) – (Standard quantity × Standard price) = (31,000 × $34) – [(3 × 9,600) × $35] = $46,000 Unfavorable 4. Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = (25,000 – 24,000) × $16* = $16,000 Unfavorable *$40 ÷ 2.5
a
5. Overhead controllable variance = Actual overhead – Overhead budgeted = [$241,500 + $381,250] – [($24 × 9,600) + ($40 × 10,000)] = $7,650 Favorable
a
Ex. 185 National Sporting Goods Company manufactures aluminum baseball bats that it sells to university athletic departments. It has developed the following per unit standard costs for 2012 for each baseball bat: Manufacturing Direct Materials Direct Labor Overhead Standard Quantity 2 Pounds (Aluminum) 1/2 hour 1/2 hour Standard Price $4.00 $10.00 $6.00 Unit Standard Cost $8.00 $5.00 $3.00 In 2012, the company planned to produce 120,000 baseball bats at a level of 60,000 hours of direct labor.
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Ex. 185
25 - 49
(Cont.)
Actual results for 2012 are presented below: 1. Direct materials purchases were 246,000 pounds of aluminum which cost $1,020,900. 2. Direct materials used were 220,000 pounds of aluminum. 3. Direct labor costs were $575,260 for 58,700 direct labor hours actually worked. 4. Total manufacturing overhead was $352,000. 5. Actual production was 114,000 baseball bats. Instructions (a) Compute the following variances: 1. Direct materials price. 2. Direct materials quantity. 3. Direct labor price. 4. Direct labor quantity. 5. Total overhead variance. a
(b) Prepare the journal entries to record the transactions and events in 2012.
Ans: N/A, SO: 4,6,9, Bloom: AP, Difficulty: Medium, Min: 40, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 185
(40–45 min.)
(a) 1. Direct materials price variance = $36,900 Unfavorable. (AQ × AP) – (AQ × SP) (246,000 × $4.15) – (246,000 × $4.00) = $1,020,900 – $984,000 = $36,900 2. Direct materials quantity variance = $32,000 Favorable. (AQ × SP) – (SQ × SP) (220,000 × $4.00) – (228,000* × $4.00) = $880,000 – $912,000 = $32,000 *SQ = 114,000 × 2 pounds = 228,000 pounds 3. Direct labor price variance = $11,740 Favorable. (AH × AR) – (AH × SR) (58,700 × $9.80) – (58,700 × $10.00) = $575,260 – $587,000 = $11,740 4. Direct labor quantity variance = $17,000 Unfavorable. (AH × SR) – (SH × SR) (58,700 × $10.00) – (57,000* × $10.00) = $587,000 – $570,000 = $17,000 *SH = 114,000 × 1/2 hour = 57,000 hours 5. Actual overhead – Overhead applied = Total overhead variance. $352,000 – $342,000* = $10,000 Unfavorable *SH = 57,000 × $6.00 = $342,000 a
(b) 1. Raw Materials Inventory .......................................................... Materials Price Variance ......................................................... Accounts Payable ............................................................ (To record purchase of materials)
984,000 36,900
2. Work in Process Inventory ...................................................... Materials Quantity Variance ............................................. Raw Materials Inventory .................................................. (To record issuance of direct materials)
912,000
FOR INSTRUCTOR USE ONLY
1,020,900
32,000 880,000
25 - 50 Test Bank for Accounting Principles, Tenth Edition Solution 185
(Cont.)
3. Factory Labor .......................................................................... Labor Price Variance........................................................ Factory Wages Payable ................................................... (To record direct labor costs)
587,000
4. Work in Process Inventory....................................................... Labor Quantity Variance ......................................................... Factory Labor .................................................................. (To assign factory labor to jobs)
570,000 17,000
5. Manufacturing Overhead ......................................................... Accounts Payable/Cash etc. ............................................ (To record overhead incurred)
352,000
6. Work in Process Inventory....................................................... Manufacturing Overhead .................................................. (To assign overhead to jobs)
342,000
11,740 575,260
587,000
352,000
7. Finished Goods Inventory (114,000 × $16.00) ......................... 1,824,000 Work in Process Inventory ............................................... (To record transfer of completed work to finished goods)
342,000
1,824,000
Ex. 186 The standard cost of Product 245 manufactured by Essex Company includes 2 pounds of direct materials at $4.00 per pound. During September, 40,000 pounds of direct materials are purchased at a cost of $3.85 per pound, and all of the direct materials are used to produce 19,000 units of Product 245. Instructions (a) Compute the materials price and quantity variances. a
(b) Journalize the purchase of the materials and the issuance of the materials, assuming a standard cost system is used.
Ans: N/A, SO: 4,9, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 186
(15–20 min.)
(a) Materials Price Variance: $154,000 – $160,000 = (40,000 × $3.85) (40,000 × $4.00)
$6,000 F
Materials Quantity Variance: $160,000 – $152,000 = (40,000 × $4.00) *(38,000 × $4.00)
$8,000 U
*19,000 × 2 pounds = 38,000
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Solution 186
25 - 51
(Cont.)
a
(b) Raw Materials Inventory ............................................................... Materials Price Variance ...................................................... Accounts Payable ................................................................
160,000
Work in Process Inventory ............................................................ Materials Quantity Variance .......................................................... Raw Materials Inventory .......................................................
152,000 8,000
6,000 154,000
160,000
Ex. 187 Gamblian Company's standard labor cost of producing one unit of product is 2 hours at the rate of $14.00 per hour. During February, 52,000 hours of labor are incurred at a cost of $13.80 per hour to produce 25,000 units of product. Instructions (a) Compute the labor price and labor quantity variances. a
(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production, assuming a standard cost system is used.
Ans: N/A, SO: 4,9, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 187
(15–20 min.)
(a) Labor Price Variance: $717,600 – $728,000 = $10,400 F (52,000 × $13.80) (52,000 × $14.00) Labor Quantity Variance: $728,000 – $700,000 = $28,000 U (52,000 × $14.00) (50,000 × $14.00) a
(b) Factory Labor ............................................................................... Labor Price Variance............................................................ Factory Wages Payable .......................................................
728,000
Work in Process Inventory ............................................................ Labor Quantity Variance ............................................................... Factory Labor .......................................................................
700,000 28,000
10,400 717,600
728,000
Ex. 188 The following direct labor data pertain to the operations of Hainey Manufacturing Company for the month of November: Standard labor rate$10.00 per hr. Actual hours incurred and used 9,000 The standard cost card shows that 2.5 hours are required to complete one unit of product. The actual labor rate incurred exceeded the standard rate by 10%. Four thousand units were manufactured in November.
FOR INSTRUCTOR USE ONLY
25 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 188
(Cont.)
Instructions (a) Calculate the price, quantity, and total labor variances. a (b) Journalize the entries to record the labor variances. Ans: N/A, SO: 4,9, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 188
(15–20 min.)
Actual Hours × Actual Rate 9,000 × $11.00 = $99,000
Actual Hours × Standard Rate 9,000 × $10.00 = $90,000
Standard Hours × Standard Rate 10,000 × $10.00 = $100,000
Price Variance
Quantity Variance
$9,000 U
$10,000 F
Total Labor Variance $1,000 F a
(b) Factory Labor ................................................................................ Labor Price Variance..................................................................... Wages Payable ....................................................................
90,000 9,000
Work in Process Inventory ............................................................ Labor Quantity Variance ....................................................... Factory Labor .......................................................................
100,000
99,000
10,000 90,000
a
Ex. 189
Jamison Industries provided the following information about its standard costing system for 2012: Standard Data Labor 2 hrs. @ $21 per hr. Budgeted fixed overhead $100,000 Budgeted variable overhead $30 per unit Budgeted production 10,000 units
Actual Data Produced 9,000 units Labor worked 17,000 hrs. costing $340,000 Actual overhead $375,000
Jamison applies fixed overhead at $10 per unit produced. Instructions Determine the amounts of the overhead variances. Ans: N/A, SO: 5,10, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard a
Solution 189
25 - 53
(8 min.)
Overhead controllable variance = Actual overhead - Overhead budgeted = $375,000 – [($100,000 + (9,000 × $30)] = $5,000 Unfavorable Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(10,000 × 2) – (9,000 × 2)] × $5/hr. = $10,000 Unfavorable Total overhead variance = Actual overhead – Overhead applied = $5,000 U + $10,000 U = $15,000 Unfavorable Ex. 190 Landis Company planned to produce 20,000 units of product and work 100,000 direct labor hours in 2012. Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to be: Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead
$ 700,000 300,000 $1,000,000
At the end of 2012, 19,000 units of product were actually produced and 98,000 actual direct labor hours were worked. Total actual overhead costs for 2012 were $935,000. Instructions (a) Compute the total overhead variance. a (b) Compute the overhead controllable variance. a (c) Compute the overhead volume variance. Ans: N/A, SO: 5,10, Bloom: AP, Difficulty: Medium, Min: 11, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 190
(11–16 min.)
(a) Actual overhead – $935,000 –
Overhead applied $950,000
= Total overhead variance = $15,000 favorable
Overhead applied = 19,000 units × 5 hrs = 95,000 standard hours allowed 95,000 × $10 = $950,000 (b) Actual overhead – Overhead budgeted = Overhead controllable variance $935,000 – $965,000 = $30,000 favorable
a
Overhead budgeted at 95,000 actual direct labor hours allowed. Variable overhead (95,000 × $7) Fixed overhead
$ 665,000 300,000 $965,000
(c) (Normal hours – Standard hours) × Fixed overhead rate = Overhead volume variance (100,000 – 95,000) × $3/hour = $15,000 unfavorable
a
FOR INSTRUCTOR USE ONLY
25 - 54 Test Bank for Accounting Principles, Tenth Edition a
Ex. 191
Dains Company planned to produce 20,000 units of product and work at the 60,000 direct labor hours level of activity for 2012. Manufacturing overhead at this level of activity and the predetermined overhead rate are as follows: Predetermined Overhead Rate per Direct Labor Hour Variable manufacturing overhead $300,000 $5 Fixed manufacturing overhead 120,000 2 Total manufacturing overhead $420,000 $7 At the end of 2012, 21,000 units were actually produced and 61,500 direct labor hours were actually worked. Total actual manufacturing overhead costs were $430,000. Instructions Using a two-variance analysis of manufacturing overhead, calculate the following variances and indicate whether they are favorable or unfavorable: (a) Overhead controllable variance. (b) Overhead volume variance. Ans: N/A, SO: 5,10, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 191
(12–17 min.)
(a) Overhead controllable variance = $5,000 unfavorable. Overhead budgeted for standard hours allowed Variable overhead (63,000 × $5) Fixed overhead
= =
Actual overhead incurred Overhead controllable variance
$315,000 120,000 435,000 430,000 $ 5,000 favorable
(b) Overhead volume variance = $6,000 favorable. Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (60,000 – 63,000) × $2/hr = $6,000 favorable Ex. 192 Markowitz Corporation prepared the following variance report. MARKOWITZ CORPORATION Variance Report—Purchasing Department for Week Ended January 9, 2012 Type of Materials Brown Green White
Quantity Purchased ? lbs. 8,000 oz. 22,000 units
Actual Price $5.25 ? $0.45
Standard Price $5.00 3.25 ?
Price Variance $6,000 ? 1,600 U 660 F
FOR INSTRUCTOR USE ONLY
Explanation Price increase Rush order Bought larger quantity
Standard Costs and Balanced Scorecard Ex. 192
25 - 55
(Cont.)
Instructions Fill in the appropriate amounts or letters for the question marks in the report. Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 192
(15 min.)
MARKOWITZ CORPORATION Variance Report – Purchasing Department For Week Ended January 9, 2012 _____________________________________________________________________________ Type of Materials
Quantity Purchased
Actual Price
Standard Price
Price Variance
Explanation
Brown Green White
24,000 lbs. 8,000 oz. 22,000 units
$5.25 $3.45 $0.45
$5.00 $3.25 $0.48
$6,000 U $1,600 U $ 660 F
Price increase Rush order Bought larger quantity
24,000 = $6,000/($5.25 – $5.00). $6,000 U because the actual price ($5.25) exceeds the standard price ($5.00). $1,600/8,000 = $0.20; $3.25 + $0.20 = $3.45 $660/22,000 = $0.03; $0.45 + $0.03 = $0.48 Ex. 193 Lake Company uses a standard cost accounting system. During March, 2012, the company reported the following manufacturing variances: Materials price variance Materials quantity variance Labor price variance Labor quantity variance Overhead controllable Overhead volume
$1,600 2,400 600 2,200 500 3,000
F U U U F U
In addition, 15,000 units of product were sold at $18 per unit. Each unit sold had a standard cost of $14. Selling and administrative expenses for the month were $15,000. Instructions Prepare an income statement for management for the month ending March 31, 2012. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
25 - 56 Test Bank for Accounting Principles, Tenth Edition Solution 193
(15–20 min.) LAKE COMPANY Income Statement For the Month Ended March 31, 2012
Sales (15,000 × $18) ............................................................................ Cost of goods sold (15,000 × $14)........................................................ Gross profit (at standard)...................................................................... Variances: Materials price ............................................................................. Materials quantity ........................................................................ Labor price .................................................................................. Labor quantity .............................................................................. Overhead controllable.................................................................. Overhead volume ........................................................................ Total variances (unfavorable) .............................................. Gross profit (actual) .............................................................................. Selling and administrative expenses .................................................... Net income ...........................................................................................
$270,000 210,000 60,000 $(1,600) 2,400 600 2,200 (500) 3,000 6,100 53,900 15,000 $ 38,900
a
Ex. 194
Newell Company developed the following standards for 2012: NEWELL COMPANY Standard Cost Card Cost Elements Direct materials Direct labor Manufacturing overhead
Standard Quantity 5 pounds 1 hour 1 hour
×
Standard Price $ 5 $18 $10
=
Standard Cost $25 18 10 $53
The company planned to produce 120,000 units of product and work at the 120,000 direct labor level of activity in 2012. The company uses a standard cost accounting system which records standard costs in the accounts and recognizes variances in the accounts at the earliest opportunity. During 2012, 116,000 actual units of product were produced. Instructions Prepare the journal entries to record the following transactions for Newell Company during 2012. (a) Purchased 588,000 pounds of raw materials for $4.90 per pound on account. (b) Actual direct labor payroll amounted to $2,108,000 for 114,000 actual direct labor hours worked. Factory labor cost is to be recorded and distributed to production. (c) Direct materials issued for production amounted to 588,000 pounds which actually cost $4.90 per pound. (d) Actual manufacturing overhead costs incurred were $1,152,000 in 2012. (e) Manufacturing overhead was applied when the 116,000 units were completed. (f) Transferred the 116,000 completed units to finished goods. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard a
Solution 194
25 - 57
(20–25 min.)
(a) Raw Materials Inventory ............................................................... 2,940,000 Materials Price Variance ..................................................... Accounts Payable ............................................................... (To record purchase of materials) (b) Factory Labor ............................................................................... 2,052,000 Labor Price Variance .................................................................... 56,000 Factory Wages Payable ...................................................... (To record direct labor costs) Work in Process Inventory ............................................................ 2,088,000 Labor Quantity Variance ..................................................... Factory Labor ..................................................................... (To assign factory labor to jobs) (c) Work In Process Inventory ............................................................ 2,900,000 Materials Quantity Variance .......................................................... 40,000 Raw Materials Inventory ..................................................... (To record issuance of raw materials)
58,800 2,881,200
2,108,000
36,000 2,052,000
2,940,000
(d) Manufacturing Overhead .............................................................. 1,152,000 Accounts Payable/Cash/Acc. Depreciation ......................... (To record overhead incurred)
1,152,000
(e) Work In Process Inventory ............................................................ 1,160,000 Manufacturing Overhead .................................................... (To assign overhead to jobs)
1,160,000
(f)
Finished Goods Inventory ............................................................. 6,148,000 Work In Process Inventory .................................................. (To record transfer of completed units to finished goods)
6,148,000
a
Ex. 195
Presented below is a flexible manufacturing budget for Jacob Company, which manufactures fine timepieces: Activity Index: Standard direct labor hours Variable costs Indirect materials Indirect labor Utilities Total variable Fixed costs Supervisory salaries Rent Total fixed Total costs
2,800
3,200
3,600
4,000
$ 5,600 3,220 7,280 16,100
$ 6,400 3,680 8,320 18,400
$ 7,200 4,140 9,360 20,700
$ 8,000 4,600 10,400 23,000
1,000 3,000 4,000 $20,100
1,000 3,000 4,000 $22,400
1,000 3,000 4,000 $24,700
1,000 3,000 4,000 $27,000
FOR INSTRUCTOR USE ONLY
25 - 58 Test Bank for Accounting Principles, Tenth Edition a
Ex. 195
(Cont.)
The company applies the overhead on the basis of direct labor hours at $7.00 per direct labor hour and the standard hours per timepiece is 1/2 hour each. The company's actual production was 5,400 timepieces with 2,700 actual hours of direct labor. Actual overhead was $20,200. Instructions (a) Compute the controllable and volume overhead variances. a
(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize the overhead variances at the end of the period.
Ans: N/A, SO: 9,10, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management a
Solution 195
(16–21 min.)
(a) Computation of variances: Actual overhead – Budgeted overhead $20,200 – [(5,400 × 1/2 × $5.75) + $4,000]
= =
Controllable overhead variance $675 Unfavorable
Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (3,200 – 2,700) × ($4,000 3,200) = $625 Unfavorable (b) 1. Manufacturing Overhead ......................................................... Accounts Payable, Cash, Etc. ......................................... (To record overhead incurred)
20,200
2. Work in Process Inventory ...................................................... Manufacturing Overhead ................................................. (To assign overhead to production)
18,900
3. Overhead Controllable Variance ............................................. Overhead Volume Variance ................................................... Manufacturing Overhead ................................................. (To recognize overhead variances)
675 625
20,200
18,900
1,300
Ex. 196 The following information was taken from the annual manufacturing overhead cost budget of Flint Company: Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in direct labor hours Normal production level in units
$93,000 $62,000 31,000 15,500
During the year, 15,000 units were produced, 32,000 hours were worked, and the actual manufacturing overhead costs were $155,000. The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours.
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Ex. 196
25 - 59
(Cont.)
Instructions (a) Compute the total, fixed, and variable predetermined manufacturing overhead rates. a
(b) Compute the total, controllable, and volume overhead variances.
Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 196
(13–18 min.)
(a) Item Variable Overhead Fixed Overhead Total Overhead
Amount $93,000 62,000 $155,000
Hours 31,000 31,000 31,000
Rate $3 2 $5
a
(b) Total overhead variance: Overhead incurred – Overhead applied ($155,000) (30,000 hours × $5.00)
= $5,000 U
Overhead controllable variance: Overhead incurred – Overhead budgeted = $3,000 U ($155,000) [(30,000 × 3.00) + $62,000] Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (31,000 – 30,000) × $2.00/hr = $2,000 U Ex. 197 George Company has a standard costing system. The following data are available for July: a. b. c. d. e.
Actual manufacturing overhead cost incurred: $22,000 Actual machine hours worked: 1,600 Overhead volume variance: $3,600 Unfavorable Total overhead variance: $2,000 Unfavorable Overhead is assigned to production on the basis of machine hours
Instructions Determine the amount of (1) the controllable overhead variance and (2) the overhead applied. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management
Solution 197
(6 min.)
(1) Volume variance plus controllable variance = total overhead variance $3,600 U + X = $2,000 U; so controllable variance = $1,600 F (2) Overhead applied = $20,000 ($22,000 – $2,000)
COMPLETION STATEMENTS 198. A ________________ is expressed as a unit amount, whereas a _________________ is expressed as a total amount. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 60 Test Bank for Accounting Principles, Tenth Edition 199. Standards which represent optimum performance under perfect operating conditions are called _______________ standards, but most companies use _________________ standards which are rigorous but attainable. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
200. In developing a standard cost for direct materials used in making a product, consideration should be given to two factors: (1) __________________ per unit of direct materials and (2) the __________________ of direct materials to produce one unit of product. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
201. The difference between actual hours times the actual pay rate and actual hours times the standard pay rate is the labor _________________ variance. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
202. The standard number of hours allowed times the predetermined overhead rate is the amount of ________________ to the products produced. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
203. The difference between actual quantity of materials times the standard price and standard quantity times the standard price is the materials ________________ variance. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
204. If the actual direct labor hours worked is greater than the standard hours, the labor quantity variance will be ___________________, and the labor rate variance will be ____________________ if the standard rate of pay is greater than the actual rate of pay. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
205. In using variance reports, top management normally looks for _________________ variances. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
206. A two-variance approach to analyzing overhead variances requires the calculation of the overhead _________________ variance and the overhead ________________ variance.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a
207. The overhead ______________ variance is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate.
Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 61
Answers to Completion Statements 198. 199. 200. 201. 202. 203. 204. 205. a 206. a 207.
standard, budget ideal, normal price, quantity price overhead applied quantity unfavorable, favorable significant controllable, volume volume
MATCHING 208. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Variances Standard costs Standard cost accounting system Normal standards Ideal standards
F. G. a H. a I. J.
Materials price variance Labor quantity variance Overhead controllable variance Overhead volume variance Standard hours allowed
____
1. The difference between actual overhead incurred and overhead budgeted for the standard hours allowed.
____
2. The hours that should have been worked for the units produced.
____
3. The difference between the actual quantity times the actual price and the actual quantity times the standard price.
____
4. The difference between total actual costs and total standard costs.
____
5. The difference between actual hours times the standard rate and standard hours times the standard rate.
____
6. Predetermined unit costs that are measures of performance.
____
7. The difference between normal capacity hours and standard hours allowed times the fixed overhead rate.
____
8. Standards based on an efficient level of performance that are attainable under expected operating conditions.
____
9. Standards based on the optimum level of performance under perfect operating conditions.
____ 10. A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
25 - 62 Test Bank for Accounting Principles, Tenth Edition
Answers to Matching a
1. 2. 3. 4. 5.
H J F A G
6. 7. 8. 9. 10. a
B I D E C
SHORT-ANSWER ESSAY QUESTIONS S-A E 209 (a) Explain the similarities and differences between standards and budgets. (b) Contrast the accounting for standard and budgets. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Solution 209 (a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a unit amount and a budget is a total amount. (b)
There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs.
S-A E 210 Moon Company computes variances as a basis for evaluating the performance of managers responsible for controlling costs. For several months, the labor quantity variance has been unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Solution 210 Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar problems that affect efficiency. The management of Moon Company would need to identify the likely causes of the variance and correct the situation with additional training, improved maintenance, better scheduling or similar appropriate actions.
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard
25 - 63
S-A E 211 In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavorable materials price variance for the month and there was an unfavorable materials quantity variance. Under what circumstances, if any, can the responsibility for each variance be placed on (a) the purchasing department and (b) the production department? Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Solution 211 (a)
Purchasing department. The investigation of a materials price variance usually begins with this department. If the price standard has been properly set, purchasing is responsible. However, it should be recognized that in a period of inflation, prices may rise faster than expected. Also, there may be extenuating circumstances such as oil cartel price increases. The purchasing department may be responsible for an unfavorable quantity variance if it purchased raw materials of inferior quality.
(b)
Production department. Ordinarily, responsibility for an unfavorable quantity variance rests with this department. For example, production is responsible if the variance is caused by inexperienced workers, faulty machinery, or carelessness. The production department may be responsible for an unfavorable price variance when the materials must be ordered on a rush basis at a higher price than planned.
S-A E 212 What are the four perspectives used in the balanced scorecard? Discuss the nature of each, and how the perspectives are linked. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Solution 212 The four perspectives of the balanced scorecard are: financial, customer, internal process, and learning and growth. The financial perspective employs financial measures of performance used by most firms. The customer perspective evaluates how well the company is performing from the viewpoint of those people who buy and use its product in terms of price, quality, product innovation, customer service, and other dimensions. The internal process perspective evaluates the value chain—product development, production, delivery and after-sale service—to ensure that the company is operating effectively and efficiently. The learning and growth perspective evaluates how well the company develops and retains its employees. The four perspectives are linked in that the results in one perspective influence the results in the next. S-A E 213 (Ethics) Detwiler, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Jerry Hancock suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "we're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Nancy Kirkham, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?" FOR INSTRUCTOR USE ONLY
25 - 64 Test Bank for Accounting Principles, Tenth Edition S-A E 213 (Cont.) The argument continued. Finally, the standards were prepared. All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used. Nancy, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances. Required: 1. Are ideal standards unethical? Explain briefly. 2. Is it unethical for Nancy to refuse to support the standards? Explain. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
Solution 213 1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the case in which employees are denied bonuses or other rewards because of not meeting a standard which was out of their reach. If they are used as a guide to maximum attainable performance, however, and not tied directly to the reward system, they may be ethical. 2. It is unethical for Nancy simply to refuse to accept a particular standard. However, if the company intends to use the standard unethically, she may refuse to hold her workers accountable while she pursues a permanent disposition of the matter. If she simply refuses to accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its legitimate objectives. This would be unethical. S-A E 214 (Communication) Mark Irwin has come to the accounting department for help in interpreting his variance report. He says that he understands that last month was not a very good one for output, but he really thought everyone put forth good effort, so he is confused about the existence of an unfavorable labor efficiency variance. He cites as an example of the workers' effort their willingness to work extra hours to get full output, even when a whole week's worth of production had to be scrapped. He knew that his materials costs would be higher, and that overtime would make his rate variance unfavorable, but he certainly didn't think his workers had been inefficient. Required: Write a short note to Mark explaining the probable cause of the unfavorable labor efficiency variance. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management
FOR INSTRUCTOR USE ONLY
Standard Costs and Balanced Scorecard Solution 214
Mark, Last month was a tough one for all of us, wasn't it? Your workers certainly did go the extra mile, no doubt about it. You asked about your efficiency variance. When we calculate it, we count the number of hours it took to get good output. Since we had such high spoilage, we got fewer units, but used more hours. That is why your efficiency variance was negative. It does not imply that you didn't do your best. It just means that we should investigate to see what happened. Good luck, and I hope this month is a better one for all of us. (signed)
FOR INSTRUCTOR USE ONLY
25 - 65
CHAPTER 26 INCREMENTAL ANALYSIS AND CAPITAL BUDGETING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
Item
SO
BT
1. 2. 3. 4. 5. 6. 7. 8.
1 2 2 2 2 2 3 3
K K C K K C C C
9. 10. 11. 12. 13. 14. 15. 16.
3 4 4 4 5 5 6 6
C C K C C C C C
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.
1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4
K K K K K C K C C K K C C C C AN AN C C C C C C AP AP K
64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5
Item
SO
BT
Item
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Item
SO
BT
25. 9 26. 9 27. 9 28. 10 29. 10 30. 10 sg 31. 1 sg 32. 2
K C C C C K K K
sg
33. 3 34. 5 sg 35. 7 sg 36. 9 sg 37. 10
C K C K K
142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. st 153. sg 154. st 155. sg 156. sg 157. sg 158. st 159. st 160. st 161. sg 162. sg 163. st 164. sg 165.
AP K C AN AN AP AP AP AP C C K AN K C K C K AP K K K K K
True-False Statements 17. 18. 19. 20. 21. 22. 23. 24.
6 7 7 8 8 9 9 9
C C C C C C K K
sg
Multiple Choice Questions K C C C C AN AN AN AN AN AN AN AN AN AP AN AN AN AN AP AN C AN AP C AN
90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115.
6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 8 8 8 8 8 9 9 9 8 9 9
C C C C C C C AP AP AN AN C AN C AN AN AN C AN AN AP AP AP K K C
116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141.
9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 10 9 9 10 10 10 10 10 10 10
AP C AP K K K C K AP K C AP C K AP AP AP AP AP AP AP AP AP AP AP AP
175. 176. 177.
9 10 10
AP AP AP
Brief Exercises 166. 167. 168. sg st
2 3 4
AP AP AP
169. 170. 171.
4 5 6
AP AN AN
172. 173. 174.
7 8 9
AP AN AP
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.
10 10 10 10 10 10 10 10 10 10 10 1 3 4 4 6 7 7 8 9 9 9 10 10
26 - 2
Test Bank for Accounting Principles, Tenth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 178. 179. 180. 181. 182. 183.
3 3 3 3 3,4 4
AN AN E E AP E
184. 185. 186. 187. 188. 189.
4 4 5 5 5 6
AP AN E AP E AN
190. 191. 192. 193. 194. 195.
6 7 7 7 7 8
E AP E AP E E
196. 8 197. 9 198. 9 199. 9 200. 9,10 201. 9,10
AP AP AP AP E AP
202. 203. 204. 205.
10 10 10 10
AP E E AP
K K K
218. 219. 220.
10 10 10
K K K
Completion Statements 206. 207. 208.
1 2 3
K K K
221.
6
K
222. 223.
4 10
K K
209. 210. 211.
4 5 6
K K K
212. 213. 214.
8 9 9
K K K
215. 216. 217.
9 9 10
Matching Short-Answer Essay 224. 225.
4 9
K K
226. 227.
9 6
K K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 31.
TF TF
38. 39.
MC MC
40. 41.
2. 3. 4.
TF TF TF
5. 6. 32.
TF TF TF
42. 43. 44.
7. 8. 9. 33.
TF TF TF TF
53. 54. 55. 56.
MC MC MC MC
57. 58. 59. 60.
10. 11. 12. 63. 64.
TF TF TF MC MC
65. 66. 67. 68. 69.
MC MC MC MC MC
70. 71. 72. 73. 74.
13. 14. 34.
TF TF TF
79. 80. 81.
MC MC MC
82. 83. 84.
Type
Item
Type
Item
Study Objective 1 MC 153. MC MC 206. C Study Objective 2 MC 45. MC 48. MC 46. MC 49. MC 47. MC 50. Study Objective 3 MC 61. MC 178. MC 62. MC 179. MC 154. MC 180. MC 167. BE 181. Study Objective 4 MC 75. MC 156. MC 76. MC 168. MC 77. MC 169. MC 78. MC 182. MC 155. MC 183. Study Objective 5 MC 85. MC 88. MC 86. MC 89. MC 87. MC 170.
For Instructor Use Only
Type
Item
Type
Item
Type
MC MC MC
51. 52. 166.
MC MC BE
207.
C
Ex Ex Ex Ex
182. 208.
Ex C
MC BE BE Ex Ex
184. 185. 209. 222. 224.
Ex Ex C SA SA
MC MC BE
186. 187. 188.
Ex Ex Ex
210.
C
Incremental Analysis and Capital Budgeting
15. 16. 17.
TF TF TF
90. 91. 92.
MC MC MC
93. 94. 95.
18. 19. 35.
TF TF TF
99. 100. 101.
MC MC MC
102. 103. 104.
20. 21.
TF TF
105. 106.
MC MC
107. 108.
22. 23. 24. 25. 26. 27. 36.
TF TF TF TF TF TF TF
110. 111. 112. 113. 114. 115. 116.
MC MC MC MC MC MC MC
117. 118. 119. 120. 121. 122. 123.
28. 29. 30. 37. 132. 135.
TF TF TF TF MC MC
136. 137. 138. 139. 140. 141.
MC MC MC MC MC MC
142. 143. 144. 145. 146. 147.
Note: TF = True-False MC = Multiple Choice MA = Matching
Study Objective 6 MC 96. MC 157. MC 97. MC 171. MC 98. MC 189. Study Objective 7 MC 158. MC 191. MC 159. MC 192. MC 172. BE 193. Study Objective 8 MC 109. MC 173. MC 160. MC 195. Study Objective 9 MC 124. MC 131. MC 125. MC 133. MC 126. MC 134. MC 127. MC 161. MC 128. MC 162. MC 129. MC 163. MC 130. MC 174. Study Objective 10 MC 148. MC 165. MC 149. MC 176. MC 150. MC 177. MC 151. MC 200. MC 152. MC 201. MC 164. MC 202.
MC BE Ex
190. 211. 221.
Ex C MA
Ex Ex Ex
194.
Ex
BE Ex
196. 212.
Ex C
MC MC MC MC MC MC BE
175. 197. 198. 199. 200. 201. 213.
MC BE BE Ex EX Ex
203. 204. 205. 217. 218. 219.
BE = Brief Exercise Ex = Exercise
26 - 3
227.
SA
BE Ex Ex Ex Ex Ex C
214. 215. 216. 225. 226.
C C C SA SA
Ex Ex Ex C C C
220. 223.
C SA
C = Completion SA = Short-Answer
CHAPTER STUDY OBJECTIVES 1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action, (d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues.
For Instructor Use Only
26 - 4
Test Bank for Accounting Principles, Tenth Edition
4. Identify the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved, (b) the purchase price, and (c) opportunity costs. 5. Give the decision rule for whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 6. Identify the factors to consider in retaining or replacing equipment. The factors to consider in determining whether equipment should be retained or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered. 7. Explain the relevant factors in whether to eliminate an unprofitable segment. In deciding whether to eliminate an unprofitable segment, determine the contribution margin, if any, produced by the segment and the disposition of the segment's fixed expenses. 8. Determine which products to make and sell when resources are limited. When a company has limited resources, find the contribution margin per unit of limited resource. Then multiply this amount by the units of limited resource to determine which product maximizes net income. 9. Contrast annual rate of return and cash payback in capital budgeting. The annual rate of return is obtained by dividing expected annual net income by the average investment. The higher the rate of return, the more attractive the investment. The cash payback technique identifies the time period to recover the cost of the investment. The formula is: Cost of capital expenditure divided by estimated net annual cash flows equals cash payback period. The shorter the payback period, the more attractive the investment. 10. Distinguish between the net present value and internal rate of return methods. Under the net present value method, compare the present value of future net cash flows with the capital investment to determine net present value. The NPV decision rule is: Accept the project if net present value is zero or positive. Reject the investment if net present value is negative. Under the internal rate of return method, find the interest yield of the potential investment. The IRR decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return. Reject the project when the internal rate of return is less than the required rate.
TRUE-FALSE STATEMENTS 1.
An important step in management's decision-making process is to determine and evaluate possible courses of action.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning
2.
In making decisions, management ordinarily considers both financial and nonfinancial information.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning
For Instructor Use Only
Incremental Analysis and Capital Budgeting 3.
26 - 5
In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
4.
Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Decision Analysis
5.
Decision-making involves choosing among alternative courses of action.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
6.
Financial data are developed for a course of action under an incremental basis and then it is compared to data developed under a differential basis before a decision is made.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
7.
A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
8.
If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
9.
A company should never accept an order for its product at less than its regular sales price.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
10.
A decision whether to continue to make a product or buy it externally, depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.
Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Quantitative Methods
11.
An opportunity cost is the potential benefit obtained by using resources in an alternative course of action.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
12.
If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
13.
In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 6 14.
Test Bank for Accounting Principles, Tenth Edition It is always better to sell now rather than process further because of the time value of money.
Ans: F, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
15.
In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered a sunk cost.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
16.
In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
17.
It is better not to replace old equipment if it is not fully depreciated.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
18.
From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
19.
The elimination of an unprofitable product line may adversely affect the remaining product lines.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
20.
When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit of limited resource.
Ans: T, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
21.
If a company has only a certain number of machine hours available for production, it is generally more profitable to produce and sell the product with the highest unit contribution margin.
Ans: F, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
22.
Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability.
Ans: T, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Investment Decisions
23.
The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
24.
A hurdle rate is the rate of return set by applying ideal standards.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Incremental Analysis and Capital Budgeting 25.
26 - 7
A major advantage of the annual rate of return technique is that it considers the time value of money.
Ans: F, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
26.
The cash payback capital budgeting technique is a quick way to calculate a project's net present value.
Ans: F, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
27.
The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.
Ans: T, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
28.
Using the net present value method, a net present value of zero indicates that the project would be acceptable.
Ans: T, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
29.
The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.
Ans: F, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
30.
The interest rate yielded by a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.
Ans: T, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Investment Decisions
31.
Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
32.
The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis
33.
If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
34.
The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
35.
In deciding on the future status of an unprofitable segment, management should recognize that net income could decrease by eliminating the unprofitable segment.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 8 36.
Test Bank for Accounting Principles, Tenth Edition The annual rate of return is computed by dividing expected annual net income by average investment.
Ans: T, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis
37.
The discounted cash flow technique considers estimated total cash inflows from the investment but not the time value of money.
Ans: F, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
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Item
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Item
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Item
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Item
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Item
Ans.
T T F F T F
7. 8. 9. 10. 11. 12.
T F F T T F
13. 14. 15. 16. 17. 18.
F F T T F T
19. 20. 21. 22. 23. 24.
T T F T F F
25. 26. 27. 28. 29. 30.
F F T T F T
31. 32. 33. 34. 35. 36.
T F T F T T
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F
MULTIPLE CHOICE QUESTIONS 38.
A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to a. assign responsibility for the decision. b. provide relevant revenue and cost data about each course of action. c. determine the amount of money that should be spent on a project. d. decide which actions that management should consider.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
39.
Which of the following stages of the management decision-making process is improperly sequenced? a. Evaluate possible courses of action → Make decision. b. Assign responsibility for the decision → Identify the problem. c. Identify the problem → Determine possible courses of action. d. Assign responsibility for decision → Determine possible courses of action.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
40.
Internal reports that review the actual impact of decisions are prepared by a. department heads. b. the controller. c. management accountants. d. factory workers.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
For Instructor Use Only
Incremental Analysis and Capital Budgeting 41.
26 - 9
Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. Determine possible courses of action b. Make the appropriate decision based on relevant data c. Prepare internal reports that review the impact of decisions d. None of these
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
42.
The process of evaluating financial data that change under alternative courses of action is called a. double entry analysis. b. contribution margin analysis. c. incremental analysis. d. cost-benefit analysis.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis
43.
Nonfinancial information that management might evaluate in making a decision would not include a. employee turnover. b. contribution margin. c. the environment. d. the corporate profile in the community.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
44.
Incremental analysis is synonymous with a. difficult analysis. b. differential analysis. c. gross profit analysis. d. derivative analysis.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
45.
In incremental analysis, a. only costs are analyzed. b. only revenues are analyzed. c. both costs and revenues may be analyzed. d. both costs and revenues that stay the same between alternate courses of action will be analyzed.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
46.
Incremental analysis is most useful a. in developing relevant information for management decisions. b. in choosing between the net present value method and the internal rate of return method. c. in evaluating the master budget. d. as a replacement technique for variance analysis.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
For Instructor Use Only
26 - 10 Test Bank for Accounting Principles, Tenth Edition 47.
The source of data to serve as inputs in incremental analysis is generated by a. market analysts. b. engineers. c. accountants. d. all of these.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Information Management
48.
Which of the following is not a true statement? a. Incremental analysis might also be referred to as differential analysis. b. Incremental analysis is the same as CVP analysis. c. Incremental analysis is useful in making decisions. d. Incremental analysis focuses on decisions that involve a choice among alternative courses of action.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
49.
Incremental analysis would not be appropriate for a. a make or buy decision. b. an allocation of limited resource decision. c. elimination of an unprofitable segment. d. analysis of manufacturing variances.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
50.
Incremental analysis would be appropriate for a. acceptance of an order at a special price. b. a retain or replace equipment decision. c. a sell or process further decision. d. all of these.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
51.
Which of the following is a true statement about cost behaviors in incremental analysis? 1. Fixed costs will not change between alternatives. 2. Fixed costs may change between alternatives. 3. Variable costs will always change between alternatives. a. 1 b. 2 c. 3 d. 2 and 3
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
For Instructor Use Only
Incremental Analysis and Capital Budgeting 52.
26 - 11
A company is considering the following alternatives: Option 1 Option 2 Revenues $330,000 $330,000 Variable costs 102,000 89,000 Fixed costs 165,000 165,000 Which of the following are relevant in choosing between the alternatives? a. Variable costs b. Revenues c. Fixed costs d. Variable costs and fixed costs
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
53.
It costs Mackey Company $22 of variable and $15 of fixed costs to produce one Panini press which normally sells for $57. A foreign wholesaler offers to purchase 1,000 Panini presses at $35 each. Mackey would incur special shipping costs of $5 per press if the order were accepted. Mackey has sufficient unused capacity to produce the 1,000 Panini presses. If the special order is accepted, what will be the effect on net income? a. $8,000 increase b. $8,000 decrease c. $22,000 decrease d. $7,000 increase
Ans: A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
54.
Keller Company manufactures a product with a unit variable cost of $150 and a unit sales price of $264. Fixed manufacturing costs were $720,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 3,000 units at $210 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows: a. Income would decrease by $162,000. b. Income would decrease by $36,000. c. Income would increase by $63,000. d. Income would increase by $180,000.
Ans: D, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
55.
In incremental analysis, a. costs are not relevant if they change between alternatives. b. all costs are relevant if they change between alternatives. c. only fixed costs are relevant. d. only variable costs are relevant.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
56.
If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price, then a. only variable costs are relevant. b. fixed costs are not relevant. c. the order will likely be accepted. d. the order will likely be rejected.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 12 Test Bank for Accounting Principles, Tenth Edition 57.
De Laurintis Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price? a. Never b. When additional fixed costs must be incurred to accommodate the order c. When the company thinks it can use the cheaper materials without the customer's knowledge d. When incremental revenues exceed incremental costs
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
58.
If a company must expand capacity to accept a special order, it is likely that there will be a. an increase in unit variable costs. b. no increase in fixed costs. c. an increase in variable and fixed costs per unit. d. an increase in fixed costs.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
59.
Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity? a. Net income will not be affected. b. Net income will increase if the special sales price per unit exceeds the unit variable costs. c. Net income will decrease. d. Additional fixed costs will probably be incurred.
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
60.
If a company anticipates that other sales will be affected by the acceptance of a special order, then a. lost sales should be considered in the incremental analysis. b. lost sales should not be considered in the incremental analysis. c. the order should not be accepted. d. the order will only be accepted if the plant is below capacity.
Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
61.
D’Arabian Company incurred the following costs for 70,000 units: Variable costs $420,000 Fixed costs 392,000 D’Arabian has received a special order from an Armenian company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If D’Arabian wants to break even on the order, what should the unit sales price be? a. $6.00 b. $8.10 c. $11.60 d. $13.70
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Incremental Analysis and Capital Budgeting 62.
26 - 13
Lagasse Company incurred the following costs for 50,000 units: Variable costs $180,000 Fixed costs 240,000 Lagasse has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $8,500 for shipping. If Lagasse wants to earn $8,000 on the order, what should the unit price be? a. $3.30 b. $11.70 c. $5.20 d. $6.90
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
63.
Which decision will involve no incremental revenues? a. Make or buy decision b. Drop a product line c. Accept a special order d. Additional processing decision
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
64.
An opportunity cost a. should be initially recorded as an asset. b. is the cost of a new product proposal. c. is the potential benefit that may be obtained by following an alternative course of action. d. is classified as manufacturing overhead.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
65.
Opportunity cost must be considered in decisions involving a. budgeting. b. financial accounting. c. CVP analysis. d. resources that have alternative uses.
Ans: D, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
66.
The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. subtracted from the "Make" costs. b. added to the "Make" costs. c. added to the "Buy" costs. d. none of these.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 14 Test Bank for Accounting Principles, Tenth Edition 67.
Opportunity cost is usually a. a standard cost. b. a potential benefit. c. a sunk cost. d. included as part of cost of goods sold.
Ans: B, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
68.
Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. quality control specifications may not be met. b. the outside supplier could increase prices significantly in the future. c. profitable product lines may be dropped. d. the supplier may not deliver on time.
Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
69.
Neely Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead
$120,000 25,000 45,000 30,000
If Neely Manufacturing Company purchases the component externally, $20,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying? a. $190,000 b. $200,000 c. $210,000 d. $220,000 Ans: C, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
70.
Neely Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead
$120,000 25,000 45,000 30,000
If Neely Manufacturing Company can purchase the component externally for $190,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision? a. Make and save $5,000 b. Buy and save $5,000 c. Make and save $15,000 d. Buy and save $15,000 Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
Incremental Analysis and Capital Budgeting 71.
26 - 15
Greenspan Inc. can make 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead
$72,000 18,000 9,000 ?
The company can purchase the 1,000 units externally for $117,000. The avoidable fixed costs are $6,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component? a. $24,000 b. $18,000 c. $12,000 d. Cannot be determined. Ans: A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
72.
Reichl Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead
$34,000 15,000 9,000 10,000
Reichl Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Reichl Company would accept to acquire the 1,000 units externally? a. $58,000 b. $64,000 c. $59,000 d. $62,000 Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
73.
Reichl Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead
$34,000 15,000 9,000 10,000
None of Reichl's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $12,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Reichl Company would be willing to accept to acquire the 1,000 units externally? a. $56,000 b. $46,000 c. $80,000 d. $70,000 Ans: D, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
26 - 16 Test Bank for Accounting Principles, Tenth Edition 74.
Simmons Inc. can produce 100 units of a component part with the following costs: Direct Materials $130,000 Direct Labor 103,000 Variable Overhead 82,000 Fixed Overhead 62,000 If Simmons Inc. can purchase the units externally for $305,000, by what amount will its total costs change? a. An decrease of 72,000 b. An increase of $10,000 c. An increase of $100,000 d. A decrease of $52,000
Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
75.
Simmons Inc. can produce 100 units of a component part with the following costs: Direct Materials $130,000 Direct Labor 103,000 Variable Overhead 82,000 Fixed Overhead 62,000 If Simmons Inc. can purchase the component part externally for $345,000 and only $28,000 of the fixed costs can be avoided, what is the correct make-or-buy decision? a. Make and save $99,000 b. Buy and save $4,000 c. Make and save $2,000 d. Buy and save $32,000
Ans: C, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
76.
Domingo Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Domingo could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Domingo would expect to pay for the units? a. $32,000 b. $29,000 c. $36,000 d. $33,000
Ans: D, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
Incremental Analysis and Capital Budgeting 77.
26 - 17
Domingo Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 None of Domingo’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Domingo would be willing to accept to acquire the 60,000 units externally? a. $36,000 b. $32,000 c. $33,000 d. $40,000
Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
78.
Dean Foods produces a variety of snack products, including fried pork rinds. The cost of one batch of pork rinds is below: Direct materials $12.00 Direct labor 10.00 Variable overhead 6.00 Fixed overhead 9.00 An outside supplier has offered to produce the pork rinds for $25 per batch. How much will Dean save if it accepts the offer? a. $2.00 per batch b. $3.00 per batch c. $19.00 per batch d. $12.00 per batch
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
79.
Garten Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $30 and Garten would sell it for $65. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a price of $85 on the assembled unit. What decision should Garten make? a. Sell before assembly, the company will be better off by $1 per unit. b. Sell before assembly, the company will be better off by $20 per unit. c. Process further, the company will be better off by $29 per unit. d. Process further, the company will be better off by $14 per unit.
Ans: A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
80.
Waters Company spent $14,000 to produce Product 612, which can be sold as is for $15,000, or processed further incurring additional costs of $11,500 and then be sold for $17,000. Which amounts are relevant to the decision about Product 612? a. $14,000, $15,000, and $17,000 b. $14,000, $11,500, and $17,000 c. $15,000, $11,500, and $17,000 d. $14,000, $15,000, $11,500 and $17,000
Ans: C, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
26 - 18 Test Bank for Accounting Principles, Tenth Edition 81.
Ray Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold for $40,000 if manufactured further at an additional cost of $12,000. What should Ray do? a. Sell the inventory for $16,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $12,000 cost d. Manufacture further and sell it for $40,000
Ans: D, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
82.
Sweet Sixteen Makeup produces facial moisturizer. Each bottle of moisturizer costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. Sweet Sixteen Makeup could sell the bottles of sunscreen for $23 each. a. Moisturizer must be processed further because its profit is $9 each. b. Moisturizer must not be processed further because costs increase more than revenue. c. Moisturizer must not be processed further because it decreases profit by $1 each. d. Moisturizer must be processed further because it increases profit by $3 each.
Ans: B, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
83.
Chiarelli Company has old inventory on hand that cost $36,000. Its scrap value is $48,000. The inventory could be sold for $120,000 if manufactured further at an additional cost of $36,000. What should Chiarelli do? a. Sell the inventory for $48,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $36,000 cost d. Manufacture further and sell it for $120,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
84.
HK Company has a process that results in 15,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $100,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? a. Process further, the company will be better off by $10,000. b. Sell now, the company will be better off by $10,000. c. Process further, the company will be better off by $90,000. d. Sell now, the company will be better off by $100,000.
Ans: B, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
85.
The decision rule on whether to sell or process further a. varies from situation to situation. b. is process further as long as total revenue exceeds present revenues. c. is process further if incremental revenue from such processing exceeds incremental fixed costs. d. is process further if incremental revenue from such processing exceeds the incremental processing costs.
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
Incremental Analysis and Capital Budgeting 86.
26 - 19
Colichio Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $80 and Colichio Company would sell it for $180. The cost to assemble the product is estimated at $36 per unit and Colichio Company believes the market would support a price of $232 on the assembled unit. What is the correct decision using the sell or process further decision rule? a. Sell before assembly, the company will be better off by $36 per unit. b. Sell before assembly, the company will be better off by $52 per unit. c. Process further, the company will be better off by $52 per unit. d. Process further, the company will be better off by $16 per unit.
Ans: D, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
87.
Allen Company manufactures kitchen utensils. Bowden Company has approached Allen with a proposal to sell the company spatulas at a price of $100,000 for 100,000 units. Alllen is currently making the spatulas in its own factory. The following costs are associated with this part of the process when 100,000 spatulas are produced: Direct material $ 41,000 Direct labor 19,000 Manufacturing overhead 50,000 Total $110,000 The manufacturing overhead consists of $36,000 of costs that will be eliminated if the components are no longer produced by Allen. From Allen's point of view, how much is the incremental cost or savings if the spatulas are bought instead of made? a. $10,000 incremental savings b. $4,000 incremental cost c. $4,000 incremental savings d. $10,000 incremental cost
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
88.
The focus of a sell or process further decision is a. incremental revenue. b. incremental cost. c. both incremental revenue and incremental cost. d. neither incremental revenue nor incremental cost.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
89.
Tsai Company gathered the following data about the three products that it produces: Product Alpha Beta Delta
Present Sales Value $12,000 14,000 11,000
Estimated Additional Processing Costs $8,000 5,000 3,000
Estimated Sales if Processed Further $21,000 18,000 16,000
Which of the products should not be processed further? a. Product Alpha b. Product Beta c. Product Delta d. Products Alpha and Delta Ans: B, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
26 - 20 Test Bank for Accounting Principles, Tenth Edition 90.
A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment b. Depreciation expense on the old equipment c. The loss on the disposal of the old equipment d. The current disposal price of the old equipment
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
91.
Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cash price of the new equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The cost savings if the new equipment is purchased
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
92.
Book value of old equipment is considered to be a a. relevant cost. b. semi-relevant cost. c. sunk cost. d. cost that can be changed by a present or future decision.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
93.
A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment d. Accumulated depreciation on the old equipment
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
94.
A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis? a. Annual depreciation charge on the old equipment b. Book value of the old equipment c. Estimated annual depreciation of the new equipment d. Cost of the new equipment
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
95.
In a retain or replace equipment decision, trade-in allowance available on old equipment a. increases the cost of the new equipment. b. is relevant because it will not be realized if the old equipment is retained. c. is not relevant to the decision. d. reduces the cost of the old equipment.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Incremental Analysis and Capital Budgeting 96.
26 - 21
Spicer Company is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $390,000 Accumulated Depreciation 180,000 Remaining useful life 6 years Useful life -0Annual operating costs $167,000
New Machine $530,000 -0-010 years $151,500
If the old machine is replaced, it can be sold for $120,000. Which of the following amounts is a sunk cost? a. $167,000 b. $151,500 c. $180,000 d. $210,000 Ans: D, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
97.
Salam Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $390,000 Accumulated Depreciation 180,000 Remaining useful life 6 years Useful life -0Annual operating costs $167,000
New Machine $530,000 -0-010 years $151,500
If the old machine is replaced, it can be sold for $120,000. Which of the following amounts is relevant to the replacement decision? a. $180,000 b. $390,000 c. $151,500 d. $0 Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
26 - 22 Test Bank for Accounting Principles, Tenth Edition 98.
Oliver Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Cost $250,000 Accumulated Depreciation 75,000 Remaining useful life 10 years Useful life -0Annual operating costs $200,000
New Machine $500,000 -0-010 years $150,500
If the old machine is replaced, it can be sold for $20,000. The net advantage (disadvantage) of replacing the old machine is a. $15,000 b. $20,000 c. $(5,000) d. $(50,000) Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
99.
Smitten Kitchen Company produces three sizes of crock pots: small, medium, and large. A condensed segmented income statement for a recent period follows:
Sales Variable expenses Contribution margin Fixed expenses Net income (loss)
Large $200,000 125,000 75,000 55,000 $ 20,000
Medium $200,000 110,000 90,000 55,000 $ 35,000
Small $105,000 65,000 40,000 45,000 $(5,000)
Total $505,000 300,000 205,000 155,000 $ 50,000
Assume none of the fixed expenses for the small size crock pot are avoidable. What will be total net income if the line is dropped? a. $45,000 b. $10,000 c. $15,000 d. $55,000 Ans: B, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
Incremental Analysis and Capital Budgeting 100.
26 - 23
Smitten Kitchen Company produces three versions of crock pots: small, medium, and large. A condensed segmented income statement for a recent period follows:
Sales Variable expenses Contribution margin Fixed expenses Net income (loss)
Large $200,000 125,000 75,000 55,000 $ 20,000
Medium $200,000 110,000 90,000 55,000 $ 35,000
Small $105,000 65,000 40,000 45,000 $(5,000)
Total $505,000 300,000 205,000 155,000 $ 50,000
Assume all of the fixed expenses for the small size crock pot are avoidable. What will be total net income if the line is dropped? a. $55,000 b. $45,000 c. $95,000 d. $10,000 Ans: A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
101.
What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. All expenses of the eliminated segment will be eliminated. b. Net income will decrease. c. Net income will increase. d. The company's variable costs will increase.
Ans: B, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
102.
Bourdrain Company has three product lines, one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss
$215,000 125,000 90,000 140,000 $ (50,000)
If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will a. increase by $50,000. b. decrease by $90,000. c. decrease by $6,000. d. increase by $6,000. Ans: C, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
26 - 24 Test Bank for Accounting Principles, Tenth Edition 103.
A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued, a. total net income will increase by the amount of the product line's fixed costs. b. total net income will decrease by the amount of the product line's fixed costs. c. the contribution margin of the product line will indicate the net income increase or decrease. d. the company's total fixed costs will decrease.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
104.
A segment has the following data: Sales Variable expenses Fixed expenses
$350,000 150,000 275,000
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments? a. $200,000 increase b. $200,000 decrease c. $275,000 decrease d. Cannot be determined from the data provided. Ans: B, SO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
105.
Flay Company expects income of $2,000 per year over the life of an investment that will cost $25,000. The calculation of the accounting rate of return is .16. The rate of return indicates that a. Flay expects to earn 16% of $2,000 as profit each year the asset is used. b. Flay expects to earn 16% of its investment annually. c. Flay expects to earn 16% of its cash outlay back over the life of the asset. d. Flay expects the asset will earn 16 times as much profit as its cost.
Ans: B, SO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
106.
A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 1,000 machine hours available to manufacture a product, income will be a. $2,000 more if Product A is made. b. $2,000 less if Product B is made. c. $2,000 less if Product A is made. d. the same if either product is made.
Ans: C, SO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
If a company has limited resources, the key factor in performing incremental analysis is a. contribution margin. b. limited resources required. c. contribution margin per unit of limited resource. d. none of these.
Ans: C, SO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
For Instructor Use Only
Incremental Analysis and Capital Budgeting 108.
26 - 25
A company can produce and sell only one of the following two products:
Product 1 Product 2
Machine Hours Required 3 2
Contribution Margin Per Unit $30 $25
If the company has machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce to maximize net income? a. $20,000 b. $24,000 c. $25,000 d. $16,000 Ans: C, SO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
109.
Brown Company’s contribution margin is $4 per unit for Product A and $5 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. How much is the contribution margin per unit of limited resource for each product? a. b. c. d.
A $4.00 $2.00 $1.25 $2.50
B $5.00 $1.25 $2.00 $1.00
Ans: B, SO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
110.
A company is considering purchasing factory equipment that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $90,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this equipment is a. 32.5%. b. 3.8%. c. 7.5%. d. 16.3%.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
111.
A company is considering purchasing factory equipment that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $90,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the equipment is a. 13.3 years. b. 8.0 years. c. 6.2 years. d. 3.1 years.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 26 Test Bank for Accounting Principles, Tenth Edition 112.
Lawson Co. is considering purchasing a new machine which will cost $350,000, but which will decrease costs each year by $70,000. The useful life of the machine is 10 years. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20,000/year. The cash payback period is a. 7.0 years. b. 4.5 years. c. 5.0 years. d. 10.0 years.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
113.
The following are all quantitative capital budgeting techniques except a. annual rate of return technique. b. cost-volume-profit technique. c. discounted cash flow technique. d. cash payback technique.
Ans: B, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
114.
A company's cost of capital refers to the a. rate management expects to pay on all borrowed and equity funds. b. total cost of a capital project. c. cost of printing and registering common stock shares. d. rate of return earned on total assets.
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
115.
How is annual cash inflow determined? a. Depreciation is subtracted from net income because it is an expense. b. Depreciation is added back to net income because it is not an outflow of cash. c. Depreciation is subtracted from net income because it is an outflow of cash. d. Depreciation is added back to net income because it is an inflow of cash.
Ans: B, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
116.
If an asset cost $270,000 and is expected to have a $60,000 salvage value at the end of its twelve-year life, and generates annual net cash inflows of $30,000 each year, the cash payback period is a. 3 years. b. 9 years. c. 6 years. d. 7 years.
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
117.
If the payback period for a project is greater than its economic life, the a. project will always be profitable. b. entire initial investment will never be recovered. c. project would only be acceptable if the company's cost of capital was low. d. project's return will always exceed the company's cost of capital.
Ans: B, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 118.
26 - 27
A company is considering purchasing factory equipment which costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $225,000 and annual operating expenses exclusive of depreciation expense are expected to be $95,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this project is a. 54.2%. b. 14.6%. c. 29.2%. d. 27.1%.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
119.
Capital budgeting is the process a. used in sell or process further decisions. b. of determining how much capital stock to issue. c. of making capital expenditure decisions. d. of eliminating unprofitable product lines.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
120.
Which of the following is not a common method of capital budgeting? a. Gross profit method b. Payback method c. Discounted cash flow method d. Annual rate of return method
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
121.
The rate that management expects to pay on borrowed or equity funds is known as a. the hurdle rate. b. the cost of capital. c. the cutoff rate. d. all of these.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
122.
The higher the rate of return for a given risk, the a. more attractive the investment. b. less attractive the investment. c. higher the cost of capital. d. higher the hurdle rate.
Ans: A, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
123.
The annual rate of return method is based on a. accounting data. b. time value of money data. c. market values. d. replacement values.
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 28 Test Bank for Accounting Principles, Tenth Edition 124.
A company projects an increase in net income of $225,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment? a. 25.0% b. 37.5% c. 50.0% d. 57.5%
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
125.
When using the payback method, payback is expressed in terms of a. a percent. b. dollars. c. time. d. a discount factor.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
126.
The payback method is criticized on the grounds that it a. ignores obsolescence factors. b. ignores the cost of an investment. c. is complicated to use. d. ignores the time value of money.
Ans: D, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
127.
Cora Company is considering buying a machine for $54,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $9,000 each year. The cash payback on this investment is a. 15.5 years. b. 10.75 years. c. 6.5 years. d. 3.75 years.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
128.
Ramsey Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is a. $240,000. b. $120,000. c. $126,000. d. $252,000.
Ans: C, SO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 129.
26 - 29
A capital budgeting technique which takes into consideration the time value of money is the a. annual rate of return approach. b. return on stockholders' equity approach. c. payback approach. d. net present value method.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
130.
Besh Company had an investment which cost $260,000 and had a salvage value at the end of its useful life of zero. If Besh's expected annual net income is $15,000, the annual rate of return is: a. 5.8%. b. 9.8%. c. 11.5%. d. 15%.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
131.
Florence Company has identified that the cost of new manufacturing equipment will be $60,000, but with the use of the new equipment, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is: a. 30 years. b. 20 years. c. 12 years. d. 7.5 years.
Ans: D, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
132.
T&T Company purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(450). Annual cost savings were: $5,000 for year 1; $4,000 for year 2; and $3,000 for year 3. The amount of the initial investment was Year 1 2 3 a. b. c. d.
Present Value of 1 at 12% .893 .797 .712
PV of an Annuity of 1 at 12% .893 1.690 2.402
$10,239. $9,158. $10,058. $9,339.
Ans: A, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 30 Test Bank for Accounting Principles, Tenth Edition 133.
MP Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Echo Project Charlie Initial investment $400,000 $600,000 Annual net income 20,000 42,000 Net annual cash inflow 100,000 142,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Periods 5 6
Present Value of an Annuity of 1 9% 10% 11% 12% 3.890 3.791 3.696 3.605 4.486 4.355 4.231 4.111
The cash payback period for Project Echo is a. 20 years. b. 10 years. c. 5 years. d. 4 years. Ans: D, SO: 9, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
134.
MP Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Echo Project Charlie Initial investment $400,000 $600,000 Annual net income 20,000 42,000 Net annual cash inflow 100,000 142,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Periods 5 6
Present Value of an Annuity of 1 9% 10% 11% 12% 3.890 3.791 3.696 3.605 4.486 4.355 4.231 4.111
The annual rate of return for Project Echo is a. 5%. b. 10%. c. 25%. d. 50%. Ans: B, SO: 9, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 135.
26 - 31
MP Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Echo Project Charlie Initial investment $400,000 $600,000 Annual net income 20,000 42,000 Net annual cash inflow 100,000 142,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111
The net present value for Project Charlie is a. $618,410. b. $182,912. c. $100,000. d. $18,410. Ans: D, SO: 10, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
136.
MP Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Echo Project Charlie Initial investment $400,000 $600,000 Annual net income 20,000 42,000 Net annual cash inflow 100,000 142,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111
The internal rate of return for Project Charlie is approximately a. 10%. b. 11%. c. 12%. d. 9%. Ans: B, SO: 10, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 32 Test Bank for Accounting Principles, Tenth Edition 137.
Use the following table, Present Value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 10% and is considering investing in a project that requires an investment of $98,000 and is expected to generate cash inflows of $42,000 at the end of each year for three years. The present value of future cash inflows for this project is a. $98,000. b. $104,454. c. $114,898. d. $6,454.
Ans: B, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
138.
Use the following table, Present Value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175,000 and is expected to generate cash inflows of $70,000 at the end of each year for three years. The net present value of this project is a. $177,170. b. $35,000. c. $17,718. d. $2,170.
Ans: D, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
139.
Use the following table, Present Value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68,337 and is expected to generate cash inflows of $27,000 each year for three years. The approximate internal rate of return on this project is a. 8%. b. 9%. c. 10%. d. less than the required 8%.
Ans: B, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 140.
26 - 33
Cha Da Thai Company wants to purchase equipment with a 3-year useful life, which is expected to produce cash inflows of $15,000 each year for two years, and $10,000 in year 3. Woods has a 14% cost of capital, and uses the following factors. What is the present value of these future cash flows? Present Value of 1 Period 14% 1 .88 2 .77 3 .67 a. b. c. d.
$29,800 $30,400 $31,450 $34,750
Ans: C, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
141.
Makoto Inc. is considering purchasing equipment costing $11,000 with a 6-year useful life. The equipment will provide cost savings of $3,100 and will be depreciated straight-line over its useful life with no salvage value. Makoto requires a 10% rate of return. Period 6
8% 4.623
Present Value of an Annuity of 1 9% 10% 11% 12% 4.486 4.355 4.231 4.111
15% 3.784
What is the approximate net present value of this investment? a. $13,925 b. $2,501 c. $1,744 d. $13,501 Ans: B, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
142.
August Inc. is considering purchasing equipment costing $45,000 with a 6-year useful life. The equipment will provide cost savings of $10,950 and will be depreciated straight-line over its useful life with no salvage value. August Inc. requires a 10% rate of return. Period 6
8% 4.623
Present Value of an Annuity of 1 9% 10% 11% 12% 4.486 4.355 4.231 4.111
15% 3.784
What is the approximate internal rate of return for this investment? a. 9% b. 10% c. 11% d. 12% Ans: D, SO: 10, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 34 Test Bank for Accounting Principles, Tenth Edition 143.
Which one of the following is correct? a. Cash flows are used to calculate the internal rate of return. b. Accrual income is used to calculate the payback period. c. Cash flows are used to calculate the annual rate of return. d. Accrual income is used to calculate the net present value.
Ans: A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
144.
If a company's required minimum rate of return is 10%, and in using the net present value method, a project's net present value is zero, this indicates that the a. project's rate of return exceeds 10%. b. project's rate of return is less than the minimum rate required. c. project earns a rate of return of 10%. d. project earns a rate of return of 0%.
Ans: C, SO: 10, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
145.
Using the net present value method, the total present value of cash inflows for Project A is $30,000 and the total present value of cash inflows of Project B is $36,000. If Project A and Project B both require an initial investment of $30,000 and have the same economic life, the project that should be accepted is a. Project A. b. Project B. c. neither; they are both the same. d. not capable of being calculated.
Ans: B, SO: 10, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
146.
Valencia Company used the net present value method and determined that project 34 had a zero net present value. What does this tell management about the project? a. The return from this project is equal to the cost of capital. b. The project guarantees company profitability. c. The project's cash inflows will equal its cash outflows. d. The project earns the company's desired minimum rate of return.
Ans: D, SO: 10, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
147.
In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash inflows were $40,000. The initial investment in the project must have been a. $40,000. b. $10,000. c. $160,000. d. an amount which cannot be determined.
Ans: C, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 148.
26 - 35
Use the following table, Present value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $420,000 and is expected to generate cash inflows of $168,000 at the end of each year for three years. The net present value of this project is a. $425,208. b. $252,000. c. $42,516. d. $5,208.
Ans: D, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
149.
Use the following table, Present value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $227,790 and is expected to generate cash inflows of $90,000 each year for three years. The approximate internal rate of return on this project is a. 8%. b. 9%. c. 10%. d. The IRR on this project cannot be approximated.
Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
150.
Use the following table, Present value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 10%. It is considering investing in a project that requires an investment of $210,000 and is expected to generate cash inflows of $90,000 at the end of each year for three years. The present value of future cash inflows for this project is a. $210,000. b. $223,830. c. $246,210. d. $13,830.
Ans: B, SO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 36 Test Bank for Accounting Principles, Tenth Edition 151.
The conceptually superior approach to capital budgeting is a. a discounted cash flow method. b. the payback method. c. the annual rate of return method. d. none of these.
Ans: A, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
152.
The appropriate table to use when an investment promises to return unequal cash flows is the a. future value of 1 table. b. future value of annuity table. c. present value of 1 table. d. present value of annuity table.
Ans: C, SO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
153.
Accounting's contribution to the decision-making process occurs in all of the following steps except to a. identify the problem and assign responsibility. b. determine possible courses of action. c. review results of the decision. d. make a decision.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
154.
It costs Galatoire Company $46 per unit ($28 variable and $18 fixed) to produce its product, which normally sells for $58 per unit. A Brazilian wholesaler offers to purchase 5,000 units at $36 each. Galatoire would incur special shipping costs of $4 per unit if the order were accepted. Galatoire has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income? a. $50,000 decrease b. $20,000 increase c. $15,000 increase d. $40,000 increase
Ans: B, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
155.
In a make-or-buy decision, opportunity costs are a. added to the make total cost. b. deducted from the make total cost. c. added to the buy total cost. d. ignored.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
156.
Which of the following would generally not affect a make-or-buy decision? a. Selling expenses b. Direct labor c. Variable manufacturing costs d. Opportunity cost
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting 157.
26 - 37
A cost that cannot be changed by any present or future decision is a(n) a. incremental cost. b opportunity cost. c. sunk cost. d. variable cost.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
158.
If an unprofitable segment is eliminated a. it is impossible for net income to decrease. b. fixed expenses allocated to the eliminated segment will be eliminated. c. variable expenses of the eliminated segment will be eliminated. d. it is impossible for net income to increase.
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
159.
All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. sales. b. variable expenses. c. contribution margin. d. fixed expenses.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
160.
In the Elian Company, contribution margin per unit is $33 for Product S and $24.75 for Product T. Product X requires 3 machine hours and Product Y requires 9 machine hours. What is the contribution margin per unit of limited resource for each product? S T a. $11.00 $2.75 b. $3.67 $30.25 c. $22.00 $5.50 d. $5.50 $5.50
Ans: A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
161.
The rate of return that management expects to pay on all borrowed and equity funds is the a. cost of capital. b. cutoff rate. c. hurdle rate. d. minimum rate.
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
162.
The cash payback formula is a. Cost of capital investment Net income. b. Cost of capital investment Annual cash inflow. c. Average investment Net income. d. Average investment Annual cash inflow.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 38 Test Bank for Accounting Principles, Tenth Edition 163.
To determine annual cash inflow, depreciation is a. subtracted from net income because it is an expense. b. subtracted from net income because it is an outflow of cash. c. added back to net income because it is an inflow of cash. d. added back to net income because it is not an outflow of cash.
Ans: D, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
164.
Net present value is the difference between the a. future cash inflows and the capital investment. b. future cash inflows and the present value of the capital investment. c. present value of future cash inflows and the capital investment. d. present value of future net income and the capital investment.
Ans: C, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
165.
A negative net present value means that the a. project's rate of return exceeds the required rate of return. b. project's rate of return is less than the required rate of return. c. project's rate of return equals the required rate of return. d. project is acceptable.
Ans: B, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.
b b c b c b b c a d b d d b a a d b d
57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.
d d b a b d a c d b b c c b a b d b c
76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.
d b b a c d b d b d d b c b d c c d d
95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113.
b d c a b a b c c b b c c c b c c c b
114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.
a b b b c c a b a a b c d c c d c d a
133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151.
d b d b b d b c b d a c b d c d b b a
152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165.
c a b a a c c d a a b d c b
For Instructor Use Only
Incremental Analysis and Capital Budgeting
26 - 39
BRIEF EXERCISES BE 166 Bayonna Inc. is considering Plan 1 which is estimated to have sales of $60,000 and costs of $22,500. The company currently has sales of $57,000 and costs of $21,000. Instructions Compare plans using incremental analysis. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 166
(3 min.)
Incremental revenue ($60,000 – $57,000) Incremental costs ($22,500 – $21,000) Incremental increase in profit if Plan 1 is selected
$3,000 (1,500) $1,500
BE 167 Parasol Enterprises produces miniature parasols. Each parasol consists of $1.20 of variable costs and $.90 of fixed costs and sells for $4.50. A French wholesaler offers to buy 8,000 units at $1.40 each, of which Pederson has the capacity to produce. Parasol will incur extra shipping costs of $.10 per bear. Instructions Determine the incremental income or loss that Parasol Enterprises would realize by accepting the special order. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 167
(5 min.)
Incremental revenue (8,000 × $1.40) Incremental variable costs ($1.20 × 8,000) Incremental shipping costs ($.10 × 8,000) Incremental profit if special order accepted
$11,200 (9,600) (800) $ 800
BE 168 R&O Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for R&O for $270 each. R&O needs 1,500 clocks annually. R&O has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (60% avoidable)
$100 110 30 150
Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 40 Test Bank for Accounting Principles, Tenth Edition Solution 168
(5 min.)
Incremental Analysis Cost to buy (1,500 × $270) Cost savings: Savings of DM $100 × 1,500 = $150,000 Savings of DL $110 × 1,500 = 165,000 Savings of VOH $30 × 1,500 = 45,000 Savings of FOH 60% × $150 × 1,500 = 135,000 Total cost savings Incremental net cost to make
Incremental Effect $(405,000)
+ 495,000 $ 95,000
BE 169 Ruelman Corporation currently manufactures 3,000 units of component XYZ annually for its main product. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$ 4.00 6.00 3.20 7.00 $22.00
Dorie Company has contacted Ruelman with an offer to sell it 3,000 components of XYZ for $17.40 each. Sixty percent of the fixed overhead per unit is unavoidable. Instructions Prepare an incremental analysis for the make-or-buy decision. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 169
(5 min.)
Incremental cost to buy Incremental savings on direct materials Incremental savings on direct labor Incremental savings on variable MOH Incremental savings on fixed MOH Incremental net cost to buy
$(52,200) + 12,000 + 18,000 + 9,600 + 8,400 $(4,200)
BE 170 Abita Quail Farm, Inc. produces a crop of heritage quail at a total cost of $66,000. The production generates 15,000 quail which can be sold for $4 each to restaurants, or the quail can be processed in house and then sold for $9 each. It costs $55,000 more to process the quail . Instructions If Abita Quail Farm processes the quail, determine how much incremental profit or loss it would report. What should Abita Quail Farm do? Ans: N/A, SO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Incremental Analysis and Capital Budgeting Solution 170
26 - 41
(4 min.)
Incremental revenues: ($9 – $4.00) × 15,000 chickens = $75,000 Incremental costs: given as $55,000 Incremental profits: $75,000 – $55,000 = $20,000 profit Abita Quail Farm should process the quail. BE 171 Southern Company has a machine that affixes labels to bottles. The machine has a book value of $60,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $210,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $500,000 to $390,000. Instructions Prepare an analysis showing whether the old machine should be retained or replaced. Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 171
(4 min.)
Variable manufacturing costs New machine cost Net savings over 3 years
Retain Equipment $1,500,000
Replace Equipment $1,170,000
Net Income Change $330,000* (210,000) $ 120,000
*For 3 years of remaining life BE 172 Southern States Dairy Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow: Sour Cream Units sold 2,000 Revenue $10,000 Variable departmental costs 6,000 Fixed costs 5,000 Net income (loss) $ (1,000)
Ice Cream 500 $20,000 13,000 2,000 $ 5,000
Yogurt 400 $10,000 4,200 3,000 $ 2,800
Butter 200 $20,000 4,800 7,000 $ 8,200
Total 3,100 $60,000 28,000 17,000 $15,000
Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 172
(4 min.)
Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5,000 x .40) Incremental decrease in profits if dropped
$(10,000) + 6,000 + 2,000 $ (2,000)
For Instructor Use Only
26 - 42 Test Bank for Accounting Principles, Tenth Edition BE 173 Gisenberry Company provided the following information concerning two products: Contribution margin per unit—Product 12 Contribution margin per unit—Product 43 Machine hours required for one unit—Product 12 Machine hours required for one unit—Product 43
$23 $15 2.5 hours 1.5 hours
Instructions Compute the contribution margin per unit of limited resource for each product. Which product should Gisenberry tell its sales personnel to ‘push’ to customers? Ans: N/A, SO: 8, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 173
(4 min.)
Product 12: $23 ÷ 2.5 hours = $9.20 Product 43: $15 ÷ 1.5 hours = $10 Therefore, sales personnel should push Product 43. BE 174 Delta Co. is considering investing in new equipment that will cost $1,400,000 with a 10-year useful life. The new equipment is expected to produce annual net income of $90,000 over its useful life. Depreciation expense, using the straight-line rate, is $140,000 per year. Instructions Compute the cash payback period. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 174
(3 min.)
$1,400,000 ÷ ($90,000 + $140,000) = 6.1 years BE 175 Handy Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $240,000, but will also increase annual expenses by $160,000. The facility will cost $980,000 to build, but will have a $20,000 salvage value at the end of its 20-year useful life. Instructions Calculate the annual rate of return on this facility. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting Solution 175
26 - 43
(4 min.)
The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s expected annual income is: $240,000 – $160,000 = $80,000 Its average investment is: $980,000 + $20,000 ————————— = $500,000 2 Therefore, its annual rate of return is: $80,000 ÷ $500,000 = 16% BE 176 Nantucket Company is proposing to spend $140,000 to purchase a machine that will provide annual cash flows of $25,000. The appropriate present value factor for 10 periods is 5.65. Instructions Compute the proposed investment’s net present value, and indicate whether the investment should be made by Nantucket Company. Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 176
(4 min.)
Cash inflows—$25,000 × 5.65 Cash outflow—investment $140,000 × 1.00 Net present value
Present Value $141,250 (140,000) $ 1,250
The investment should be made because the net present value is positive. BE 177 An investment costing $90,000 is being contemplated by Mergenthaler Inc. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16,870. Instructions Compute the approximate internal rate of return for this investment. (Table C-2 is needed) Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 177
(3 min.)
When net annual cash inflows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. $90,000 ÷ $16,870 = 5.33 By tracing across on the 8-year row, we see that the discount factor for 10% is 5.33493. Thus, the internal rate of return on this project is approximately 10%. For Instructor Use Only
26 - 44 Test Bank for Accounting Principles, Tenth Edition
EXERCISES Ex. 178 Fromherz Company produced and sold 50,000 units of product and is operating at 80% of plant capacity. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost ($500,000 ÷ 50,000) Profit per unit
$68 $42 10
52 $16
The company received a proposal from a Danish company to buy 10,000 units of Fromherz Company's product for $49 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Fromherz Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 178
(9–13 min.) FROMHERZ COMPANY Incremental Analysis Proposal to sell 10,000 units at $49
Revenues (10,000 × $49) Costs (10,000 × $42) Net Income
Reject Order $ -0-0$ -0-
Accept Order $490,000 (420,000) $ 70,000
Net Income Increase (Decrease) $490,000 (420,000) $ 70,000
Fromherz Company would increase its income by $70,000 in accepting the special order. Ex. 179 Good Home Company manufactures cappuccino makers. For the first ten months of 2012, the company reported the following operating results while operating at 80% of plant capacity: Sales (500,000 units) Cost of goods sold Gross profit Operating expenses Net income
$90,000,000 54,000,000 36,000,000 24,000,000 $12,000,000
An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit.
For Instructor Use Only
Incremental Analysis and Capital Budgeting Ex. 179
26 - 45
(Cont.)
In November, Good Home Company receives a special order for 30,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Good Home Company accept the special order? Justify your answer. Ans: N/A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 179
(12–17 min.)
(a) Revenues Cost of Goods Sold Operating Expense Net Income
Reject Order $ -0-0-0$ -0-
Accept Order $4,050,000 2,850,000* 1,060,000** $ 140,000
Net Income Increase (Decrease) $4,050,000 (2,850,000) (1,060,000) $ 140,000
*Variable cost of goods sold = 30,000 × $95 = $2,850,000. **Variable operating expenses = 30,000 × $35 = $1,050,000 + $10,000 = $1,060,000. (b) The incremental analysis shows Good Home Company should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. Ex. 180 Jim-Matt Company supplies schools with floor mattresses to use in physical education classes. Jim-Matt has received a special order from a large school district to buy 700 mats at $55 each. Acceptance of the special order will not affect fixed costs but will result in $1,400 of shipping costs. For the first 7 months of 2010, the company reported the following operating results while operating at 75% capacity: Sales (100,000 units) Cost of goods sold Gross profit Operating expenses Net income
$9,000,000 5,300,000 3,700,000 2,500,000 $ 1,200,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and 25% fixed. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Jim-Matt Company accept the special order? Justify your answer. Ans: N/A, SO: 3, Bloom: E, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 46 Test Bank for Accounting Principles, Tenth Edition Solution 180
(13–18 min.)
(a) Revenues Cost of Goods Sold Operating Expense Net Income
Reject Order $ -0-0-0$ -0-
Accept Order $38,500 25,970 14,525 $ (1,995)
Net Income Increase (Decrease) $38,500 (25,970) (14,525) $ (1,995)
Variable cost of goods sold = $5,300,000 × 70% = $3,710,000. Variable cost of goods sold per unit = $3,710,000 ÷ 100,000 = $37.10. Variable cost of goods sold for the special order = 700 × $37.10 = $25,970. Variable operating expenses = $2,500,000 × 75% = $1,875,000 Variable operating expenses per unit = $1,875,000 ÷ 100,000 = $18.75 Variable operating expenses for the special order = 700 × $18.75 = $13,125 + $1,400 = $14,525 (b)
The incremental analysis shows Jim-Matt Company should not accept the special order because incremental costs exceed incremental revenues.
Ex. 181 Charleston Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is: Materials Labor Variable overhead Fixed overhead Total
$ 10,000 30,000 20,000 40,000 $100,000
Charleston also incurs 5% sales commission ($0.30) on each disc sold. Lundy Corporation offers Charleston $4.25 per disc for 5,000 discs. Lundy would sell the discs under its own brand name in foreign markets not yet served by Charleston. If Charleston accepts the offer, its fixed overhead will increase from $50,000 to $55,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Charleston accept the special order? Why or why not? Ans: N/A, SO: 3, Bloom: E, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 181
(12 min.)
(a) Revenues Materials ($0.40) Labor ($1.20) Variable overhead ($0.80) Fixed overhead Sales commissions Net income
Reject Order $ -0-0-0-0-0-0$ -0-
Accept Order $21,250 (2,000) (6,000) (4,000) (5,000) -0$ 4,250
For Instructor Use Only
Net Income Effect $21,250 (2,000) (6,000) (4,000) (5,000) -0$ 4,250
Incremental Analysis and Capital Budgeting Ex. 181 (b)
26 - 47
(Cont.)
As shown in the incremental analysis, Charleston should accept the special order because incremental revenue exceeds incremental expenses by $4,250.
Ex. 182 Kaizen Inc. budgeted to produce 10,000 widgets during 2010. Kaizen has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr. × 2 hrs./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $45
$ 70,000 300,000 30,000 50,000 $450,000
Instructions Answer each of the following independent questions: 1. Kaizen received an order for 1,000 units from a new customer in a country in which Kaizen has never done business. This customer has offered $43 per widget. Should Kaizen accept the order? 2. Kaizen received an offer from another company to manufacture the same quality widgets for $39. Should Kaizen let someone else manufacture all 10,000 widgets and focus only on distribution? Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 182
(10–12 min.)
1. Yes, Kaizen can make an extra $3,000. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $3 = Incremental profit per unit
$43 40 $ 3
Total incremental profit = $3 × 1,000 = $3,000 2. Yes, Kaizen will save $10,000 if it buys instead of makes. Cost to buy per widget Cost to make per widget: $7 + ($15 × 2) + $3 = Incremental savings per widget if purchased
$39 40 $ 1
Total incremental savings if purchased = $1 × 10,000 = $10,000
For Instructor Use Only
26 - 48 Test Bank for Accounting Principles, Tenth Edition Ex. 183 Wilmington Company manufactured 5,000 units of a component part that is used in its product and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead
$35,000 25,000 20,000 15,000 $95,000
Another company has offered to sell the same component part to the company for $17.50 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Wilmington Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $19,000. Instructions Prepare an incremental analysis report for Wilmington Company which can serve as informational input into this make or buy decision. Ans: N/A, SO: 4, Bloom: E, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 183
(13–18 min.)
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (5,000 × $17.50) Total annual cost Opportunity cost Total cost
Make $35,000 25,000 20,000 15,000 -095,000 19,000 $114,000
Buy $ -0-0-015,000 87,500 102.500 -0$102,500
Increase (Decrease) $ 35,000 25,000 20,000 -0(87,500) (7,500) 19,000 $11,500
Income is expected to increase by $11,500 if the component part is purchased from the outside firm and the new product is manufactured. Ex. 184 Troutman Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$10 20 7 9 $36
Fez Company has contacted Troutman with an offer to sell it 6,000 of the subassemblies for $30 each. If Troutman makes the subassemblies, $4 of the fixed overhead per unit will be allocated to other products. For Instructor Use Only
Incremental Analysis and Capital Budgeting Ex. 184
26 - 49
(Cont.)
Instructions Should Troutman make or buy the subassemblies? Explain your answer. Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
Solution 184
(6 min.)
Cost to make - cost to buy = incremental cost ($36 – $4) – $30 = $2 Incremental cost to make = $2 × 6,000 units = $12,000 Troutman should buy to save $2 per unit. Ex. 185 Uptown Unicycle Company has been manufacturing its own seats for its unicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 unicycles per year. A supplier offers to make the unicycle seats at a price of $20 each. If the unicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the unicycle seats will have to be absorbed by other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Uptown Unicycle Company buy the seats from the outside supplier? Justify your answer. Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management
Solution 185
(15–20 min.)
(a) Direct Materials (50,000 × $8) Direct Labor (50,000 × $9) Variable Manufacturing Costs ($450,000 × 60%) Fixed Manufacturing Costs Purchase Price (50,000 × $20) Total annual cost
Make $ 400,000 450,000
Buy $ -0-0-
Net Income Increase (Decrease) $ 400,000 450,000
270,000 30,000 -0$1,150,000
-030,000 1,000,000 $1,030,000
270,000 -0(1,000,000) $ 120,000
(b) The seats should be purchased from the outside supplier. As indicated, the company's net income would increase $120,000 by purchasing the seats.
For Instructor Use Only
26 - 50 Test Bank for Accounting Principles, Tenth Edition Ex. 186 Gulf States Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2010, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$6.00 1.20 .80 .60 $8.60
The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. Ans: N/A, SO: 5, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 186
(15–20 min.) Sell Chemical $11.00
Process Further $15.00
6.00 1.20 .80 .60 8.60 $ 2.40
7.70 1.80 1.30 .60 11.40 $ 3.60
Sales price per unit Cost per unit: Direct materials (A) Direct labor (B) Variable manufacturing overhead (C) Fixed manufacturing overhead Total Net income per unit
Net Income Increase (Decrease) $4.00 (1.70) (.60) (.50) — (2.80) $1.20
(A) $6.00 + $1.70 (B) $1.20 + $.60 (C) $.80 + $.50 Assuming the company sells all 40,000 gallons that it produces, the incremental net income would be $48,000 (40,000 gallons × $1.20). Ex. 187 Happy Cow Dairy Inc. produces milk at a total cost of $75,000. The production generates 55,000 gallons of organic milk which can be sold for $2 per gallon to a pasteurization company, or the milk can be processed further into ice cream and then sold for $4.50 per gallon. It costs $90,000 more to turn the annual milk supply into ice cream.
For Instructor Use Only
Incremental Analysis and Capital Budgeting Ex. 187
26 - 51
(Cont.)
Instructions If Happy Cow processes the milk into ice cream, how much is the incremental profit or loss? Should Happy Cow process the milk into ice cream or sell it as is? Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 187
(6 min.)
Incremental revenues: ($4.50 – $2.00) × 55,000 gallons = $137,500 Incremental costs: given as $90,000 Incremental profits: $137,500 – $90,000 = $47,500 profit Happy Cow should process into ice cream. Ex. 188 Go Light Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. Direct materials Direct labor Variable overhead (70% of direct labor) Fixed overhead (30% of direct labor) Manufacturing cost per unit
$150 70 49 21 $290
The unassembled bikes are sold to retailers at $400 each. Go Light currently has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. (b) Should Go Light sell or process further? Why or why not? Ans: N/A, SO: 5, Bloom: E, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 188
(12 min.)
(a)
Sales per unit Costs per unit Materials Labor Variable overhead (70%) Fixed overhead Total Net income per unit
Sell $400
Process Further $440
Net Income Increase (Decrease) $ 40
150 70 49 21 $290 $110
155 80 56 21 312 $128
(5) (10) (7) -0(22) $ 18
For Instructor Use Only
26 - 52 Test Bank for Accounting Principles, Tenth Edition Ex. 188
(Cont.)
(b) As shown in the incremental analysis, Go Light Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit. Ex. 189 Hill Lumber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable, resulting in significant downtime and wasted labor costs. Management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life
Old Machine $325,000 230,000 4 years
New Machine $405,000 — 4 years
It is estimated that the new machine will produce annual cost savings of $107,000. The old machine can be sold to a scrap dealer for $11,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Instructions Determine whether the company should purchase the new machine. Ans: N/A, SO: 6, Bloom: AN, Difficulty: Medium, Min: 11, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 189
(11–16 min.)
Cost savings New machine cost Proceeds from sale of old machine Net incremental net income
Retain Equipment $ -0-0$ -0$ -0-
Replace Net Income Equipment Increase/(Decrease) $428,000 (A) $428,000 (405,000) (405,000) 11,000 11,000 $ 34,000 $ 34,000
(A) $107,000 × 4 = $428,000. The company should purchase the new machine because there will be an increase in net income of $34,000. Ex. 190 Crescent City Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life
Current Copier $15,000 12,000 9,000 4 years
New Model $21,000 — 3,500 4 years
If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years.
For Instructor Use Only
Incremental Analysis and Capital Budgeting Ex. 190
26 - 53
(Cont.)
Instructions Prepare an analysis to show whether the company should retain or replace the machine. Ans: N/A, SO: 6, Bloom: E, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 190
(12–16 min.)
Operating costs New machine cost Salvage value Totals
Retain Machine $36,000 -0-0$36,000
Replace Machine $14,000 21,000 (1,000) $34,000
Net Income Increase (Decrease) $22,000 (21,000) 1,000 $ 2,000
The current copier should be replaced. The incremental analysis shows that net income for the five-year period will be $2,000 higher by replacing the current copier. Ex. 191 Tri-Cities Inc. has three divisions: Boone, Lenoir, and Hickory. The results of August, 2012 are presented below. Boone Lenoir Hickory Total Units sold 3,000 5,000 2,000 10,000 Revenue $70,000 $50,000 $40,000 $160,000 Less variable costs 32,000 26,000 16,000 74,000 Less direct fixed costs 14,000 19,000 12,000 45,000 Less allocated fixed costs 6,000 10,000 4,000 20,000 Net income $18,000 $ (5,000) $ 8,000 $ 21,000 All of the allocated costs will continue even if a division is discontinued. Tri-Cities allocates indirect fixed costs based on the number of units to be sold. Since the Lenoir division has a net loss, Tri-Cities feels that it should be discontinued. Tri-Cities feels if the division is closed, that sales at the Boone division will increase by 10%, and that sales at the Hickory division will stay the same. Instructions (a) Prepare an analysis showing the effect of discontinuing the Lenoir division. (b) Should Tri-Cities close the Lenoir division? Briefly indicate why or why not. Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 191
(10–12 min.)
(a) Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income
Boone $77,000 35,200 14,000 12,453 $15,347
Hickory $40,000 16,000 12,000 7,547 $ 4,453
For Instructor Use Only
Total $117,000 51,200 26,000 20,000 $ 19,800
26 - 54 Test Bank for Accounting Principles, Tenth Edition Solution 191
(Cont.)
Calculations: Revenue = $70,000 × 110% = $77,000 Variable costs = $32,000 × 110% = $35,200 Allocation of total allocated fixed costs of $20,000: To Boone: [3,300 ÷ (3,300 + 2,000)] × $20,000 = $12,453 To Hickory: [2,000 ÷ (3,300 + 2,000)] × $20,000 = $7,547 (b) No. The profit decreases by $1,200 ($21,000 – $19,800) when the division is eliminated. The increase in sales by 10% of the Boone division was not enough to offset the loss of the Lenoir division. Ex. 192 Texas Forest Corporation operates two divisions, the Commercial Division and the Consumer Division. The Commercial Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2012 are presented below:
Sales Cost of goods sold Gross profit Selling & administrative expenses Net income
Commercial $1,500,000 900,000 600,000 250,000 $ 350,000
Consumer $500,000 350,000 150,000 180,000 $ (30,000)
Total $2,000,000 1,250,000 750,000 430,000 $ 320,000
In the Consumer Division, 70% of cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs. The management of the company feels it can save $45,000 of fixed cost of goods sold and $60,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. (b) If the company had discontinued the division for 2012, determine what net income would have been. Ans: N/A, SO: 7, Bloom: E, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting Solution 192
(20–25 min.)
(a)
CONSUMER DIVISION
Sales Variable expenses: Cost of goods sold Selling and admin. exp. Contribution margin Fixed expenses: Cost of goods sold Selling and admin. exp. Net income (A) (B)
26 - 55
Continue $500,000
Net Income Increase (Decrease) $(500,000)
Eliminate $ -0-
245,000 (A) 45,000 (B) 210,000
-0-0-0-
245,000 45,000 (210,000)
105,000 (C) 135,000 (D) $ (30,000)
60,000 75,000 $(135,000)
45,000 60,000 $(105,000)
$350,000 × 70% = $245,000 $180,000 × 25% = $45,000
(C) (D)
$350,000 – $245,000 = $105,000 $180,000 – $45,000 = $135,000
The company should continue the Consumer Division because contribution margin, $210,000, is greater than the avoidable fixed costs, $105,000. (b)
Net income for the total company would have been $245,000: Commercial Division + Decrease in Net Income $350,000 + $(105,000) = $245,000
Ex. 193 Black Bear Merchandising Inc. has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below: Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)
Books $24,000 16,000 4,000 5,000 $ (1,000)
Music $40,000 21,000 6,000 5,000 $ 8,000
Videos $28,000 12,000 3,000 5,000 $ 8,000
Total $92,000 49,000 13,000 15,000 $ 15,000
The allocated fixed costs are unavoidable. Demand for individual products is not affected by changes in other product lines. Instructions What will happen to profits if Black Bear discontinues the Books product line? Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 193
(6 min.)
Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued
$(24,000) + 16,000 + 4,000 $ (4,000)
For Instructor Use Only
26 - 56 Test Bank for Accounting Principles, Tenth Edition Ex. 194 A recent accounting graduate from East Southwest State University evaluated the operating performance of Postell Company's four divisions. The following presentation was made to Postell's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Northern Division stating that total net income would increase by $60,000. (See analysis below.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
Other Three Divisions $2,000,000 950,000 1,050,000 800,000 $ 250,000
Northern Division $480,000 400,000 80,000 140,000 $ (60,000)
Total $2,480,000 1,350,000 1,130,000 940,000 $ 190,000
For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Northern Division is 35% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $10,000 of the fixed operating costs will be eliminated. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. Ans: N/A, SO: 7, Bloom: E, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 194
(20–25 min.)
Sales Variable Expenses Cost of goods sold Operating expenses Total Variable Contribution Margin Fixed Expenses Cost of goods sold Operating expenses Net Income (Loss)
Net Income Increase (Decrease) $(480,000)
Continue $480,000
Eliminate $ -0-
260,000 35,000 295,000 185,000
-0-0-0-0-
260,000 35,000 295,000 (185,000)
140,000 105,000 $ (60,000)
140,000 95,000 $(235,000)
-010,000 $(175,000)
The accountant is not correct. If the Northern Division is eliminated, the net income will be $175,000 less, not $60,000 greater. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10,000.
For Instructor Use Only
Incremental Analysis and Capital Budgeting
26 - 57
Ex. 195 Charlotte Manufacturing Company has 8,000 machine hours available to use to produce either Product A or Product B. The cost accounting department developed the following unit information for each of the products: Product A Product B Sales price $57 $71 Direct materials 19 21 Direct labor 15 14 Variable manufacturing overhead 8 12 Fixed manufacturing overhead 3 6 Machine hours required .6 1.2 Management desires to make a decision regarding which product to produce in order to maximize the company's income. Instructions Taking into consideration the constraint under which the company operates, prepare a report to show which product should be produced and sold. Ans: N/A, SO: 8, Bloom: E, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 195
(20–25 min.) CHARLOTTE MANUFACTURING COMPANY Contribution Margin per Unit Limited Resource
Contribution margin per unit: Sales price Variable costs Direct material Direct labor Variable overhead Contribution margin
Product A
Product B $57
$19 15 8
42 $15
Machine hours required:
$71 $21 14 12
47 $24
.6 hrs.
Contribution margin per unit of limited resource ($15 ÷ .6) ($24 ÷ 1.2) Machine hours available Contribution margin
$
1.2 hrs.
25 $
8,000 $200,000
20 8,000 $160,000
The company should produce and sell Product A. Ex. 196 Houston Company manufactures and sells two products. Relevant per unit data concerning each product are given below: Product Basic Superior Selling price $33.60 $38.40 Variable costs $12.00 $14.40 Machine hours 4.8 6 For Instructor Use Only
26 - 58 Test Bank for Accounting Principles, Tenth Edition Ex. 196
(Cont.)
Instructions (a) Compute the contribution margin per unit of the limited resource for each product. (b) If 1,200 additional machine hours are available, which product should be manufactured? (c) Prepare an analysis showing the total contribution margin if the additional hours are (1) Divided equally among the products. (2) Allocated entirely to the product identified in (b) above. Ans: N/A, SO: 8, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 196
(25–30 min.)
(a)
Product Contribution margin per unit (a) Machine hours required (b) Contribution margin per unit of limited resource (a) ÷ (b)
Basic $21.60 4.8 $4.50
Superior $24.00 6 $4.00
(b) The Standard product should be manufactured because it results in the highest contribution margin per machine hour. (c) (1)
Product Basic 600 4.8 125 $21.60 $2,700
Machine hours 1,200 ÷ 2 (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin (2) Machine hours (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin
Superior 600 6 100 $24.00 $2,400
Product Basic 1,200 4.8 250 $21.60 $5,400
Ex. 197 Senegal Company estimates the following cash flows and depreciation on a project that will cost $200,000 and will last 10 years with no salvage value: Revenues Sales Operating expenses Salary expense Depreciation expense Miscellaneous expenses Net Income
$70,000 $32,000 20,000 8,000
For Instructor Use Only
60,000 $10,000
Incremental Analysis and Capital Budgeting Ex. 197
26 - 59
(Cont.)
Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer. (b) Calculate the cash payback on this project showing calculations to support your answer. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 197
(9–14 min.)
(a) Annual rate of return is 10%. $200,000 Average investment = ———— = $100,000 2 $10,000 Annual rate of return = ———— = 10% $100,000 (b) Cash payback period is 6.67 years. Investment $200,000 Annual cash inflow ($10,000 + $20,000) $30,000 Cash payback = $200,000 ÷ $30,000 = 6.67 years Ex. 198 Watauga Medical Center is considering purchasing an ultrasound machine for $1,135,000. The machine has a 10-year life and an estimated salvage value of $40,000. Installation costs and freight charges will be $24,200 and $800, respectively. The Center uses straight-line depreciation. The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $850. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. Instructions (a) Compute the payback period for the new ultrasound machine. (b) Compute the annual rate of return for the new machine. Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 198
(16–22 min.)
(a) Cost of the ultrasound machine: $1,135,000 + $24,200 + $800 = $1,160,000 Annual Cash Flow: Number of procedures: 52 × 5 = 260 Contribution margin per procedure: $850 – $10 – $40 = $800 Total annual cash flow: 260 × $800 = $208,000
For Instructor Use Only
26 - 60 Test Bank for Accounting Principles, Tenth Edition Solution 198
(Cont.)
$1,160,000 Cash payback: ————— = 5.6 years $208,000 (b)
$1,160,000 + $40,000 Average Investment: —————————— = $600,000 2 $1,160,000 – $40,000 Annual Depreciation: —————————— = $112,000 10 years Annual Net Income: $208,000 – $112,000 = $96,000 $96,000 Average Annual Rate of Return: ———— = 16% $600,000
Ex. 199 Mooresville Service Center just purchased an automobile hoist for $16,900. The hoist has a 5year life and an estimated salvage value of $1,250. Installation costs were $3,770, and freight charges were $960. Laramie uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Mooresville estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $84.50 installed. The cost of a muffler is $45.50, and the labor cost to install a muffler is $13. Instructions (a) Compute the payback period for the new hoist. (b) Compute the annual rate of return for the new hoist. (Round to one decimal.) Ans: N/A, SO: 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 199
(10 min.)
(a) Cost of hoist: $16,900 + $3,770 + $960 = $21,630. Net annual cash flow: Number of extra mufflers: 4 × 52 weeks Contribution margin per muffler ($84.50 – $45.50 – $13) Total net annual cash flow: (a) × (b) Cash payback = $21,630 ÷ $5,408 = 4 years.
(a) (b)
(b) Average investment: ($21,630 + $1,250) ÷ 2 = $11,440. Annual depreciation: ($21,630 – $1,250) ÷ 5 = $4,076. Annual net income: $5,408 – $4,076 = $1,332. Average annual rate of return = $1,332 ÷ $11,440 = 11.6% (rounded).
For Instructor Use Only
208 $ 26 $5,408
Incremental Analysis and Capital Budgeting
26 - 61
Ex. 200 Fosco Manufacturing Company is considering three new projects, each requiring an equipment investment of $20,000. Each project will last for 3 years and produce the following cash inflows. Year 1 2 3 Total
AA $ 7,000 9,000 15,000 $31,000
BB $ 9,500 9,500 9,500 $28,500
CC $11,000 10,000 9,000 $30,000
The equipment's salvage value is zero. Fosco uses straight-line depreciation. Fosco will not accept any project with a payback period over 2 years. Fosco's minimum required rate of return is 12%. Instructions (a) Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.) Ans: N/A, SO: 9,10, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 200
(25 min.)
(a)
Year 1 2 3
AA Annual Net Cash Flow $ 7,000 9,000 15,000
Cumulative Net Cash Flow $ 7,000 16,000 31,000
Cash payback 2.27 years $20,000 – $16,000 = $4,000 $4,000 ÷ $15,000 = .27 BB 20,000 ÷ (28,500 ÷ 3) = 2.11 years CC Year 1 2 3
$11,000 10,000 9,000
$11,000 21,000 30,000
Cash payback 1.9 years $20,000 – 11,000 = $9,000 $9,000 ÷ $10,000 = .9
For Instructor Use Only
26 - 62 Test Bank for Accounting Principles, Tenth Edition Solution 200
(Cont.)
The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.9 years. (b)
Discount Year Factor 1 .89286 2 .79719 3 .71178 Total present value Investment Net present value
AA Net Annual Cash Present Flow Value $ 7,000 $ 6,250 9,000 7,175 15,000 10,677 24,102 20,000 $ 4,102
BB Net Annual Cash Flow $9,500 9,500 9,500
CC
Present Net Cash Value Flow $ 8,482 $11,000 7,573 10,000 6,762 9,000 22,817(1) 20,000 $ 2,817
Present Value $ 9,821 7,972 6,406 24,199 20,000 $ 4,199
(1) This total may also be obtained from Table 2: $9,500 2.40183 = $22,817. Project CC is still the most desirable project. Also, on the basis of net present values, all of the projects are acceptable. Project BB is the least desirable. Ex. 201 Medici Company is considering a capital investment of $300,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $27,000 and $87,000, respectively. Medici has an 11% cost of capital rate, which is the minimum acceptable rate of return on the investment. Instructions (Round to two decimals.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. (b) Using the discounted cash flow technique, compute the net present value. Ans: N/A, SO: 9,10, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 201 (a)
(16 min.)
(1)
Annual rate of return: $27,000 ÷ [(300,000 + $0) ÷ 2] = 18%
(2)
Cash payback: $300,000 ÷ $87,000 = 3.45 years.
(b) Item Net annual cash flows Capital investment Positive net present value
Amount $ 87,000 $300,000
Years 1-5 Now
PV Factor 3.60478 1.00000
For Instructor Use Only
Present Value $313,616 300,000 $ 13,616
Incremental Analysis and Capital Budgeting
26 - 63
Ex. 202 McGee Corporation recently purchased a new machine for its factory operations at a cost of $840,000. The investment is expected to generate $250,000 in annual cash flows for a period of five years. The required rate of return is 12%. The new machine is expected to have zero salvage value at the end of the five-year period. Instructions Calculate the internal rate of return. (Table 2 from Appendix C is needed.) Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 202
(4 min.)
IRR = Capital investment ÷ Annual cash inflows = Factor $840,000 ÷ $250,000 = 3.36. This factor is found in the PVA table at n = 5 periods. IRR = 15% Ex. 203 Greyton Company is considering two new projects, each requiring an equipment investment of $72,000. Each project will last for three years and produce the following annual net income. Year 1 2 3
TIP $ 6,000 9,000 14,000 $29,000
TOP $ 9,000 9,000 9,000 $27,000
The equipment will have no salvage value at the end of its three-year life. Greyton Company uses straight-line depreciation. Greyton requires a minimum rate of return of 12%. Present value data are as follows: Present Value of 1 Period 12% 1 .893 2 .797 3 .712
Present Value of an Annuity of 1 Period 12% 1 .893 2 1.690 3 2.402
Instructions (a) Compute the net present value of each project. (b) Which project should be selected? Why? Ans: N/A, SO: 10, Bloom: E, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 203 (a) Year 1 2 3
(22–27 min.) Project TIP Annual Cash Inflows* Present Value of 1 $ 30,000 .893 33,000 .797 38,000 .712 $101,000
*Net income plus annual depreciation of $24,000.
For Instructor Use Only
Present Value $26,790 26,301 27,056 $80,147
26 - 64 Test Bank for Accounting Principles, Tenth Edition Solution 203
(Cont.)
Present value of future cash inflows Capital investment Positive net present value
$80,147 72,000 $ 8,147
Project TOP Present value of future cash inflows ($33,000 × 2.402) Capital investment Positive net present value
$79,266 72,000 $ 7,266
(b) Both projects are acceptable because both show a positive net present value. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value. Ex. 204 Jezak Company is considering investing in a project that will cost $129,600 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $36,000 each year. The company has a hurdle or cutoff rate of return of 8% and uses the following compound interest table: Present Value of an Annuity of 1 Period 5
6% 4.212
8% 3.993
10% 3.791
12% 3.605
15% 3.352
Instructions Using the internal rate of return method, determine if this project is acceptable by calculating an approximate interest yield for the project. Ans: N/A, SO: 10, Bloom: E, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 204
(6–11 min.)
Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $129,600 ————$36,000
= 3.60
Since the calculated internal rate of return factor of 3.60 is very near the factor 3.605 for five periods and 12% interest, this project has an approximate interest yield of 12%, and is therefore acceptable because it is greater than the company's cutoff rate of 8%. Ex. 205 Hiro Company has money available for investment and is considering two projects each costing $70,000. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow: Project A Project B Year 1 $ 8,000 $28,000 Year 2 24,000 28,000 Year 3 52,000 28,000 For Instructor Use Only
Incremental Analysis and Capital Budgeting Ex. 205
26 - 65
(Cont.)
Instructions If 8% is an acceptable earnings rate, which project should be selected? Justify your response. (Table 1 from Appendix C is needed.) Ans: N/A, SO: 10, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 205
(12 min.)
Project B is acceptable since its net present value is positive. This indicates that project B provides a return greater than the company's minimum expected return of 8%. Project A earns less than an 8% return. Project A Year 1 $8,000 × .926 = Year 2 $24,000 × .857 = Year 3 $52,000 × .794 = Present value of cash inflows Cash purchase price Net present value of project A
$ 7,408 20,568 41,288 69,264 (70,000) $ (736)
Project B Year 1 $28,000 × .926 = Year 2 $28,000 × .857 = Year 3 $28,000 × .794 = Present value of cash inflows Cash purchase price Net present value of project B
$25,928 23,996 22,232 72,156 (70,000) $ 2,156
COMPLETION STATEMENTS 206. An important purpose of management accounting is to provide _____________________ for decision making. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Interaction, IMA: Business Economics
207. The process used to identify the financial data that change under alternative courses of action is called __________________ analysis. Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
208. In a decision on whether an order should be accepted at a special price when there is plant capacity available, a major consideration is whether the special price exceeds __________________. Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
209. The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
26 - 66 Test Bank for Accounting Principles, Tenth Edition 210. A decision whether to sell a product now or to process it further, depends on whether the incremental _____________ from processing further are greater than the incremental processing ______________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
211. The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
212. In an environment where there are limited resources, the products with the highest contribution per unit of ______________ should identify the products to be produced. Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
213. The process of making capital expenditure decisions in business is called ___________. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
214. Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________, (2) _________________, and (3) ___________________. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
215. A major limitation of the annual rate of return approach is that it does not consider the _______________ of money. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
216. The technique which identifies the time period required to recover the cost of the investment is called the ________________ method. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
217. The two discounted cash flow techniques used in capital budgeting are (1) the _______________________ method and (2) the ______________________ method. Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
218. Knowledge of the ______________________ is necessary when discounting future cash flows under the net present value approach. Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
219. In using the net present value approach, a project is acceptable if the project's net present value is ____________ or _______________. Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
220. The internal rate of return method differs from the net present value method in that it results in finding the ___________________ of the potential investment. Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
Incremental Analysis and Capital Budgeting
26 - 67
Answers to Completion Statements 206. 207. 208. 209. 210. 211. 212. 213.
relevant information incremental (differential) variable costs (incremental costs) opportunity revenues, costs book, sunk limited resource capital budgeting
214. annual rate of return, cash payback, discounted cash flow 215. time value 216. cash payback 217. net present value, internal rate of return 218. required rate of return 219. zero, positive 220. interest yield
MATCHING 221. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Incremental analysis Opportunity cost Discounted cash flow technique Capital budgeting Annual rate of return technique
F. G. H. I. J.
Cash payback technique Hurdle or cutoff rate Net present value method Sunk cost Internal rate of return method
____
1. A cost that cannot be changed by any present or future decision.
____
2. A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money.
____
3. A method used in capital budgeting in which cash inflows are discounted to their present value and then compared to the capital outlay required by the capital investment.
____
4. The process of identifying the financial data that change under alternative courses of action.
____
5. A method used in capital budgeting that results in finding the interest yield of the potential investment.
____
6. The minimum rate of return management requires on an investment.
____
7. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment.
____
8. The potential benefit that may be lost from following an alternative course of action.
____
9. The process of making capital expenditure decisions in business.
____ 10. A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual cash inflow produced by the investment. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
For Instructor Use Only
26 - 68 Test Bank for Accounting Principles, Tenth Edition
Answers to Matching 1. 2. 3. 4. 5.
I C H A J
6. 7. 8. 9. 10.
G E B D F
SHORT-ANSWER ESSAY QUESTIONS S-A E 222 Management is often faced with the alternative of continuing to make a product or component internally, or going to an external source and purchasing the product or component. In gathering relevant information for these two alternatives, briefly identify the quantitative factors that should be considered. Are there any qualitative factors that should also be considered? Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 222 The quantitative factors to be considered in a make or buy decision include the incremental costs to make the product, the incremental costs of buying the product, and the opportunity cost (potential benefit foregone) if the product is made. Generally, all variable production costs are relevant in a make or buy decision, but only some fixed costs, or no fixed costs, are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. S-A E 223 Management uses several capital budgeting approaches in evaluating projects for possible investment. Identify those approaches that are more desirable from a conceptual standpoint, and briefly explain what features these approaches have that make them more desirable than other approaches. Also identify the least desirable approach and explain its major weaknesses. Ans: N/A, SO: 10, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 223 From a conceptual standpoint, the discounted cash flow methods (net present value and internal rate of return) are considered more desirable because they consider both the estimated cash flows and the time value of money. The time value of money is critical because of the long-term impact of capital budgeting decisions. Capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback. The cash payback method is the least desirable because it also ignores the expected profitability of the project.
For Instructor Use Only
Incremental Analysis and Capital Budgeting
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S-A E 224 Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision? Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 224 Opportunity cost may be defined as the potential benefit that may be obtained by following an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income. S-A E 225 Sandy Everhart is trying to understand the term "cost of capital." Define the term, and indicate its relevance to the decision rule under the annual rate of return technique. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 225 Cost of capital is the rate of return that management expects to pay on all borrowed and equity funds. The decision rule is: A project is acceptable if its rate of return is greater than or equal to management's minimum rate of return (which often is its cost of capital), and the project is unacceptable when the rate of return is less than the minimum rate of return. S-A E 226 (Ethics) Susan Bosco is on the capital budgeting committee for her company, Magnificent Tile. Bill Baumhauer is an engineer for the firm. Bill expresses his disappointment to Susan that a project that was given to him to review before submission looks extremely good on paper. "I really hoped that the cost projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven't sent it on yet, though I probably should." "You can keep it if it's really that bad," assures Susan. "Anyway, you can probably get it shot out of the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those sessions. Your engineering genius need never know. He'll just think someone else's project was even better than his." Required: 1. Who are the stakeholders in this situation? 2. Is it ethical to adjust the figures to compensate for risk? Explain. 3. Is it ethical to change the proposal before submitting it? Explain. Ans: N/A, SO: 9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 226 1. The stakeholders include: Bill Baumhauer Magnificent Tile the engineer who submitted the proposal. For Instructor Use Only
26 - 70 Test Bank for Accounting Principles, Tenth Edition Solution 226
(Cont.)
2. It is ethical, in general, to adjust projections to compensate for risk. However, it should be clearly stated that the projections have been adjusted for risk, and the method used should be available for review. Otherwise, the entire selection process is undermined, and it becomes entirely subjective. 3. It is probably not ethical to modify a proposal at all; certainly not in the way described. The engineer submitting the proposal should have the right to know about any changes that were made, and should have the right to review those changes. S-A E 227 (Communication) You are the general accountant for Free Words, Inc., a typing service based in San Francisco, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows:
Initial Investment Returns Year 1 Year 2 Year 3 Net Present Value
Option #1 $(95,000) 55,000 30,000 10,000 0
Option #2 $(270,000) 90,000 90,000 90,000 0
Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
Solution 227 I recommend that the company accept Option #1, to purchase upgrades to our present system and to buy a more efficient printer. In the first place, the changes will be easier to implement because the equipment is similar to that which we already use. Secondly, the company will have less money invested in the project, which decreases our risk of loss should the project fail. Option #2 appears to be too risky.
For Instructor Use Only