Kimmel, Weygandt, Kieso Accounting Tools for Business Decision Making, 5th Edition Test Bank- by Ace Test Banks

Accounting Tools for Business Decision Making, 5th Edition By Kimmel, Weygandt, Kieso

Email: richard@qwconsultancy.com

CHAPTER 1 INTRODUCTION TO FINANCIAL STATEMENTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8.

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K K K K K K K K

9. 10. 11. 12. 13. 14. 15. 16.

2 2 2 3 3 3 3 3

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. 67.

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

K K K K K K K K K K C C K K C K K K K K K K K K K K K

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.

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 3 4

175. 176. 177. 178. 154.

1 3 4,5 4,5

C C AP AP

179. 180. 181. 182.

5 4,5 4 5

192. 193.

4,5 4,5

AP AP

194. 195.

5 4

Item LO BT Item True-False Statements K 17. 3 K 25. K 18. 3 C 26. K 19. 3 K 27. K 20. 4 K 28. K 21. 4 K 29. K 22. 4 K 30. K 23. 4 K 31. K 24. 4 K 32. Multiple Choice Questions K 95. 4 AP 122. K 96. 4 K 123. K 97. 3 C 124. K 98. 3 C 125. C 99. 4 K 126. K 100. 4 K 127. K 101. 4 K 128. C 102. 4 C 129. C 103. 4 K 130. C 104. 4 C 131. K 105. 4 K 132. K 106. 4 K 133. K 107. 4 K 134. K 108. 4 K 135. K 109. 4 C 136 K 110. 5 K 137. K 111. 4 K 138. K 112. 4 K 139. K 113. 4 C 140. K 114. 4 K 141. K 115. 4 C 142. K 116. 4 K 143. K 117. 4 K 144. K 118. 4 C 145. K 119. 4 AP 146. K 120. 4 AP 147. AP 121. 4 AP 148. Brief Exercises AP 183. 5 AP 187. C 184. 5 AP 188. AP 185. 5 K 189. K 186. 5 C 190. Exercises AP 196. 4,5 AN 198. AP 197. 4,5 AP 199.

Item

4 4 5 5 5 5 5 5

K K K C C C C C

33. 34. 35. 36. 37. 38. 39. 40.

5 5 6 6 6 6 6 6

K K K K K K K C

4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 4 5 5 5 3 5 5 5 4 4 4

AP AN AN K K K AP AP AP AP AN AN AN AN AN K K K K K K K K K K C K

149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174.

5 5 5 5 5 5 5 5 5 5 4 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6

K C C C AP AP AP AP AP AP K K AN AN AN AN AN K K K K K K K C K

5 5 5 5

C AN C AN

191.

5 5

AP AN

200. 201.

5 5

AP AN

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

1-2

202. 203.

1 2

K K

210.

1-6

211. 212. 213.

1 1 2

K C C

204. 205.

3 5

K K

Completion Statements 206. 5 K 208. 207. 5 K 209.

5 6

K K

6 6 4

C E C

Matching

214. 215. 216.

2 5 5

K C C

Short Answer Essay 217. 5 AN 220. 218. 5 K 221. 219. 5 C 222.

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item

Type

Item

Type

Learning Objective 1 Item Type Item Type

44.

48.

52.

202.

41.

45.

49.

53.

210.

42.

46.

50.

54.

211.

43.

47.

51.

175.

212.

Item

Type

Item

Type

214.

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 2 Item Type Item Type

55.

61.

67.

73.

56.

62.

68.

74.

57.

63.

69.

75.

58.

64.

70.

203.

10.

59.

65.

71.

210.

11.

60.

66.

72.

213.

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 3 Item Type Item Type

12.

18.

80.

86.

92.

204.

13.

19.

81.

87.

93.

210.

14.

76.

82.

88.

97.

15.

77.

83.

89.

98.

16.

78.

84.

90.

142.

17.

79.

85.

91.

176.

Introduction to Financial Statements

1-3

Item

Type

Item

Type

Learning Objective 4 Item Type Item Type

20.

96.

107.

117.

146.

193.

21.

99.

108.

118.

147.

194.

22.

100.

109.

119.

148.

195.

23.

101.

111.

120.

159.

196.

24.

102.

112.

121.

177.

197.

25.

103.

113.

122.

178.

210.

26.

104.

114.

123.

180.

222.

94.

105.

115.

124.

181.

95.

106.

116.

138.

192.

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 5 Item Type Item Type

27.

130.

144.

161.

187.

215.

28.

131.

145.

162.

188.

216.

29.

132.

146.

163.

189.

217.

30.

133.

149.

164.

190.

218.

31.

134.

150.

165.

191.

219.

32.

135.

151.

177.

196.

210.

33.

136.

152.

178.

198.

34.

137.

153.

179.

199.

110.

138.

154.

180.

200.

125.

139

155.

182.

201.

126.

140

156.

183.

205.

127.

141.

157.

184.

206.

128.

142.

158.

185.

207.

129.

143.

160.

186.

208.

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 6 Item Type Item Type

35.

39.

168.

172.

210.

36.

40.

169.

173.

220.

37.

166.

170.

174.

221.

38.

167.

171.

209.

Note: TF = True-False MC = Multiple Choice Ma = Matching

C = Completion Ex = Exercise SA = Short Answer Essay

1-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. Describe the primary forms of business organization. A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners. A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock. 2. Identify the users and uses of accounting information. Internal users are managers who need accounting information to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use accounting information to help them decide whether to buy, hold, or sell shares of a company’s stock. Creditors (suppliers and bankers) use accounting information to assess the risk of granting credit or loaning money to a business. Other groups who have an indirect interest in a business are taxing authorities, customers, labor unions, and regulatory agencies. 3. Explain the three principal types of business activity. Financing activities involve collecting the necessary funds to support the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the resources of the business into action to generate a profit. 4. Describe the content and purpose of each of the financial statements. An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. 5. Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation. Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the claims of owners on the assets of the business. Stockholders’ equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is: Assets = Liabilities + Stockholders’ Equity 6. Describe the components that supplement the financial statements in an annual report. The management discussion and analysis provides management’s interpretation of the company’s results and financial position as well as a discussion of plans for the future. Notes to the financial statements provide additional explanation or detail to make the financial statements more informative. The auditor’s report expresses an opinion as to whether the financial statements present fairly the company’s results of operations and financial position.

Introduction to Financial Statements

1-5

TRUE-FALSE STATEMENTS 1.

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Corporate stockholders generally pay higher taxes but have no personal liability.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The information needs and questions of external users vary considerably.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

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

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

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

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12.

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

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13.

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

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-6 14.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15.

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

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

Payments to owners are operating activities.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17.

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

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18.

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

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19.

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

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20.

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

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

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

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

The heading for the income statement might include the line “As of December 31, 20xx.”

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23.

Net income is another term for revenue.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Cash is another term for stockholders’ equity.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 27.

1-7

The basic accounting equation states that Assets = Liabilities.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

28.

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

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

29.

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

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

30.

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

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

31.

If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders’ equity totals $45,000.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

32.

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

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

33.

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

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34.

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

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

35.

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

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36.

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

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37.

An auditor is an accounting professional who conducts an independent examination of the accounting data presented by a company.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting

38.

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

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

39.

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

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

1-8 40.

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

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Answers to True-False Statements 1. F 2. T

9. T 10. T

17. F 18. T

25. T 26. T

33. F 34. T

3. 4. 5. 6. 7. 8.

11. 12. 13. 14. 15. 16.

19. 20. 21. 22. 23. 24.

27. 28. 29. 30. 31. 32.

35. 36. 37. 38. 39. 40.

T F F F F F

T T F F T F

F F F F F F

F F T T T F

T F T T F T

MULTIPLE CHOICE QUESTIONS 41.

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

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43.

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

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 45.

1-9

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

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46.

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

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

48.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

49.

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

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

50.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1-10 51.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52.

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

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

All of the following are advantages for choosing a proprietorship for a business except a. a proprietorship is a simple form of business to set up. b. a proprietorship gives the owner control of the business. c. proprietorship receive more favorable tax treatment. d. transfer of ownership is easily achieved through stock sales.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

54.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

55.

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

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Introduction to Financial Statements 56.

1-11

Which of the following are internal reports that accounting provides to internal users? a. Forecasts of cash needs for next year. b. Financial comparisons of operating activity alternatives. c. Both forecasts of cash needs and financial comparisons are internal reports. d. Neither forecasts of cash needs or financial comparisons is an internal report.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57.

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

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

External users of accounting information, like the Internal Revenue Service, are most commonly known as a. taxing authorities. b. labor unions. c. customers. d. regulatory agencies.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59.

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

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

Which of the following is not a step for solving an ethical dilemma? a. Identifying the alternatives and weighing the impact of each alternative on various stakeholders. b. Certifying the ethical accuracy of the financial information. c. Identifying and analyzing the principal elements in the situation. d. Recognizing the ethical situation and issues involved.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting

61.

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

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-12 62.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

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

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting

64.

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

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

65.

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

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66.

Which of the following groups uses accounting information to determine whether the company’s net income will result in a stock price increase? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67.

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

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

Introduction to Financial Statements 68.

1-13

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

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69.

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

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

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

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

71.

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

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

72.

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

Ans: D, LO: 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 concerning users of accounting information is incorrect? a. Management is considered an internal user. b. Present creditors are considered external users. c. Regulatory authorities are considered internal users. d. Taxing authorities are considered external users.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-14

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

74.

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

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

75.

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

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76.

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n) a. account payable. b. account receivable. c. revenue. d. expense.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77.

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

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

79.

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

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Introduction to Financial Statements 80.

1-15

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

81.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

82.

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

83.

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

84.

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

85.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1-16

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

86.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

88.

The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

89.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

90.

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

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

91.

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

92.

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

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Introduction to Financial Statements 93.

1-17

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

94.

Jackson Company recorded the following cash transactions for the year: Paid $135,000 for salaries. Paid $60,000 to purchase office equipment. Paid $15,000 for utilities. Paid $6,000 in dividends. Collected $245,000 from customers. What was Jackson’s net cash provided by operating activities? a. $95,000 b. $35,000 c. $110,000 d. $89,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $245,000 − $135,000 − $15,000 = $95,000

95.

Gibson Company recorded the following cash transactions for the year: Paid $180,000 for salaries. Paid $80,000 to purchase office equipment. Paid $20,000 for utilities. Paid $8,000 in dividends. Collected $310,000 from customers. What was Gibson’s net cash provided by operating activities? a. $110,000 b. $30,000 c. $130,000 d. $102,000

96.

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

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

97.

Which of the following is an asset? a. Mortgage payable b. Investments c. Common stock d. Retained earnings

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-18 98.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

99.

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

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

100.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

101.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

102.

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

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

103.

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

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 104.

1-19

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

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

105.

The financial statement that summarizes the changes in retained earnings for a specific period of time is the a. balance sheet. b. income statement. c. statement of cash flows. d. retained earnings statement.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106.

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

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

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

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109.

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

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-20 110.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111.

The company’s policy toward dividends and growth could best be determined by examining the a. balance sheet. b. income statement. c. retained earnings statement. d. statement of cash flows.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

112.

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

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

113.

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

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

114.

The retained earnings statement would not show a. the retained earnings beginning balance. b. revenues and expenses. c. dividends. d. the ending retained earning balance.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

115.

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

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Introduction to Financial Statements 116.

1-21

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

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

117.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

118.

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

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

119.

Henson Company began the year with retained earnings of $330,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Henson’s retained earnings at the end of the year? a. $490,000 b. $410,000 c. $790,000 d. $450,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $330,000 + ($500,000 − $380,000) − $40,000 = $410,000

120.

Pinson Company began the year with retained earnings of $570,000. During the year, the company recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was Pinson’s retained earnings at the end of the year? a. $930,000 b. $650,000 c. $1,030,000 d. $500,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $570,000 + ($600,000 − $380,000) − $140,000 = $650,000

1-22 121.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Finney Company began the year by issuing $40,000 of common stock for cash. The company recorded revenues of $370,000, expenses of $320,000, and paid dividends of $20,000. What was Finney’s net income for the year? a. $30,000 b. $70,000 c. $50,000 d. $90,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $370,000 − $320,000 = $50,000

122.

Lankston Company began the year by issuing $90,000 of common stock for cash. The company recorded revenues of $825,000, expenses of $720,000, and paid dividends of $45,000. What was Lankston’s net income for the year? a. $60,000 b. $150,000 c. $105,000 d. $195,000

123.

Gilkey Corporation began the year with retained earnings of $465,000. During the year, the company issued $630,000 of common stock, recorded expenses of $1,800,000, and paid dividends of $120,000. If Gilkey’s ending retained earnings was $495,000, what was the company’s revenue for the year? a. $1,830,000 b. $1,950,000 c. $2,460,000 d. $2,580,000

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $495,000 + $120,000 + $1,800,000 − $465,000 = $1,950,000

124.

Kilmer Corporation began the year with retained earnings of $620,000. During the year, the company issued $840,000 of common stock, recorded expenses of $2,400,000, and paid dividends of $160,000. If Kilmer’s ending retained earnings was $660,000, what was the company’s revenue for the year? a. $2,440,000 b. $2,600,000 c. $3,280,000 d. $33,440,000

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $660,000 + $160,000 + $2,400,000 − $620,000 = $2,600,000

125.

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

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 126.

1-23

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

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127.

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

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

128.

Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded $420,000 in revenues, $220,000 in expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was a. $240,000. b. $200,000. c. $160,000. d. $180,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($200,000 − $160,000) + ($420,000 − $220,000) − $40,000 = $200,000

129.

Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded $420,000 in revenues, $220,000 in expenses, and dividends of $40,000. The net income reported by Jimmy’s Repair Shop for the year was a. $160,000. b. $200,000. c. $120,000. d. $380,000.

130.

Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was a. $120,000. b. $110,000. c. $130,000. d. $70,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($140,000 − $80,000) + ($220,000 − $110,000) − $40,000 = $130,000

1-24 131.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in expenses, and dividends of $40,000. The net income reported by Ashley’s Accessory Shop for the year was a. $80,000. b. $100,000. c. $130,000. d. $110,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $220,000 − $110,000 = $110,000

132.

If total liabilities increased by $75,000 and stockholders’ equity increased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $100,000 decrease b. $100,000 increase c. $125,000 increase d. $150,000 increase

Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $75,000 + $25,000 = $100,000

133.

If total liabilities decreased by $75,000 and stockholders’ equity increased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $100,000 increase b. $50,000 decrease c. $50,000 increase d. $75,000 decrease

134.

If total liabilities decreased by $50,000 and stockholders’ 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. $40,000 decrease b. $40,000 increase c. $50,000 increase d. $60,000 increase

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($50,000) + $10,000 = ($40,000)

Introduction to Financial Statements 135.

1-25

If total liabilities decreased by $75,000 and stockholders’ equity decreased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $100,000 increase b. $50,000 decrease c. $100,000 decrease d. $50,000 decrease

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($75,000) + ($25,000) = ($100,000)

136.

If total liabilities increased by $46,000 during a period of time and stockholders’ equity decreased by $18,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n) a. $46,000 increase. b. $64,000 increase. c. $28,000 decrease. d. $28,000 increase.

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $46,000 − $18,000 = $28,000 increase.

137.

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

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138.

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

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

139.

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

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1-26 140.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

141.

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

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

142.

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

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

143.

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

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

144.

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

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

145.

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

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

146.

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

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Introduction to Financial Statements 147.

1-27

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

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

148.

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

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

149.

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

Ans: B, LO: 5, 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 is not a common way that managers use the balance sheet? a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period b. To determine if the cash balance is sufficient for future needs c. To analyze the balance between debt and common stock financing d. To analyze the balance of accounts receivable on the last day of the accounting period

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

151.

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

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152.

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

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-28 153.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Elston Company compiled the following financial information as of December 31, 2014: Service revenue $700,000 Common stock 150,000 Equipment 200,000 Operating expenses 625,000 Cash 175,000 Dividends 50,000 Supplies 25,000 Accounts payable 100,000 Accounts receivable 75,000 Retained earnings, 1/1/14 375,000 Elston’s assets on December 31, 2014 are a. $1,175,000. b. $850,000. c. $400,000. d. $475,000.

154.

Elston Company compiled the following financial information as of December 31, 2014: Service revenue $700,000 Common stock 150,000 Equipment 200,000 Operating expenses 625,000 Cash 175,000 Dividends 50,000 Supplies 25,000 Accounts payable 100,000 Accounts receivable 75,000 Retained earnings, 1/1/14 375,000 Elston’s retained earnings on December 31, 2014 are a. $375,000. b. $450,000. c. $400,000. d. $ 25,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $375,000 + ($700,000 − $625,000) − $50,000 = $400,000

Introduction to Financial Statements 155.

1-29

Elston Company compiled the following financial information as of December 31, 2014: Service revenue $700,000 Common stock 150,000 Equipment 200,000 Operating expenses 625,000 Cash 175,000 Dividends 50,000 Supplies 25,000 Accounts payable 100,000 Accounts receivable 75,000 Retained earnings, 1/1/14 375,000 Elston’s stockholders’ equity on December 31, 2014 is a. $525,000. b. $550,000. c. $400,000. d. $600,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 + [$375,000 + ($700,000 − $625,000) − $50,000] = $550,000

156.

Benedict Company compiled the following financial information as of December 31, 2014: Service revenue $560,000 Common stock 120,000 Equipment 160,000 Operating expenses 500,000 Cash 140,000 Dividends 40,000 Supplies 20,000 Accounts payable 80,000 Accounts receivable 60,000 Retained earnings, 1/1/14 300,000 Benedict’s assets on December 31, 2014 are a. $940,000. b. $680,000. c. $320,000. d. $380,000.

1-30 157.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Benedict Company compiled the following financial information as of December 31, 2014: Service revenue $560,000 Common stock 120,000 Equipment 160,000 Operating expenses 500,000 Cash 140,000 Dividends 40,000 Supplies 20,000 Accounts payable 80,000 Accounts receivable 60,000 Retained earnings, 1/1/14 300,000 Benedict’s retained earnings on December 31, 2014 are a. $300,000. b. $360,000. c. $320,000. d. $ 20,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 + ($560,000 − $500,000) − $40,000 = $320,000

158.

Benedict Company compiled the following financial information as of December 31, 2014: Service revenue $560,000 Common stock 120,000 Equipment 160,000 Operating expenses 500,000 Cash 140,000 Dividends 40,000 Supplies 20,000 Accounts payable 80,000 Accounts receivable 60,000 Retained earnings, 1/1/14 300,000 Benedict’s stockholders’ equity on December 31, 2014 is a. $420,000. b. $440,000. c. $320,000. d. $480,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $120,000 + [$300,000 + ($560,000 − $500,000) − $40,000] = $440,000

159.

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

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 160.

1-31

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

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

161.

Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash

$18,000 3,000 ? 9,000

Equipment Land Unearned service revenue Total stockholders' equity

$21,000 21,000 6,000 ?

If the balance of the Buildings account was $42,000 and $3,000 of Accounts Payable were paid in cash, what would be the balance of the total stockholders' equity? a. $81,000 b. $72,000 c. $102,000 d. $78,000 Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($3,000 + $42,000 + $6,000 + $21,000 + $21,000) − ($15,000 + $6,000) = $72,000

162.

Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash

$18,000 3,000 ? 9,000

Equipment Land Unearned service revenue Total stockholders' equity

$21,000 21,000 6,000 ?

If the balance of the Buildings account was $24,000 and $6,000 of Accounts Payable were paid in cash, what would be the total liabilities and stockholders' equity? a. $54,000 b. $78,000 c. $48,000 d. $72,000 Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000 + $24,000 + $3,000 + $21,000 + $21,000 = $72,000

1-32

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

163.

Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash

$18,000 3,000 ? 9,000

Equipment Land Unearned service revenue Total stockholders' equity

$21,000 21,000 6,000 ?

If total stockholder's equity was $57,000, what would be the balance of the Buildings Account? a. $21,000 b. $81,000 c. $87,000 d. $27,000 Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($18,000 + $6,000 + $57,000) − ($3,000 + $9,000 + $21,000 + $21,000) = $27,000

164.

Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash

$18,000 3,000 ? 9,000

Equipment Land Unearned service revenue Total stockholders' equity

$21,000 21,000 6,000 ?

If the balance of the Buildings account was $45,000 and the equipment was sold for $21,000, what would be the total of stockholders' equity? a. $39,000 b. $54,000 c. $69,000 d. $75,000 Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000 + $45,000 + ($9,000 + $21,000) + $21,000 − ($18,000 + $6,000) = $75,000

165.

Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash

$18,000 3,000 ? 9,000

Equipment Land Unearned service revenue Total stockholders' equity

$21,000 21,000 6,000 ?

If the balance of the Buildings account was $51,000, what would be the total of liabilities and stockholders' equity? a. $102,000 b. $105,000 c. $81,000 d. $75,000 Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000 + $51,000 + $9,000 + $21,000 + $21,000 = $105,000

Introduction to Financial Statements 166.

1-33

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

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

167.

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

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

168.

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

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

169.

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

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

170.

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

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

171.

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

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1-34 172.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173.

Which of the following statements is true? a. Publicly traded U.S. companies must provide an annual report to their shareholders when operating conditions change significantly. b. An unqualified independent auditor’s report must be included in the annual report. c. Notes to the financial statements do not need to be included in the annual report because that information is only for internal users. d. None of these answer choices are correct.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174.

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

Ans: B, LO: 6, 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 41. b 42. c 43. b 44. d 45. a 46. a 47. c 48. c 49. a 50. c 51. d 52. c 53. d 54. c 55. c 56. c 57. d 58. a 59. c 60. b

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

a d b c c a b b c b a d c c b a b d b c

81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.

d c c c d d a d d b c d c a a a b c d c

101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

c b b d d b c d b a c d d b a b c c b b

121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140.

c c b b d b a b b c d b b a c d c a b c

141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160.

b c d b c d d c b a b b d c b d c b a d

161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174.

b d d d b c b d c d d b d b

Introduction to Financial Statements

1-35

BRIEF EXERCISES Be. 175 Indicate in the space by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). More than one answer may be appropriate. ____ a. Simple to establish. ____ b. Shared control. ____ c. Easy to transfer ownership. ____ d. No personal liability. ____ e. Tax advantage. ____ f.

Easier to raise funds.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Solution 175

(5 min.)

S&P

Be. 176 Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity. ____ a. Cash receipts from customers. ____ b. Issuance of common stock for cash. ____ c. Payment of cash dividends. ____ d. Cash purchase of equipment. ____ e. Cash payments to suppliers. ____ f.

Sale of old machine for cash.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

1-36

Solution 176

(5 min.)

Be. 177 Use the following information to calculate for the year ended December 31, 2014 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies $ 1,500 Other operating expenses 10,000 Accounts payable 11,000 Accounts receivable 4,000 Common stock 10,000 Retained earnings (beginning) 5,000

Service revenue Cash Dividends Notes payable Equipment

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

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 177 (a) $9,000

(5 min.) (b) $8,000

Be. 178 Use the following information to calculate for the year ended December 31, 2014 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies $ 1,000 Other operating expenses 12,000 Accounts payable 9,000 Accounts receivable 3,000 Common stock 9,000 Retained earnings (beginning) 5,000

Service revenue Cash Dividends Notes payable Equipment

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

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 178 (a)

$6,000

(5 min.) (b)

$10,000

(c)

$32,000

Introduction to Financial Statements

1-37

Be. 179 Listed below in alphabetical order are the balance sheet items of Nolan Company at December 31, 2014. Prepare a balance sheet and include a complete heading. Accounts payable Accounts receivable Buildings Cash Common stock Land Equipment Retained earnings

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

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 179

(5 min.) NOLAN COMPANY Balance Sheet December 31, 2014 ASSETS

Cash Accounts receivable Equipment Buildings Land Total assets

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

Liabilities Accounts payable

$ 11,000

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

$80,000 41,000

121,000 $132,000

1-38

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 180 Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or retained earnings statement (RE): a.

____

Service Revenue

g. ___

Accounts Receivable

____

Utilities Expense

h. ___

Common Stock

____

Cash

i. ____

Equipment

____

Accounts Payable

j. ____

Advertising Expense

____

Supplies

k. ___

Dividends

____

Salaries and Wages Expense

l. ____

Notes Payable

Ans: N/A, LO: 4,5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 180 a. b. c. d. e. f.

IS IS BS BS BS IS

(5 min.) g. h. i. j. k. l.

BS BS BS IS RE BS

Be. 181 Cesar Ruiz was reviewing his company’s activities at the end of the year (2014) and decided to prepare a retained earnings statement. At the beginning of the year his assets were $530,000, liabilities were $140,000, and common stock was $120,000. The net income for the year was $250,000. Dividends of $220,000 were paid during the year. Prepare a retained earnings statement in good form. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Introduction to Financial Statements Solution 181

1-39

(5 min.) CESAR RUIZ.COMPANY Retained Earnings Statement For the Year Ended December 31, 2014

Retained Earnings, Beginning Add: Net Income

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

Less: Dividends Retained Earnings, Ending Be. 182

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

Common Stock Service Revenue Land Salaries and Wages Expense Notes Payable

f. g. h. i. j.

Accounts Payable Cash Advertising Expense Supplies Utilities Expense

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 182

(5 min.)

a, c, e, f, g, i Be. 183 Determine the missing items. Assets = Liabilities + Stockholders’ Equity $80,000 (b) $84,000

$56,000 $28,000 (c)

(a) $34,000 $55,000

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 183 a. $24,000

(5 min.) b. $62,000

c. $29,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

1-40 Be. 184

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

$50,000 $18,000 (c)

(a) $30,000 $40,000

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 184

(5 min.)

a. $16,000

b. $48,000

c. $14,000

Be. 185 Identify which of the following accounts appear on a balance sheet. (a) Service revenue (b) Cash (c) Common stock (d) Accounts payable (e) Rent expense (f) Supplies (g) Land Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 185 (5 min.) (b), (c), (d), (f), (g)

Introduction to Financial Statements

1-41

Be. 186 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or stockholders’ equity item. Code Asset A Liability L Stockholders’ Equity SE _____

1. Rent Expense

____

6. Cash

_____

2. Equipment

____

7. Accounts Receivable

_____

3. Accounts Payable

____

8. Retained Earnings

_____

4. Common Stock

____

9. Service Revenue

_____

5. Insurance Expense

____ 10. Notes Payable

Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 186 1. 2. 3. 4. 5.

(5 min.)

SE A L SE SE

6. 7. 8. 9. 10.

A A SE SE L

Be. 187 Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE). _____ 1. _____ 2. _____ 3. _____ 4. _____ 5. _____ 6. _____ 7. _____ 8.

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

Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 187 1. 2. 3. 4.

(5 min.)

A L SE A

5. 6. 7. 8.

SE A L A

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

1-42 Be. 188

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

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

(2)

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

(3)

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

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 188 Beginning Change Ending

Beginning Change Ending

(5 min.) Total Assets $660,000 225,000 $885,000

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

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

Total Liabilities $300,000

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

Total Assets $660,000 $745,000 (2) Total Assets $660,000 (60,000) $600,000

Stockholders’ Equity

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

$ 90,000 (3)

$685,000 (1)

Be. 189 Reinhardt’s Carpet Cleaning has the following balance sheet items: Buildings Accounts Payable Cash Supplies Accounts Receivable

Notes Payable Common Stock Retained Earnings Equipment

Identify which items are (1) Assets (2) Liabilities (3) Stockholders’ Equity Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements Solution 189

1-43

(5 min.)

(1) Assets—Buildings, Cash, Supplies, Accounts Receivable, Equipment (2) Liabilities—Accounts Payable, Notes Payable (3) Stockholders’ Equity—Common Stock, Retained Earnings Be. 190 On June 1, 2014, Shaw Company prepared a balance sheet that shows the following: Assets (no cash) ...................................................................... $125,000 Liabilities ................................................................................. 75,000 Stockholders’ Equity ................................................................. 50,000 Shortly thereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets

Balances Immediately After Sale Assets Liabilities = Stockholders’ Equity

Cash A

$135,000

$________

Cash B

120,000

________

Cash C

105,000

________

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 190

Cash A Cash B Cash C

(5 min.)

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

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

Be. 191 Compute the missing amount in each category of the accounting equation.

(a) (b) (c)

Assets $243,000 $183,000 $ ?

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

Liabilities $ ? $ 75,000 $212,000

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

1-44

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 191

(5 min.)

(a) $152,000: ($243,000 - $91,000 = $152,000). (b) $108,000: ($183,000 - $75,000 = $108,000). (c) $522,000: ($212,000 + $310,000 = $522,000).

EXERCISES Ex. 192 Prepare an income statement and a retained earnings statement, for the month of October, 2014 and a balance sheet at October 31, 2014 for the medical practice of Linda Denny, MD, from the items listed below. Retained earnings (October 1) Common stock Accounts payable Equipment Service revenue Dividends Insurance expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense

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

LINDA DENNY, MD Income Statement For the Month Ended October 31, 2014 ___________________________________________________________________________ Revenues

Expenses

Total expenses

Net income

Introduction to Financial Statements Ex. 192

1-45

(Cont.)

LINDA DENNY, MD Retained Earnings Statement For the Month Ended October 31, 2014 ___________________________________________________________________________ Retained Earnings, October 1 Add:

Less:

LINDA DENNY, MD Balance Sheet October 31, 2014 ___________________________________________________________________________ Assets $

Total assets $

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

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

1-46

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 192

(15 min.)

LINDA DENNY, MD Income Statement For the Month Ended October 31, 2014 ___________________________________________________________________________ Revenues Service revenue ............................................................................. $23,000 Expenses Salaries and wages expense ......................................................... $9,000 Insurance expense ........................................................................ 3,500 Rent expense ................................................................................ 2,000 Utilities expense ............................................................................ 700 Total expenses ........................................................................ 15,200 Net income .............................................................................. $ 7,800 LINDA DENNY, MD Retained Earnings Statement For the Month Ended October 31, 2014 ___________________________________________________________________________ Retained Earnings, October 1 ............................................................. $15,000 Add: Net income .................................................................................. 7,800 22,800 Less: Dividends ................................................................................... 6,000 Retained Earnings, October 31 ........................................................... $16,800

LINDA DENNY, MD Balance Sheet October 31, 2014 ___________________________________________________________________________ Assets Cash ...................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Equipment ........................................................................................... Total assets ................................................................................... Liabilities and Stockholders’ Equity Liabilities Accounts payable .......................................................................... Stockholders’ Equity Common stock ............................................................................... Retained earnings ........................................................................... Total liabilities and stockholders’ equity .........................................

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

$ 6,000 $30,000 16,800

46,800 $52,800

Introduction to Financial Statements

1-47

Ex. 193 Use the following accounts and information to prepare, in good form, an income statement and a retained earnings statement, for the month of August and a balance sheet at August 31, 2014 for Pierce Industries. Accounts payable $ 1,100 Accounts receivable 5,400 Buildings 63,000 Cash 18,600 Service revenue 25,700 Common stock 52,000 Retained earnings (beginning) 25,900

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

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

PIERCE INDUSTRIES Income Statement For the Month Ended August 31, 2014 ___________________________________________________________________________ Revenues $ Expenses $

Total expenses Net income

PIERCE INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2014 ___________________________________________________________________________ Retained Earnings, August 1 Add:

Less:

Retained Earnings, August 31

1-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 193

(Cont.)

PIERCE INDUSTRIES Balance Sheet August 31, 2014 ___________________________________________________________________________ Assets $

Total assets $

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

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 193

(15 min.)

PIERCE INDUSTRIES Income Statement For the Month Ended August 31, 2014 ___________________________________________________________________________ Revenues Service revenue ............................................................................. $25,700 Expenses Salaries and wages expense ......................................................... $12,000 Rent expense ................................................................................ 3,400 Insurance expense ........................................................................ 1,200 Total expenses ........................................................................ 16,600 Net income .............................................................................. $9,100

Introduction to Financial Statements Solution 193

1-49

(Cont.)

PIERCE INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2014 ___________________________________________________________________________ Retained Earnings, August 1 ............................................................... $25,900 Add: Net income ................................................................................. 9,100 35,000 Less: Dividends ................................................................................... 3,000 Retained Earnings, August 31 ............................................................. $32,000 PIERCE INDUSTRIES Balance Sheet August 31, 2014 ___________________________________________________________________________ Assets Cash … ................................................................................................ Accounts receivable ............................................................................ Supplies .............................................................................................. Buildings .............................................................................................. Total assets ................................................................................... Liabilities and Stockholders’ Equity Liabilities Accounts payable ................................................................................ $ 1,100 Notes payable ..................................................................................... 3,300 Total liabilities..................................................................................... Stockholders’ Equity Common stock ............................................................................... $52,000 Retained earnings .......................................................................... 32,000 Total liabilities and stockholders’ equity .........................................

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

$4,400

84,000 $88,400

Ex. 194 At September 1, the balance sheet accounts for Kiner's Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment

$ 3,800 1,600 66,000 5,000 15,700

Land Common Stock Notes Payable Supplies Retained Earnings

$33,000 ? 46,000 3,600 45,200

The following transactions occurred during the next two days: Stockholders invested an additional $20,000 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, 2014. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

1-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 194

(10 min.) KINER’S RESTAURANT Balance Sheet September 3, 2014 ASSETS

Cash Accounts receivable Supplies Equipment Buildings Land Total assets

$21,200 1,600 3,600 15,700 66,000 33,000 $141,100 LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities Notes payable

$ 46,000

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

$49,900 45,200

Cash ($5,000 + $20,000 - $3,800) = $21,200 Accounts Payable ($3,800 - $3,800) = $0 Common Stock Beginning balance ($124,900 - $95,000) Additional investment Ending balance

95,100 $141,100

$29,900 20,000 $49,900

Ex. 195 This information relates to Connor Co. for the year 2014. Retained earnings, January 1, 2014 Advertising expense Dividends paid during 2014 Rent expense Service revenue Utilities expense Salaries and wages expense

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

Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2014. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Introduction to Financial Statements Solution 195

1-51

(10 min.)

CONNOR CO. Income Statement For the Year Ended December 31, 2014 ___________________________________________________________________________ Revenues Service revenue ............................................................................ $52,000 Expenses Salaries and wages expense ......................................................... $25,000 Rent expense ................................................................................ 10,400 Utilities expense ............................................................................ 2,400 Advertising expense ...................................................................... 1,800 Total expenses ........................................................................ 39,600 Net income .......................................................................................... $12,400

CONNOR CO. Retained Earnings Statement For the Year Ended December 31, 2014 ___________________________________________________________________________ Retained earnings, January 1 ............................................................. $59,000 Add: Net income ................................................................................. 12,400 71,400 Less: Dividends ................................................................................... 9,000 Retained earnings, December 31 ........................................................ $62,400 Ex. 196 Here are incomplete financial statements for Brandon, Inc. BRANDON, INC. Balance Sheet Assets Cash Inventory Buildings Total assets

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

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

1-52

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 196

(Cont.) Income Statement Revenues Cost of goods sold Administrative expenses Net income

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

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

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

Instructions Calculate the missing amounts. Ans: N/A, LO: 4,5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 196

(10 min.)

First note that the retained earnings statement shows that (b) equals $24,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders' equity $5,000 + a + $24,000 = $55,000 a + $29,000 = $55,000 a = $26,000 Beginning retained earnings + Net income – Dividends = Ending retained earnings $10,000 + e – $5,000 = $24,000 $5,000 + e = $24,000 e = $19,000 From above, we know that net income (d) equals $19,000. Revenue – Cost of goods sold – Administrative expenses = Net income $80,000 – c – $10,000 = $19,000 $70,000 – c = $19,000 c = $51,000

Introduction to Financial Statements

1-53

Ex. 197 Sleep Cheap is a private camping ground near the Boulder Peak Recreation Area. It has compiled the following financial information as of December 31, 2014. Services revenues (from camping fees) $132,000 Dividends $ 8,000 Sales revenues (from general store) 25,000 Notes payable 50,000 Accounts payable 13,000 Administrative expenses 133,000 Cash 13,500 Supplies 2,500 Equipment 108,000 Common stock 40,000 Retained earnings (1/1/2014) 5,000 Instructions (a) Determine net income from Sleep Cheap for 2014. (b) Prepare a retained earnings statement and a balance sheet for Sleep Cheap as of December 31, 2014. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (10 min.) (a) Service revenue ............................................................................ $132,000 Sales revenue ............................................................................... 25,000 Total revenue .......................................................................... 157,000 Expenses ...................................................................................... 133,000 Net income .................................................................................... $ 24,000

(b)

SLEEP CHEAP Retained Earnings Statement For the Year Ended December 31, 2014 _________________________________________________________________

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

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

SLEEP CHEAP Balance Sheet December 31, 2014 _________________________________________________________________ Assets Cash ................................................................................................... $ 13,500 Supplies .............................................................................................. 2,500 Equipment............................................................................................ 108,000 Total assets ................................................................................... $124,000

1-54

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 197

(Cont.)

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

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

61,000 $124,000

Ex. 198 John Tate is the bookkeeper for Gabelli Company. John has been trying to get the balance sheet of Gabelli Company to balance. It finally balanced, but now he's not sure it is correct. GABELLI COMPANY Balance Sheet December 31, 2014 Assets Cash Supplies Equipment Dividends Total assets

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

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

Instructions Prepare a correct balance sheet. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 198

(5 min.)

GABELLI COMPANY Balance Sheet December 31, 2014 ___________________________________________________________________________ Assets Cash .................................................................................................... Accounts receivable ............................................................................ Supplies ............................................................................................... Equipment ............................................................................................ Total assets ...................................................................................

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

Introduction to Financial Statements Solution 198

1-55

(Cont.)

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

$18,000 $40,000 26,000*

66,000 $84,000

*$39,000 – $13,000 Ex. 199 The summaries of data from the balance sheet, income statement, and retained earnings statement for two corporations, Bates Corporation and Wilson Enterprises, are presented below for 2014. Bates Corporation Beginning of year Total assets Total liabilities Total stockholders' equity End of year Total assets Total liabilities Total stockholders' equity Changes during year in retained earnings Dividends Total revenues Total expenses

Wilson Enterprises

$110,000 80,000 (a)

$130,000 (d) 70,000

(b) 120,000 70,000

190,000 65,000 (e)

5,000 (f) 80,000

Instructions Determine the missing amounts. Assume all changes in stockholders' equity are due to changes in retained earnings. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 199

(10 min.)

(a)

Assets $110,000 (a)

= = =

Liabilities $80,000

+ +

Stockholders' Equity (a) $30,000

(b)

Assets (b) (b)

= = =

Liabilities $120,000 $190,000

+ +

Stockholders' Equity $70,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 199

(Cont.)

Revenues

–

Expenses

–

Dividends

$225,000 $90,000

– –

$165,000 (c) (c)

–

(c)

= = =

(d)

Assets $130,000 (d)

= = =

Liabilities (d) $60,000

+ +

Stockholders' Equity $70,000

(e)

Assets $190,000 (e)

= = =

Liabilities $65,000 $125,000

+ +

Stockholders' Equity (e)

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

Revenues

–

Expenses

–

Dividends

(f) $140,000

–

$80,000

–

$5,000

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

Ending Stockholders' Equity $125,000(e)

Ex. 200 This information is for Campo Corporation for the year ended December 31, 2014. Cash received from lenders Cash received from customers Cash paid for new equipment Cash dividends paid Cash paid to suppliers Cash balance 1/1/14

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

Instructions Prepare the 2014 statement of cash flows for Campo Corporation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Introduction to Financial Statements Solution 200

1-57

(10 min.)

CAMPO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 ____________________________________________________________________________ Cash flows from operating activities Cash received from customers ...................................................... $65,000 Cash paid to suppliers ................................................................... (28,000) Net cash provided by operating activities ...................................... $37,000 Cash flows from investing activities Cash paid for new equipment ......................................................... (30,000) Net cash used by investing activities .............................................. (30,000) Cash flows from financing activities Cash received from lenders............................................................ 20,000 Cash dividends paid ....................................................................... (9,000) Net cash provided by financing activities ........................................ 11,000 Net increase in cash ............................................................................ 18,000 Cash at beginning of period ................................................................ 12,000 Cash at end of period .......................................................................... $30,000 Ex. 201 One item is omitted in each of the following summaries of balance sheet and income statement data for three different corporations, A, B, and C. Determine the amounts of the missing items, identifying each corporation by letter.

Corporation B

$410,000 250,000

$150,000 115,000

$199,000 166,000

460,000 280,000

195,000 95,000

205,000 169,000

79,000

78,000

Dividends

70,000

83,000

Revenue

195,000

187,000

Expenses

155,000

113,000

183,000

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

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 201 (10 min.) Corporation A ($50,000) Beginning stockholders’ equity ($410,000 - $250,000) Additional investments ($180,000 + $70,000 - $160,000 - $40,000) Net income for year ($195,000 - $155,000) Less dividends Ending stockholders’ equity ($460,000 - $280,000) Corporation B ($182,000) Beginning stockholders’ equity ($150,000 - $115,000) Additional investments Net income for year ($183,000 - $35,000 - $79,000) [Revenues = $182,000 ($113,000 + $69,000)] Less dividends Ending stockholders’ equity ($195,000 - $95,000) Corporation C ($79,000) Beginning stockholders’ equity ($199,000 - $166,000) Additional investments Net income for year ($187,000 - $183,000) Less dividends ($115,000 - $36,000) Ending stockholders’ equity ($205,000 - $169,000)

$160,000 50,000 40,000 250,000 70,000 $180,000

$ 35,000 79,000 69,000 183,000 83,000 $100,000

$ 33,000 78,000 4,000 115,000 79,000 $ 36,000

COMPLETION STATEMENTS 202. A business organized as a separate legal entity owned by stockholders is a ___________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

203. _______________ of accounting information are managers who plan, organize, and run a business. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

204. _________________ activities involve collecting the necessary funds to start the business. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

205. The ________________ reports the assets, liabilities, and stockholders’ equity of a business at a specific date. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

206. The claims of owners on the assets of a corporation are known as ________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements

1-59

207. The basic accounting equation is Assets = ____________ + _______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

208. The primary purpose of a ________________ is to provide financial information about the cash receipts and cash payments of a business. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

209. The _________________ is prepared by an independent auditor stating the auditor’s opinion as to the fairness of the presentation of the financial statements. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 202. 203. 204. 205.

corporation Internal users Financing balance sheet

206. 207. 208. 209.

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

MATCHING 210. Match the items below by entering the appropriate code letter in the space provided. A. Internal users B. Management discussion and analysis C. Annual report D. Sole proprietorship E. Dividends

F. G. H. I. J.

Corporation Assets Liabilities Expenses Investing activities

____

1. Distributions of cash from a corporation to its stock holders.

____

2. Consumed assets or services.

____

3. Ownership is limited to one person.

____

4. Officers and others who manage the business.

____

5. Creditor claims against the assets of the business.

____

6. A separate legal entity under state laws.

____

7. A report prepared by management that presents financial information.

____

8. A section of the annual report that presents management’s views.

____

9. Future economic benefits.

____ 10. Involves acquiring the resources necessary to run the business. Ans: N/A, LO: 1,2,3,4,5,6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

E I D A H

6. 7. 8. 9. 10.

F C B G J

SHORT-ANSWER ESSAY QUESTIONS S-A E 211 What are the advantages to a business of being formed as a corporation? What are the disadvantages? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 211 Advantages of a corporation are limited liability (stockholders are not personally liable for corporate debts), easy transferability of ownership, and easier to raise funds. Disadvantages of a corporation are increased taxation and government regulations. S-A E 212 Why would it be safer for a wealthy individual to set up his or her business as a corporation rather than as a proprietorship or partnership? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 212 With a proprietorship or partnership, the owner(s) have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. Therefore, it would be safer for a wealthy individual to set up his/her business as a corporation. S-A E 213 Your friend, James, made this comment: “My major is biology and I plan to research for cures for major illnesses. Therefore, I have no need to study accounting.” What is your response to James? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Introduction to Financial Statements

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Solution 213 James, 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. S-A E 214 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 214 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?

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 215 The statement of cash flows for Nyland Corporation reveals the following information: Net cash used by operating activities ($150,000) Net cash used by investing activities Net cash provided by financing activities Issuance of common stock Issued note payable Net change in cash

($200,000)

$100,000 250,000

$350,000 0

Provide three comments about this information. Make your comments concise yet thorough. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 215 (1) Operating activities represent the ongoing activities of the company and are a result of its reason for being in business. The fact that this is a negative cash flow is a cause of concern. This may be a new company and future cash flows from operations will be positive. (2) The cash that was used for operating and investing activities came from the stockholders (issuance of common stock) and creditors (borrowing with a notes payable). This is to be expected for a new company, or a company that is expanding, but should not be considered an ongoing way to finance the business. Cash from operating activities should be available to purchase assets and pay dividends to shareholders. (3) There is a concern that all proceeds raised from issuing stock have been used. If operating activities cannot generate positive cash flows, can the corporation issue additional stock to raise cash? (4) The corporation owes on the note payable. Will there be sufficient cash from operating activities to pay the interest and repay the principal? (5) Does the corporation need to acquire additional assets for use in the business? If so, will it be able to get the cash to pay for these future acquisitions. The net of zero may be misleading. The reader may think that there are no potential problems because the cash flows netted to zero. The user of the Statement of Cash Flows needs to consider the activities of each of the sections – operating, investing, and financing. S-A E 216 How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 216 (a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c) The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.

Introduction to Financial Statements

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S-A E 217 Broadway Corporation’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s liabilities are $270,000. What is the amount of the company’s stockholders’ equity? Ans: N/A, LO: 5, Bloom: AN, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 217 $90,000: X = 270,000 + ¼X S-A E 218 Which three items affect retained earnings, and how do they affect it? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 218 Net income increases retained earnings, whereas a net loss and dividends decrease it. S-A E 219 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are financial statements related to the accounting equation? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 219 The basic accounting equation is expressed as follows: Assets = Liabilities + Stockholders’ Equity Assets are defined as resources owned by the business. Liabilities are creditors’ claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. The financial statements report the results and effects of transactions on the business' assets, liabilities, and stockholders’ equity. The balance sheet is a summary expression of the basic accounting equation. S-A E 220 What types of information are presented in the notes to the financial statements? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 220 Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and details too voluminous to be reported in the financial statements.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 221 (Ethics) Joe Laramie owns and operates Joe's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joe's Burgers began to have problems. Most of the problems were related to Joe's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joe does not have the cash or financial backing to expand further. He has therefore decided to sell his business. William Sheets is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Joe why he is selling Joe's Burgers. Joe replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Joe reasons that William should not have asked him anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Joe act ethically in not revealing fully his reasons for selling the business? Why or why not? Ans: N/A, LO: 6, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 221 1. The stakeholders include: Joe Laramie William Sheets Newton, Ohio

Students of City College and other customers City College Persons financing the purchase of Don's Burgers

2. Joe did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Joe 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. Joe has shown an intent to deceive that is unethical, and might be actionable in court as well. S-A E 222 (Communication) Mary Baroni 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. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Introduction to Financial Statements

1-65

Solution 222 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. At a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows:

1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Mary, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature)

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

IFRS Questions 1.

Which of the following is not a reason one set of international accounting standards are needed? a. Multinational corporation. b. Financial markets. c. Information technology. d. All of these answer choices are reasons one set of international accounting standards are needed.

Ans: D, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: A, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: B, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: C, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: D, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

The United States and the international standard-setting environment are primarily driven by meeting the needs of a. investors and creditors. b. tax authorities. c. central government planners. d. academic researchers.

Ans: A, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

Introduction to Financial Statements 7.

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. exchange. c. International companies listed on U.S. exchange. d. U.S. companies listed on U.S. exchange.

Ans: D, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: A, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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

Ans: D, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

10.

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

Ans: C, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

11.

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

Ans: B, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

12.

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

Ans: A, LO: 7, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting IMA: Reporting

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CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 1 1 2 2 2 3

K K K K C K C K C K K

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

3 3 3 4 4 4 4 4 5 5 5

C C K K C K K K K K K

56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 4 4 1 1 1 4 4 1

K K K K K K K K K K K K K K K K AP K K AP AP AP AP AP AP AP AP AP AP AP

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. 115.

1 1 1 1 4 4 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 4

AP AP AP AP AP AP K AP AP K K C K AN AN AP AN AP AP C K K C C C AP AP AN AN K

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. 144. 145.

205. 206.

1 2

AP AP

207. 208.

3 4

C AP

209. 210.

Item

7 7 7 7 7 7 7 7 7 7 7

K C K K C K K K K K K

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

7 7 7 7 7 7 7 7 7 7 7

K K K K K K K K K K K

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. 173. 174. 175.

4 4 4 5 5 5 5 5 5 5 5 5 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7

AP AP K K K K AP AP AN AP AP C K K K K K K K K K K K K K K K K K K

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. 202. 203. 204.

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 7 7 7

K C C C K C C C C K C C K K K K C K K K K K C C K K C C C

211. 212.

7 7

C C

213. 214.

7 7

C K

True-False Statements 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

5 5 5 6 6 6 7 7 7 7 7

K K C K K K K K K C K

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Multiple Choice Questions 4 4 4 4 4 4 4 4 4 4 4 1 4 4 4 2 4 4 4 2 4 4 4 4 4 4 4 4 4 4

K K C K K K K C C K K AP AP AP AP AP AP AP AP AP AP K K K C C C C AP AP

Brief Exercises 7 7

K K

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

215. 216. 217. 218.

1 1 1. 1, 2, 3, 4

AP K AP AP

219. 220. 221. 222.

1, 2, 4 1, 3 1, 3 2

231. 232.

6 7

K K

233. 234.

7 7

239.

1-7

240. 241. 242.

1 2,4 1, 4

K K K

Exercises AP AP AP AP

223. 224. 225. 226.

2, 4 2, 4, 5 2, 4 2, 4, 5

AP AP AP AN

227. 228. 229. 230.

2, 4, 5 2, 4 3 4

K AP AP AN

K K

237.

238.

C K K

249.

250.

Completion Statements K K

235. 236.

4 1

Matching Short Answer Essay 243. 244. 245.

2, 4 7 7

C C C

246. 247. 248.

7 7 7

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item 1. 2. 3. 4. 5. 6. 7. 56. 57.

Type TF TF TF TF TF TF TF MC MC

Item 58. 59. 60. 61. 62. 63. 64. 65. 66.

Type MC MC MC MC MC MC MC MC MC

Item 8. 9. 10. 74. 92.

Type TF TF TF MC MC

Item 93. 94. 95. 96. 97.

Type MC MC MC MC MC

Item 11. 12. 13. 14.

Type TF TF TF TF

Item 103. 104. 105. 106.

Type MC MC MC MC

Learning Objective 1 Item Type Item Type 67. MC 77. MC 68. MC 80. MC 69. MC 81. MC 70. MC 82. MC 71. MC 85. MC 72. MC 86. MC 73. MC 87. MC 75. MC 88. MC 76. MC 89. MC Learning Objective 2 Item Type Item Type 98. MC 131. MC 99. MC 135. MC 100. MC 206. BE 101. MC 218. Ma 102. MC 219. Ex Learning Objective 3 Item Type Item Type 107. MC 111. MC 108. MC 112. MC 109. MC 113. MC 110. MC 114. MC

Item 127. 205. 215. 216. 217. 218. 219. 220. 221.

Type MC BE Ex Ma Ma Ma Ex Ma Ma

Item 236. 239. 240. 242.

Type CS Ma SA SA

Item 222. 223. 224. 225. 226.

Type Ma Ex Ma Ma Ma

Item 227. 228. 239. 241. 243.

Type Ex Ma Ma SA SA

Item 207. 218. 220. 221.

Type BE Ma Ma Ma

Item 229. 239.

Type Ma Ma

A Further Look at Financial Statements

Item 15. 16. 17. 18. 19. 78. 79. 83. 84. 90.

Type TF TF TF TF TF MC MC MC MC MC

Item 91. 115. 116. 117. 118. 119. 120. 121. 122. 123.

Type MC MC MC MC MC MC MC MC MC MC

Item 20. 21. 22. 23.

Type TF TF TF TF

Item 24. 25. 149. 150.

Type TF TF MC MC

Item 26. 27.

Type TF TF

Item 28. 158.

Type TF MC

Item 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF

Item 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 162. 163. 164.

Type TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

Learning Objective 4 Item Type Item Type 124. MC 137. MC 125. MC 138. MC 126. MC 139. MC 128. MC 140. MC 129. MC 141. MC 130. MC 142. MC 132. MC 143. MC 133. MC 144. MC 134. MC 145. MC 136. MC 146. MC Learning Objective 5 Item Type Item Type 151. MC 155. MC 152. MC 156. MC 153. MC 157. MC 154. MC 224. Ex Learning Objective 6 Item Type Item Type 159. MC 161. MC 160. MC 231. CS Learning Objective 7 Item Type Item Type 165. MC 180. MC 166. MC 181. MC 167. MC 182. MC 168. MC 183. MC 169. MC 184. MC 170. MC 185. MC 171. MC 186. MC 172. MC 187. MC 173. MC 188. MC 174. MC 189. MC 175. MC 190. MC 176. MC 191. MC 177. MC 192. MC 178. MC 193. MC 179. MC 194. MC

Item 147. 148. 208. 218. 219. 223. 224. 225. 226. 227.

Type MC MC BE Ex Ex Ex Ma Ma Ma Ex

Item 228. 230. 235. 237. 239. 241. 242. 243. 249.

Type Ma Ma CS CS Ma SA SA SA SA

Item 226. 227. 238. 239.

Type Ma Ex CS Ma

Item

Type

Item 239.

Type Ma

Item

Type

Item 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 209. 210. 211. 212. 213.

Type MC MC MC MC MC MC MC MC MC MC BE BE BE BE BE

Item 214. 232. 233. 234. 239. 244. 245. 246. 247. 248. 250.

Type BE CS CS CS Ma SA SA SA SA SA SA

C = Completion Ex = Exercise SA = Short Answer Essay

2-3

2-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings. 2. Identify tools for analyzing financial statements and ratios for computing a company’s profitability. Ratio analysis expresses the relationship among selected items of financial statements data. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. 3. Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. The retained earnings statement presents the factors that changed the retained earnings balance during the period. A statement of stockholders’ equity presents the factors that changed stockholders’ equity during the period, including those that changed retained earnings. Thus, a statement of stockholders’ equity is more inclusive. 4. Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to assets ratio, measure the ability of a company to survive over a long period. 5. Use the statement of cash flows to evaluate solvency. Free cash flow indicates a company’s ability to generate cash from operations that is sufficient to pay debts, acquire assets, and distribute dividends. 6. Explain the meaning of generally accepted accounting principles. Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objective of financial reporting is to provide information that is useful for decision making. 7. Discuss financial reporting concepts. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, useful information is comparable, consistency, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The periodicity assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that the companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The full disclosure principle requires that companies disclose circumstances and events that matter to financial statement users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.

A Further Look at Financial Statements

2-5

TRUE-FALSE STATEMENTS 1.

Cash and supplies are both classified as current assets.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Stockholders’ equity is divided into two parts: common stock and retained earnings.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

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

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10.

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

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

11.

The retained earnings statement describes the changes in retained earnings during the period.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12.

The retained earnings statement is more comprehensive than the statement of stockholders’ equity.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-6 13.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Revenues have the effect of increasing retained earnings.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

14.

Most companies use a retained earnings statement rather than a statement of stockholders’ equity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

16.

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

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

17.

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

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

18.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

19.

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

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: Project Management, IMA: Business Economics

20.

Net cash provided by operating activities takes into account that a company must invest in capital expenditures just to maintain its current level of operations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

21.

Both investors and creditors have an interest in a company’s ability to generate favorable cash flows.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

22.

Free cash flow is net cash provided by operating activities less capital expenditures.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23.

In the statement of cash flows, Net cash provided by operating activities indicates the cash-generating capability of the company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Free cash flow is Net cash provided by operating activities less dividends.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

25.

Long-term creditors consider a high free cash flow amount an indication of solvency.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

26.

2-7

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

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

27.

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

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

28.

GAAP stands for generally accepted accounting procedures.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

29.

To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31.

For information to be useful, it must be both relevant and faithfully representative.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

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

Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

34.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35.

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

Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36.

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

Ans: F, LO: 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 periodicity assumption states that the business will remain in operation for the foreseeable future.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

2-8 38.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39.

The most generally accepted value used in accounting is market value.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

40.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

44.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

46.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

49.

Materiality is a company-specific aspect of faithful representation.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A Further Look at Financial Statements

50.

2-9

Relevance and cost are two constraints in accounting.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

51.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

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

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54.

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

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55.

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

Ans: F, LO: 7, 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 1. 2. 3. 4. 5. 6. 7. 8.

9. 10. 11. 12.

T F T T F F F F T T T F

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

T F T F F T T F T F T F

25. 26. 27. 28. 29. 30. 31 32. 33. 34. 35. 36.

T F T F F F

T T F F T F

37. 38. 39. 40. 41. 42. 43. 44 45. 46. 47. 48.

F F F T T F T F T T T F

49. 50. 51. 52. 53. 54. 55.

F F T T F T F

2-10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

MULTIPLE CHOICE QUESTIONS 56.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. expected to be converted to cash or used in the business within a relatively short period of time.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

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

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

61.

2-11

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

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62.

Trademarks would appear in which balance sheet section? a. Intangible assets b. Investments c. Property, plant, and equipment d. Current assets

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64.

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

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66.

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

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-12 68.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

69.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

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

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

71.

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

72.

These are selected account balances on December 31, 2014. Land $100,000 Land (held for future use) 150,000 Buildings 800,000 Inventory 200,000 Equipment 450,000 Furniture 100,000 Accumulated Depreciation 300,000 What is the total amount of property, plant, and equipment that will appear on the balance sheet? a. $1,500,000 b. $1,300,000 c. $1,800,000 d. $1,150,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $100,000 + $800,000 + $450,000 + $100,000 − $300,000 = $1,150,000

A Further Look at Financial Statements

73.

2-13

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

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74.

Ratios that measure the income or operating success of a company for a given period of time are a. liquidity ratios. b. profitability ratios. c. solvency ratios. d. trending ratios.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

75.

Use the following data to determine the total dollar amount of assets to be classified as current assets. Koonce Office Supplies Balance Sheet December 31, 2014

Cash $ 130,000 Accounts receivable 100,000 Inventory 110,000 Prepaid insurance 60,000 Stock investments 170,000 Land 180,000 Buildings $210,000 Less: Accumulated depreciation (40,000) 170,000 Trademarks 140,000 Total assets $1,060,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 140,000 20,000 160,000 $320,000

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

$240,000 500,000 $740,000 $1,060,000

$570,000 $400,000 $340,000 $290,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $130,000 + $100,000 + $110,000 + $60,000 = $400,000

2-14 76.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Koonce Office Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 140,000 20,000 160,000 $320,000

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

$240,000 500,000 $740,000 $1,060,000

$660,000 $350,000 $490,000 $390,000

77.

Use the following data to determine the total dollar amount of assets to be classified as investments. Koonce Office Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 140,000 20,000 160,000 $320,000

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

$240,000 500,000 $740,000 $1,060,000

$0 $350,000 $170,000 $310,000

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: Stock investments = $170,000

A Further Look at Financial Statements

78.

2-15

Use the following data to determine the total amount of working capital. Koonce Office Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 140,000 20,000 160,000 $320,000

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

$240,000 500,000 $740,000 $1,060,000

$240,000 $390,000 $130,000 $180,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($130,000 + $100,000 + $110,000 + $60,000) − ($140,000 + $20,000) = $240,000

79.

Use the following data to calculate the current ratio. Koonce Office Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 140,000 20,000 160,000 $320,000

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

$240,000 500,000 $740,000 $1,060,000

2.13 : 1 1.44 : 1 2.86 : 1 2.50 : 1

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($130,000 + $100,000 + $110,000 + $60,000)  ($140,000 + $20,000) = 2.50:1

2-16 80.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following data to determine the total dollar amount of assets to be classified as current assets. Carne Auto Supplies Balance Sheet December 31, 2014

Cash $ 35,000 Accounts receivable 50,000 Inventory 70,000 Prepaid insurance 40,000 Stock investments 90,000 Land 95,000 Buildings $115,000 Less: Accumulated depreciation (30,000) 85,000 Trademarks 70,000 Total assets $535,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 65,000 10,000 90,000 $165,000

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

$120,000 250,000 $370,000 $535,000

$195,000 $125,000 $285,000 $165,000

Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $35,000 + $50,000 + $70,000 + $40,000 = $195,000

81.

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Carne Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 65,000 10,000 90,000 $165,000

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

$120,000 250,000 $370,000 $535,000

$270,000 $250,000 $180,000 $210,000

A Further Look at Financial Statements

82.

2-17

Use the following data to determine the total dollar amount of assets to be classified as investments. Carne Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 65,000 10,000 90,000 $165,000

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

$120,000 250,000 $370,000 $535,000

$0 $160,000 $90,000 $140,000

83.

Use the following data to determine the total amount of working capital. Carne Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 65,000 10,000 90,000 $165,000

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

$120,000 250,000 $370,000 $535,000

$130,000 $120,000 $80,000 $210,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($35,000 + $50,000 + $70,000 + $40,000) − ($65,000 + $10,000) = $120,000

2-18 84.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following data to calculate the current ratio. Carne Auto Supplies Balance Sheet December 31, 2014

Cash $ 35,000 Accounts receivable 50,000 Inventory 70,000 Prepaid insurance 40,000 Stock investments 80,000 Land 95,000 Buildings $100,000 Less: Accumulated depreciation (30,000) 85,000 Trademarks 70,000 Total assets $535,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 65,000 10,000 90,000 $165,000

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

$120,000 250,000 $370,000 $535,000

2.07 : 1 1.67 : 1 3.00 : 1 2.60 : 1

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($35,000 + $50,000 + $70,000 + $40,000)  ($65,000 + $10,000) = $2.60:1

85.

N3 Corporation has assets of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the creditors’ claims on their assets? a. $2,695,000 b. $1,255,000 c. $1,745,000 d. $3,305,000

86.

K2 Corporation has assets of $2,400,000, common stock of $624,000, and retained earnings of $380,000. What are the creditors’ claims on their assets? a. $2,156,000 b. $1,004,000 c. $1,396,000 d. $2,644,000

A Further Look at Financial Statements

87.

2-19

Use the following data to determine the total dollar amount of assets to be classified as current assets. Eddy Auto Supplies Balance Sheet December 31, 2014

Cash $ 84,000 Accounts receivable 80,000 Inventory 140,000 Prepaid insurance 60,000 Stock investments 170,000 Land 190,000 Buildings $226,000 Less: Accumulated depreciation (40,000) 186,000 Trademarks 140,000 Total assets $1,050,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 110,000 20,000 180,000 $310,000

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

$240,000 500,000 $740,000 $1,050,000

$534,000 $224,000 $364,000 $304,000

88.

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Eddy Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 110,000 20,000 180,000 $310,000

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

$240,000 500,000 $740,000 $1,050,000

$686,000 $516,000 $556,000 $376,000

2-20 89.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following data to determine the total dollar amount of assets to be classified as investments. Eddy Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 110,000 20,000 180,000 $310,000

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

$240,000 500,000 $740,000 $1,050,000

$0 $310,000 $170,000 $390,000

90.

Use the following data to determine the total amount of working capital. Eddy Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 110,000 20,000 180,000 $310,000

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

$240,000 500,000 $740,000 $1,050,000

$404,000 $234,000 $254,000 $174,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($84,000 + $80,000 + $140,000 + $60,000) − ($110,000 + $20,000) = $234,000

A Further Look at Financial Statements

91.

2-21

Use the following data to calculate the current ratio. Eddy Auto Supplies Balance Sheet December 31, 2014

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 110,000 20,000 180,000 $310,000

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

$240,000 500,000 $740,000 $1,050,000

2.34 : 1 2.80 : 1 3.31 : 1 1.26 : 1

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($84,000 + $80,000 + $140,000 + $60,000)  ($110,000 + $20,000) = 2.80:1

92.

A measure of profitability is the a. current ratio. b. debt to assets ratio. c. earnings per share. d. working capital.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

93.

For 2014 Kuhlman Corporation reported net income of $28,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2014 earnings per share? a. $1.75 b. $0.57 c. $25.00 d. $0.07

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($28,000 − 0)  16,000 = $1.75

94.

For 2014 Fielder Corporation reported net income of $30,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2014 earnings per share? a. $0.08 b. $0.53 c. $25.00 d. $1.88

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($30,000 − 0)  16,000 = $1.88

2-22 95.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Earnings per share are calculated by dividing a. gross profit by average common shares outstanding. b. (net income less preferred dividends) by average common shares outstanding. c. net income by average common shares outstanding. d. net sales by average common shares outstanding.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

96.

Earnings per share is a a. profitability ratio. b. liquidity ratio. c. solvency ratio. d. trending ratio.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

97.

Which of the following statements is true? a. Earnings per share is an internal measure and is not used by stockholders. b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period. c. Net income is not adjusted when computing earnings per share. d. By comparing earnings per share of a single corporation over time, a stockholder can evaluate the corporation’s relative earnings performance.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

98.

Earnings available to common stockholders is equal to a. total revenues b. net income + preferred dividends. c. preferred dividends – net income. d. net income – preferred dividends.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

99.

The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation (in millions) 2014 2013 Preferred dividends 25 10 Net income 500 480 Shares outstanding at the 200 180 end of the year Shares outstanding at the 180 150 beginning of the year

Newell Corporation 2014 2013 0 30 490 520 150 200 200

220

Based on this information, the earnings per share calculations (rounded to two decimals) suggest a. lower performance in 2013 than in 2014 for Bradshaw Corporation. b. higher performance in 2014 than in 2013 for Bradshaw Corporation. c. fewer earnings available to Bradshaw's common stockholders in 2014 than in 2013. d. an increase in the average number of common shares outstanding between 2013 and 2014 for Bradshaw Corporation. Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A Further Look at Financial Statements

100.

2-23

The following information is available for Bradshaw Corporation and Newell Corporation:

(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Bradshaw Corporation 2014 2013 25 10 500 480 200 180 180

150

Newell Corporation 2014 2013 0 30 490 520 150 200 200

220

Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given? a. There is lower performance in 2013 than in 2014 for Newell Corporation. b. There is higher performance in 2013 than in 2014 for Newell Corporation. c. There are fewer earnings available to Newell's common stockholders in 2014 than in 2013. d. There is a decrease in preferred shares of stock in 2014 as compared with 2013. Ans: A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

101.

The following information is available for Bradshaw Corporation and Newell Corporation: (in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Bradshaw Corporation 2014 2013 25 10 500 480 200 180 180

150

Newell Corporation 2014 2013 0 30 490 520 150 200 200

220

Based on this information, what is the amount of Bradshaw's earnings per share (rounded to two decimals) for 2014? a. $2.76 b. $2.50 c. $1.25 d. $1.32 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($500 − $25)  [(200 + 180)  2] = $2.50

2-24 102.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Bradshaw Corporation 2014 2013 25 10 500 480 200 180 180

150

Newell Corporation 2014 2013 0 30 490 520 150 200 200

220

Based on the information for both Bradshaw and Newell over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that a. Bradshaw is seeing a greater performance improvement than Newell. b. the earnings available to common stockholders is decreasing for Newell and increasing for Bradshaw. c. the earnings per share calculations for both companies assume that changes in shares between 2013 and 2014 occur in the middle of the year. d. Newell is more financially stable than Bradshaw. Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

103

Dawson Corporation has the following information available for 2014: Issued common stock Retired common stock Paid dividends Net income Beginning Common Stock balance Beginning Retained Earnings balance

(in millions) $45 $65 $75 $130 $625 $475

Based in this information, what is Dawson's Common Stock balance at the end of the year? a. $605 b. $735 c. $245 d. $680 Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $625 + $45 − $65 = $605

A Further Look at Financial Statements

104.

2-25

(in millions) $45 $65 $75 $130 $625 $475

Based on this information, what is Dawson's Retained Earnings balance at the end of the year? a. $680 b. $530 c. $420 d. $605 Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $475,000 + $130,000 − $75,000 = $530,000

105.

Which of the following is the least likely consideration that management uses when deciding whether to pay a dividend? a. Does the company have more cash than it has opportunities? b. Is the company's average number of common shares outstanding decreasing? c. Does the company have uses for cash that will increase its value? d. What are the company's cash needs?

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

106.

Most companies use a(n) _________ rather than a retained earnings statement. a. balance sheet b. income statement c. statement of cash flows d. statement of stockholders’ equity

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

Dividends appear on a. the retained earnings statement only. b. the income statement only. c. both the retained earnings statement and the balance sheet. d. the balance sheet only.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

Issuing new shares of common stock will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

2-26 109.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Declaring a cash dividend will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

110.

Reporting a net income of $95,000 will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111.

McKinney Corporation had beginning retained earnings of $2,242,000 and ending retained earnings of $2,499,000. During the year they issued common stock totaling $141,000. No dividends were paid. What was their net income for the year? a. $257,000 b. $116,000 c. $398,000 d. $323,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,499,000 − $2,242,000 = $257,000

112.

Wilton Corporation had beginning retained earnings of $724,000 and ending retained earnings of $833,000. During the year they issued common stock totaling $47,000. No dividends were paid. What was Wilton's net income for the year? a. $109,000 b. $62,000 c. $156,000 d. $131,000

113.

At December 31, 2014 Lowery Company had retained earnings of $2,384,000. During 2014 they issued stock for $98,000, and paid dividends of $34,000. Net income for 2014 was $402,000. The retained earnings balance at the beginning of 2014 was a. $2,752,000. b. $2,016,000. c. $2,114,000. d. $2,654,000.

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,384,000 + $34,000 − $402,000 = $2,016,000

A Further Look at Financial Statements

114.

2-27

At December 31, 2014 Keen Company had retained earnings of $1,292,000. During 2014 they issued stock for $49,000, and paid dividends of $17,000. Net income for 2014 was $201,000. The retained earnings balance at the beginning of 2014 was a. $1,476,000. b. $1,108,000. c. $1,157,000. d. $1,427,000.

115.

The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. solvency.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

116.

Which of the following is a measure of liquidity? a. Working capital b. Profit margin c. Earnings per share d. Debt to assets ratio

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

117.

Current assets divided by current liabilities is known as the a. working capital. b. current ratio. c. profit margin. d. capital structure.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

118.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

119.

A short-term creditor is primarily interested in the __________ of the borrower. a. liquidity b. profitability c. consistency d. solvency

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2-28 120.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

121.

Working capital is calculated by taking a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

122.

Working capital is a measure of a. consistency. b. liquidity. c. profitability. d. solvency.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

123.

Long-term creditors are usually most interested in evaluating a. liquidity and profitability. b. consistency and profitability. c. liquidity and solvency. d. consistency and solvency.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

124.

A liquidity ratio measures the a. income or operating success of a company over a period of time. b. ability of a company to survive over a long period of time. c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d. percentage of total financing provided by creditors.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

125.

Working capital is a. calculated by dividing current assets by current liabilities. b. used to evaluate a company’s liquidity and short-term debt paying ability. c. used to evaluate a company’s solvency and long-term debt paying ability. d. calculated by subtracting current assets from current liabilities.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

126.

2-29

The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is a. leverage. b. liquidity. c. profitability. d. wealth.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127.

Based on the following data, what is the amount of current assets? Accounts payable……………………………………………………….. $62,000 Accounts receivable…………………………………………………….. 100,000 Cash………………………………………………………………………. 50,000 Intangible assets………………………………………………………… 100,000 Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 Long-term liabilities……………………………………………………… 200,000 Short-term investments…………………………………………………. 80,000 Notes payable……………………………………………………………. 56,000 Property, plant, and equipment…………………………………………… 1,340,000 Prepaid insurance……………………………………………………….. 2,000 a. b. c. d.

$212,000 $370,000 $232,000 $230,000

128.

Based on the following data, what is the amount of working capital? Accounts payable……………………………………………………….. $64,000 Accounts receivable…………………………………………………….. 114,000 Cash………………………………………………………………………. 60,000 Intangible assets………………………………………………………… 100,000 Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 Long-term liabilities……………………………… ……………………. 200,000 Short-term investments…………………………………………………. 80,000 Notes payable (short-term)……………………………………………… 56,000 Property, plant, and equipment…………………………………………… 1,340,000 Prepaid insurance……………………………………………………….. 2,000 a. b. c. d.

$274,000 $322,000 $360,000 $316,000

2-30 129.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 16,000 Net income $ 21,000 Current liabilities 8,000 Stockholders’ equity 39,000 Average assets 80,000 Total liabilities 21,000 Total assets 60,000 Average common shares outstanding was 10,000. a. b. c. d.

$ 4,000 $16,000 $ 5,000 $ 8,000

130.

Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 16,000 Net income $ 21,000 Current liabilities 8,000 Stockholders’ equity 39,000 Average assets 80,000 Total liabilities 21,000 Total assets 60,000 Average common shares outstanding was 10,000. a. b. c. d.

2.0 : 1 2.6 : 1 0.5 : 1 2.9 : 1

131.

Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 16,000 Net income $ 21,000 Current liabilities 8,000 Stockholders’ equity 39,000 Average assets 80,000 Total liabilities 21,000 Total assets 60,000 Average common shares outstanding was 10,000. a. b. c. d.

$3.90 $6.00 $2.10 $0.48

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $21,000  $10,000 = $2.10

A Further Look at Financial Statements

132.

2-31

Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 14,000 Net income $ 21,000 Current liabilities 8,000 Stockholders’ equity 39,000 Average assets 80,000 Total liabilities 21,000 Total assets 60,000 Average common shares outstanding was 10,000. a. b. c. d.

26 percent 13 percent 65 percent 35 percent

133.

Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 7,000 Net income $ 15,000 Current liabilities 4,000 Stockholders’ equity 21,000 Average assets 44,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000. a. b. c. d.

$7,000 $5,000 $3,000 $2,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $7,000 − $4,000 = $3,000

134.

Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 7,000 Net income $ 15,000 Current liabilities 4,000 Stockholders’ equity 21,000 Average assets 44,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000. a. b. c. d.

0.78 : 1 3.33 : 1 0.57 : 1 1.75: 1

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $7,000  $4,000 = $1.75:1

2-32 135.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 7,000 Net income $ 15,000 Current liabilities 4,000 Stockholders’ equity 21,000 Average assets 44,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000. a. b. c. d.

$1.50 $2.50 $0.67 $0.55

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $15,000  $10,000 = $1.50

136.

Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 7,000 Net income $ 15,000 Current liabilities 4,000 Stockholders’ equity 21,000 Average assets 44,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000. a. b. c. d.

20.5 percent 30 percent 33.3 percent 40.9 percent

137.

The debt to assets ratio is computed by dividing a. long-term liabilities by total assets. b. long-term liabilities by average assets. c. total liabilities by total assets. d. total liabilities by average assets.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

138.

A useful measure of solvency is the a. current ratio. b. earnings per share. c. return on assets ratio. d. debt to assets ratio.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

139.

Which of the following is not considered a measure of liquidity? a. Current ratio b. Working capital c. Debt to assets ratio d. Each of these answer choices are liquidity measures

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

140.

2-33

Which measure would a long-term creditor be least interested in reviewing? a. Free cash flow b. Debt to assets ratio c. Current ratio d. Solvency measure

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

141.

Bathlinks Corporation has a debt to assets ratio of 73%. This tells the user of Bathlinks’s financial statements that a. Bathlinks is getting a 27% return on its assets. b. there is a risk that Bathlinks cannot pay its debts as they come due. c. 73% of the assets are financed by the stockholders. d. based on this measure, the user should not invest in Bathlinks.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

142.

Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory build up. Which of the following statements is true? a. As long as the current ratio remains constant, there is no need for concern. b. The composition of current assets and current liabilities does not matter. c. The management of Ace should consider the effect of slow moving inventory on its liquidity. d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

143.

How can a company improve its current ratio? a. Work with a creditor to reclassify some current debt into long-term debt b. Use cash to reduce current liabilities c. Nothing can ethically be done to improve the current ratio d. Use excess cash to buy new equipment

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

144.

Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be? a. 3.1:1 b. 2.4:1 c. 3.6:1 d. 2.0:1

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,800,000 − $250,000)  ($750,000 − $250,000) = $3.1:1

2-34 145.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded) a. 2.5:1 b. 2.1:1 c. 2.3:1 d. 2.4:1

146.

Mitchell Corporation has current assets of $1,600,000 million and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be? a. 2.7:1 b. 3.2:1 c. 1.69:1 d. 2.1:1

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,600,000 − $250,000)  ($750,000 − $250,000) = $2.7:1

147.

Mitchell Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded) a. 2.27:1 b. 2.04:1 c. 1.88:1 d. 2.13:1

148.

The debt to assets ratio is a a. liquidity ratio. b. profitability ratio. c. solvency ratio. d. None of the answer choices is correct.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

149.

Free cash flow provides an indication of a company’s ability to a. generate cash to invest in new capital expenditures. b. generate net income. c. generate cash to pay dividends. d. generate cash to invest in new capital expenditures and to pay dividends.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

150.

Free cash flow represents a. cash provided by operations less adjustments for capital expenditures and dividends. b. a measurement of a company’s cash generating ability. c. a measure of solvency. d. All of these answer choices are correct.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

151.

2-35

Free cash flow is Net cash provided by operating activities a. less capital expenditures. b. less cash dividends. c. less capital expenditures and cash dividends. d. less capital expenditures and salaries expense.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152.

In 2014 Grider Corporation had cash receipts of $56,000 and cash disbursements of $32,000. Grider’s ending cash balance at December 31, 2014 was $88,000. What was Grider’s beginning cash balance? a. $64,000 b. $80,000 c. $120,000 d. $112,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $88,000 − $56,000 + $32,000 = $64,000

153.

In 2014 Grider Corporation had cash receipts of $35,000 and cash disbursements of $20,000. Grider’s ending cash balance at December 31, 2014 was $55,000. What was Grider’s beginning cash balance? a. $40,000 b. $50,000 c. $75,000 d. $70,000

154.

Suppose that Morgan Corporation produced and sold 4,800 laptop computers during 2014. It reported $150,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Morgan invested in $8,600 in equipment. Morgan paid $1,400 in dividends. What is Morgan’s free cash flow? a. $140,000 b. $160,000 c. $157,000 d. $150,000

2-36 155.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information is available for Cooke Corporation:

Cash receipts from operating activities Cash payments from operating activities Net cash used by investing Net cash provided by financing Net increase in cash and equivalents Cash and equivalents at start of year Cash and equivalents at year-end

(in million) $980 $240 $210 $750 ? $550 ?

What is the net increase in cash and equivalents? a. $1,700 b. $1,280 c. $730 d. $2,250 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $980,000 − $240,000 − $210,000 + $750,000 = $1,280,000

156.

The following information is available for Cooke Corporation:

(in million) $980 $240 $210 $750 ? $550 ?

What is the cash and equivalents amount at year-end? a. $1,290 b. $730 c. $1,830 d. $2,730 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $980 − $240 − $210 + $750 + $550 = $1,830

157.

If Morris Corporation has a negative $131 million free cash flow, which of the following statements is most likely true? a. Morris' capital expenditures plus its cash dividends are less than its cash provided by operations. b. This free cash flow indicates that Morris is in good shape to repay its long-term obligations when they come due. c. This free cash flow indicates that Morris presents good cash generating ability to retire stock. d. Morris' cash provided by operations is less than its cash dividends plus capital expenditures.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

158.

2-37

Which of the following organizations issues accounting standards for countries outside the United States? a. SEC b. GAAP c. IASB d. FASB

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159.

Generally accepted accounting principles a. are accounting rules formulated by the Internal Revenue Service. b. are sound in theory but rarely used in real life. c. are accounting rules that are recognized as a general guide for financial reporting. d. have eliminated all errors in accounting.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

160.

The agency of the United States Government that oversees the U.S. financial markets is the a. Internal Revenue Service. b. Security Exchange Commission. c. Financial Accounting Standards Board. d. International Auditing Standards Committee.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

161.

What organization issues U.S. accounting standards? a. Security Exchange Commission b. International Accounting Standards Committee c. International Auditing Standards Committee d. Financial Accounting Standards Board

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

162.

Which one of the following is not an enhancing quality of useful information? a. Timeliness b. Understandability c. Materiality d. Comparability

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

163.

All of the following are qualities of useful information except a. faithful representation. b. materiality. c. relevance. d. flexibility.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

2-38 164.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The two fundamental qualities of useful information are a. relevance and faithful representation. b. verifiability and timeliness. c. comparability and flexibility. d. understandability and consistency.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

165.

The convention of consistency refers to consistent use of accounting principles a. among firms. b. among accounting periods. c. throughout the accounting periods. d. within industries.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

166.

The quality of consistency enhances a. relevance. b. materiality. c. comparability. d. faithful representation.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

167.

Information that is presented in a clear fashion, so that users of that information can interpret it is an example of a. relevance. b. faithful representation. c. understandability. d. comparability.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

168.

In order for accounting information to be relevant, it must a. have very little cost. b. help predict future events or confirm prior expectations. c. not be reported to the public. d. be used by a lot of different firms.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

169.

Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

170.

2-39

Accounting information is relevant to business decisions because it a. has been verified by external audit. b. is prepared on an annual basis. c. confirms prior expectations. d. is neutral in its representations.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

171.

If accounting information has relevance, it is useful in making predictions about a. future IRS audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

172.

Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173.

Which of the following is not a quality associated with faithful representation? a. Complete b. Materiality c. Neutral d. All of these answer choices are correct.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174.

Accounting information should be neutral in order to enhance a. faithful representation. b. consistency. c. comparability. d. relevance.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

175.

Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176.

Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. verifiable and neutral. c. complete and neutral. d. relevance and verifiable.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-40 177.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free of error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178.

A company can change to a new method of accounting if management can justify that the new method results in a. more meaningful financial information. b. a higher net income. c. a lower net income for tax purposes. d. less likelihood of clerical errors.

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

179.

An item is considered material if a. it doesn’t costs a lot of money. b. it is of a tangible good. c. its size is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

180.

Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of a. consistency. b. timeliness. c. verifiability. d. understandability.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

181.

A company using the same accounting principles from year to year is an application of a. timeliness. b. consistency. c. full disclosure. d. materiality.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

182.

Information is _________ if independent measures, using the same methods, obtain similar results. a. Verifiable b. Consistent c. Understandable d. Relevant

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

183.

2-41

Different companies using the same accounting principles is an application of a. consistency. b. materiality. c. full disclosure. d. comparability.

Ans: D, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

184.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the a. economic entity assumption. b. monetary unit assumption. c. going concern assumption. d. periodicity assumption.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

185.

Which of the following is a constraint in accounting? a. Comparability b. Cost c. Consistency d. Relevance

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

186.

The accounting concept that indicates assets should be reported at the price received to sell an asset is the a. economic entity assumption. b. monetary unit assumption. c. fair value principle. d. historical cost principle.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187.

For accounting information to have relevance, it must be a. consistent. b. timely. c. verifiable. d. understandable.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

188.

The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-42 189.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which accounting assumption requires that only those things that can be expressed in dollar values are included in the accounting records? a. monetary unit assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

190.

The principle that indicates that assets should be reported at the price received to sell an asset is the a. historical cost principle. b. fair value principle. c. full disclosure principle. d. consistency principle.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics

191.

Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption b. Economic entity assumption c. Periodicity assumption d. Going concern assumption

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

192.

It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the a. going concern assumption. b. economic entity assumption. c. monetary unit assumption. d. periodicity assumption.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

193.

The going concern assumption assumes that the business a. will be liquidated in the near future. b. will be purchased by another business. c. is in a growth industry. d. will remain in operation for the foreseeable future.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

194.

The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

195.

2-43

The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the a. economic entity assumption. b. monetary unit assumption. c. periodicity assumption. d. going concern assumption.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

196.

Which of the following is not an accounting assumption? a. Integrity b. Going concern c. Periodicity d. Economic entity

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

197.

The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

198.

The TNT Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be reported as assets at a. $200 million. b. $800 million. c. $300 million. d. $500 million.

Ans: C, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

199.

The Mac Company has four plants nationwide that cost $350 million. The current fair value of the plants is $300 million. The plants will be reported as assets at a. $350 million. b. $700 million. c. $300 million. d. $600 million.

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

200.

The historical cost principle requires that when assets are acquired, they be recorded at a. market value. b. the amount paid for them. c. selling price. d. list price.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

2-44 201.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Valuing assets at their fair value rather than at their cost is inconsistent with the a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

202.

Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

203.

Connor Corporation hired a new accountant. Over the next four years, the accountant used four different accounting methods to depreciation for Connor's equipment. Which of the following qualities of useful information has Connor most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency

Ans: D, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

204.

Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following? a. Monetary unit assumption b. Going concern assumption c. Economic entity assumption d. Periodicity assumption.

Ans: D, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

2-45

Answers to Multiple Choice Questions 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71 72. 73. 74. 75. 76. 77.

d c d d a b a d a d b d b c c d d d b b b c

78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.

a d a c c b d c c c d c b b c a d b a d d d

100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.

a b c a b b d a c b a a a b b b a b c a c b

122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143.

b c c b b b a d a c d c d a b c d c c b c a

144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165.

a a a a c d d c a a a b c d c c b d c d a b

166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187.

c c b b c d d b a b c a a c d b a d b b c b

188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204.

c a b d b d d d a b c a b b c d d

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

2-46

BRIEF EXERCISES BE. 205 A list of financial statement items for Maloney Company includes the following: Accounts receivable $19,500 Prepaid insurance $5,400 Cash $22,400 Supplies $1,800 Debt investments $ 6,200 Prepare the current assets section of the balance sheet listing the items in the proper sequence. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 205

(5 min.) MALONEY COMPANY Balance Sheet (PARTIAL)

Assets Current assets Cash. ...................................................................... Debt investments .................................................... Accounts receivable ................................................ Supplies ................................................................. Prepaid insurance .................................................... ` Total current assets .................................................

$ 22,400 6,200 19,500 1,800 5,400 $55,300

BE. 206 The following information (in millions of dollars) is available for Kline Sportswear for 2014: Sales revenue $6,300 Net income $588.7 Stock price per share $18.45 Preferred stock dividend $0 Average shares outstanding

336.4 million

Compute the earnings per share for Kline Sportswear. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 206

(5 min.)

Earnings per share =

$588.7 – 0 336.4

= $1.75

A Further Look at Financial Statements

2-47

BE. 207 For each of the following events affecting the stockholders’ equity of Carney, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS). _____1. Declared a cash dividend. _____2. Issued new shares of common stock. _____3. Reported net loss of $40,000 _____4. Reported net income of $20,000. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 207 1. DRE

(5 min.) 2. ICS

3. DRE

4. IRE

BE. 208 These selected condensed data are taken from a recent balance sheet of Sanson Company (in millions of dollars). Cash $ 7.2 Accounts receivable 14.4 Inventory 18.0 Other current assets 11.1 Total current liabilities $ 24.8 Additional information: Current liabilities at the beginning of the year were $35.6 million. What are (a) the working capital, and (b) the current ratio? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 208

(5 min.)

a. $25.9 b. 2.04: 1

($50.7 – $24.8) ($50.7  $24.8)

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

2-48 BE. 209

Insert the qualitative characteristics listed below that are associated with relevance and faithful representation. Confirmatory value Free from error Neutral

Materiality Complete Predictive value

RELEVANCE

FAITHFUL REPRESENTATION

_______________________

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 209

(5 min.)

RELEVANCE 1. Confirmatory value 2. Predictive value 3. Materiality

FAITHFUL REPRESENTATION 1. Free from error 2. Complete 3. Neutral

BE. 210 The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d. _____

Confirmatory value Neutral Predictive value Relevant

e. f. g.

Faithful representation Timely Verifiable

1. Accounting information that is not biased toward one position or another.

_____ 2. Providing information before it loses its capacity to influence decisions. _____ 3. Providing information that is proven to be free from error. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that accurately depicts what really happened. _____ 6. Confirms or corrects prior decisions. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

Solution 210

2-49

(5 min.)

1. b

3. g

5. e

2. f

4. d

6. a

BE. 211 For each of the independent situations described below, list the fundamental or enhancing of quality or useful information that has been violated, if any. List only one term for each case. 1. Carrier Company is in its third year of operation and has yet to issue financial statements. 2. Larsen Corporation has selected the FIFO inventory costing method during the current year. Last year it used the LIFO method and next year it plans to change to the average cost method. 3. Reiser Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year. Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 211

(5 min.)

1. Relevance (timely) 2. Consistency

3. No violation (materiality)

BE. 212 Each of the following statements is justified by an accounting concept. Write the letter in the blank next to each statement corresponding to the concept involved. a. b. c. d.

Consistency Materiality Full disclosure Periodicity

1. The life of a business is divided into artificial time periods. 2. This characteristic best enhances comparability of financial statements between years. 3. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statement. 4. A large company rounds its financial statement figures to the nearest thousand. Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 212 1. d

2. a

(5 min.) 3. c

4. b

BE. 213 Each of the following statements is justified by a fundamental quality or an enhancing of quality accounting. Write the letter in the blank next to each statement corresponding to the quality involved. a. b. c.

Comparability Understandability Verifiable

d. e. f.

Consistency Relevance Faithful representation

_____ 1.

A company uses the same accounting principles from year to year.

_____ 2.

Information that is free from error.

_____ 3.

Information presented in a clear and concise fashion.

_____ 4.

Information that makes a difference in a decision.

_____ 5.

Information accurately depicts what really happened.

Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 213

(5 min.)

1. d

3. b

2. c

4. e.

5. f

A Further Look at Financial Statements

2-51

Be. 214 Presented below are the basic assumptions and principles underlying financial statements. a. Historical cost principle b. Economic entity assumption c. Full disclosure principle

d. Going concern assumption e. Monetary unit assumption f. Periodicity assumption

Identify the basic assumption or principle that is described below. ____ 1. The economic life of a business can be divided into artificial time periods. ____ 2. The business will continue in operation long enough to carry out its existing objectives. ____ 3. Assets should be recorded at their cost. ____ 4. Economic events can be identified with a particular unit of accountability. ____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. ____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 214 1. f 2. d 3. a

(5 min.) 4. b 5. c 6. e

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

2-52

EXERCISES Ex. 215 The following information is available for Mullen Company for the year ended December 31, 2014: Accounts payable Stock investments Accumulated depreciation, equipment Retained earnings Common stock Intangible assets Notes payable (due in 5 years) Accounts receivable Cash Debt investments Land Equipment

4,700 8,400 4,000 16,000 4,800 2,500 6,000 1,500 2,600 3,000 10,000 7,500

Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2014. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 215

(20 min.) MULLEN COMPANY Balance Sheet December 31, 2014

Assets Current assets Cash. ....................................................................... Debt investments .................................................... Accounts receivable ................................................ Total current assets ............................................................. Investments Stock investments.................................................... ................................................................................8,400 Property, plant, and equipment Land ..................................................................... Equipment ............................................................... $7,500 Less Accumulated depreciation-equipment.............. 4,000 Intangible assets ............................................................... Total assets ……. ...............................................................

$ 2,600 3,000 1,500 $7,100 8,400

10,000 3,500

13,500 2,500 $31,500

A Further Look at Financial Statements

Solution 215

2-53

(Cont.) Liabilities and Stockholders’ Equity

Current liabilities Accounts payable ................................................... Long-term liabilities Notes payable ......................................................... Total liabilities .................................................................... Stockholders’ equity Common stock ........................................................ Retained earnings ................................................... Total stockholders’ equity .................................................... Total liabilities and stockholders’ equity ..............................

$ 4,700 6,000 $10,700 4,800 16,000 20,800 $31,500

Ex. 216 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. B. C. D. E. F. G. H.

Current assets Investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Stockholders’ equity Not on the balance sheet

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 216 _____ _____ _____ _____ _____

1. 2. 3. 4. 5.

1. C

2. G

(5 min.)

Accumulated depreciation-equip. Common stock Interest expense Salaries and wages payable Retained earnings 3. H

4. E

5. G

_____ 6. _____ 7. _____ 8. _____ 9. _____ 10.

6. A

7. D

8. A

Inventory Patents Prepaid insurance Mortgage payable Land (held for investment) 9. F

10. B

2-54

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 217 These items are taken from the financial statements of Donovan Company. at December 31, 2014. Buildings Accounts receivable Prepaid insurance Cash Equipment Land Insurance expense Depreciation expense Interest expense Common stock Retained earnings (January 1, 2014) Accumulated depreciation—buildings Accounts payable Mortgage payable Accumulated depreciation—equipment Interest payable Service revenue

$95,800 15,600 4,680 18,840 79,400 61,200 780 7,300 2,600 57,000 40,000 45,600 15,500 88,600 18,720 3,600 17,180

Instructions Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2015. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 217

(20 min.)

DONOVAN COMPANY Balance Sheet December 31, 2014 ___________________________________________________________________________ Assets Current assets Cash ....................................................... Accounts receivable .................................. Prepaid Insurance ..................................... Total current assets .............................. Property, plant, and equipment Land ........................................................ Buildings ..................................................... Less: Accumulated depreciation— buildings ............................................. Equipment ................................................. Less: Accumulated depreciation— equipment....................................... Total assets ........................................

$18,840 15,600 4,680 $ 39,120 61,200 $95,800 45,600 79,400

50,200

18,720

60,680

172,080 $211,200

A Further Look at Financial Statements

Solution 217

2-55

(Cont.)

Liabilities and Stockholders' Equity Current liabilities Accounts payable ........................................................... Current portion of note payable ......................................... Interest payable ................................................................. Total current liabilities ....................... Long-term liabilities Mortgage payable ..................................... Total liabilities ............................... Stockholders' equity Common stock.................................................................... Retained earnings ($40,000 + $6,500*) ....................................................... Total stockholders' equity ......................................... Total liabilities and Stockholders' equity ..............................................

$ 15,500 13,600 3,600 $ 32,700 75,000 107,700 57,000 46,500 103,500 $211,200

*Net income = $17,180 – $780 – $7,300 – $2,600 = $6,500 Ex. 218 The following items are taken from the financial statements of Tracy Company for 2014: Accounts payable Accounts receivable Accumulated depreciation—equipment Advertising expense Cash Common stock Depreciation expense Dividends Equipment Insurance expense Notes payable (due 2017) Prepaid insurance Rent expense Retained earnings (beginning) Salaries and wages expense Salaries and wages payable Service revenue Supplies Supplies expense

$ 10,000 11,000 38,000 21,000 14,000 90,000 12,000 15,000 210,000 3,000 70,000 6,000 17,000 12,000 34,000 3,000 130,000 4,000 6,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

2-56 Ex. 218

(Cont.)

Instructions (a)

Calculate the net income.

(b)

Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2014

(c)

Prepare a classified balance sheet for Tracy Company at December 31, 2014 assuming the note payable is a long-term liability.

(d)

Compute the current ratio, debt to assets ratio, and earnings per share value. The average number of shares outstanding for 2014 was 10,000.

Ans: N/A, LO: 1, 2, 3, 4 Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 218

(20 min.)

(a)

Net income = $37,000: ($130,000 – $21,000 – $12,000 – $3,000 – $17,000 – $34,000 – $6,000)

(b)

Retained earnings, January 1 Add: Net income

$12,000 37,000 49,000 15,000 $34,000

Less: Dividends Retained earnings, December 31 (c)

TRACY COMPANY Balance Sheet December 31, 2014 ___________________________________________________________________________ Assets Current assets Cash .................................................................................... $ 14,000 Accounts receivable ............................................................ 11,000 Supplies .............................................................................. 4,000 Prepaid insurance ............................................................... 6,000 Total current assets ...................................................... Property, plant, and equipment Equipment ........................................................................... 210,000 Less: Accumulated depreciation—equipment ...................... 38,000 Total assets ..................................................................

$35,000

172,000 $207,000

A Further Look at Financial Statements

Solution 218

(Cont.)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................................................ $ 10,000 Salaries and wages payable ............................................... 3,000 Total current liabilities .................................................. Long-term liabilities Notes payable ..................................................................... Total liabilities .............................................................. Stockholders’ equity Common stock ..................................................................... 90,000 Retained earnings ............................................................... 34,000 Total liabilities and stockholders’ equity ....................... (d)

2-57

$13,000 70,000 83,000

124,000 $207,000

Current ratio: $35,000 ÷ $13,000 = 2.7:1 Debt to assets ratio: $83,000 ÷ $207,000 = 40.1% Earnings per share: $37,000 ÷ 10,000= $3.70

Ex. 219 The following items are taken from the financial statements of Grove Company for 2014: Accounts payable Accounts receivable Accumulated depreciation-equipment Bonds payable Cash Common stock Cost of goods sold Depreciation expense Dividends Equipment Interest expense Patents Retained earnings, January 1 Salaries and wages expense Sales revenue Supplies

$18,500 8,000 4,800 18,000 24,000 25,000 27,000 4,800 5,300 44,000 2,500 7,500 16,000 5,200 50,500 4,500

Instructions (a) Prepare an income statement and a classified balance sheet for Grove Company. (b) Compute the following ratios and values: 1. Current ratio 2. Debt to assets ratio 3. Working capital 4. Earnings per share (Grove’s average number of shares outstanding during the year was 5,000.) Ans: N/A, LO: 1, 2, 4, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

2-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 219 (a)

(25 min.) GROVE COMPANY Income Statement For the Year Ended December 31, 2014

Sales revenue Cost of goods sold Gross profit Operating expenses Depreciation expense Salaries and wages expense Income from operations Other expenses and losses Interest expense Net income

$50,500 27,000 23,500 $4,800 5,200

10,000 13,500 2,500 $ 11,000

GROVE COMPANY Balance Sheet December 31, 2014 Assets Current assets Cash ........................................................................................... Accounts receivable .................................................................... Supplies ...................................................................................... Total current assets ............................................................ Property, plant, and equipment Equipment .................................................................................. Less: Accumulated depreciation—equipment ............................. Intangible assets Patents ....................................................................................... Total assets ....................................................................... Liabilities and Stockholders’ Equity Current liabilities Accounts payable ....................................................................... Long-term liabilities Bonds payable ............................................................................ Total liabilities .................................................................... Stockholders’ equity Common stock............................................................................. Retained earnings ...................................................................... Total liabilities and stockholders’ equity ............................. *Retained earnings = $21,700 ($16,000 + $11,000 – $5,300). (b) 1. 2. 3. 4.

Current ratio: $36,500 ÷ $18,500 = 1.97:1 Debt to assets ratio: $36,500 ÷ $83,200 = 43.9% Working capital $36,500 – $18,500 = $18,000 Earnings per share ( $11,000 ÷ 5,000) = $2.20

$24,000 8,000 4,500 $36,500 44,000 4,800

39,200 7,500 $83,200

$18,500 18,000 36,500 $25,000 21,700*

46,700 $83,200

A Further Look at Financial Statements

2-59

Ex. 220 These financial statement items are for Snyder Corporation at year-end, July 31, 2014. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue Notes payable (due 2016) Common stock Cash Accounts receivable Accumulated depreciation—equipment Dividends Depreciation expense Retained earnings (beginning of the year)

$ 2,580 50,700 22,600 21,000 4,100 62,100 8,500 1,800 16,000 20,200 12,780 6,000 5,000 4,000 35,200

Instructions (a) Prepare an income statement and a retained earnings statement for the year ended July 31, 2014. Snyder Corporation did not issue any new stock during the year. (b) Prepare a classified balance sheet at July 31, 2014. Ans: N/A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 220

(25 min.)

(a)

SNYDER CORPORATION Income Statement For the Year Ended July 31, 2014 _____________________________________________________________________________ Revenues Service revenue ............................................ $62,100 Rent revenue ................................................ 8,500 Total revenues ............................... $70,600 Expenses Salaries and wages expense ......................... 50,700 Utilities expense ............................................. 22,600 Depreciation expense .................................... 4,000 Total expense ................................. 77,300 Net loss ............................................................ $( 6,700) SNYDER CORPORATION Retained Earnings Statement For the Year Ended July 31, 2014 _____________________________________________________________________________ Retained earnings, August 1, 2013 ..................... $35,200 Less: Net loss ............................................................ $6,700 Dividends .......................................................... 5,000 11,700 Retained earnings, July 31, 2014 ......................... $23,500 .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 220

(25 min.)

(b)

SNYDER CORPORATION Balance Sheet July 31, 2014 _____________________________________________________________________________ Assets Current assets Cash $20,200 Accounts receivable 12,780 Total current assets $32,980 Property, plant, and equipment Equipment 21,000 Less: Accumulated depreciation—equipment 6,000 15,000 Total assets $47,980 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,100 Salaries and wages payable 2,580 Total current liabilities Notes payable (due 2016) Total liabilities Stockholders' equity Common stock 16,000 Retained earnings 23,500 Total stockholders' equity Total liabilities and stockholders' equity

$6,680 1,800 8,480

39,500 $47,980

Ex. 221 These items are taken from the financial statements of Drew Corporation for 2014. Retained earnings (beginning of year) Utilities expense Equipment Accounts payable Cash Salaries and wages payable Common stock Dividends Service revenue Prepaid insurance Maintenance and repairs expense Depreciation expense Accounts receivable Insurance expense Salaries and wages expense Accumulated depreciation—equipment

$33,000 2,000 56,000 15,300 15,900 3,000 13,000 14,000 78,000 3,500 1,800 3,300 14,200 2,200 47,000 17,600

A Further Look at Financial Statements

Ex. 221

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(Cont.)

Instructions Prepare an income statement and a retained earnings statement for the year ended December 31, 2014 and a classified balance sheet as of December 31, 2014. Ans: N/A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 221

(25 min.)

DREW CORPORATION Income Statement For the Year Ended December 31, 2014 _____________________________________________________________________________ Revenues Service revenue ...................................... Expense Salaries and wages expense .................. Depreciation expense ............................. Insurance expense.................................. Utilities expense ...................................... Maintenance and repairs expense .......... Total expenses................................. Net income.......................................................

$78,000 $47,000 3,300 2,200 2,000 1,800 56,300 $21,700

DREW CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 _____________________________________________________________________________ Retained earnings, January 1, 2013.................... Add: Net income ................................................ Less: Dividends.................................................. Retained earnings, December 31, 2014 ..............

$33,000 21,700 54,700 14,000 $40,700

DREW CORPORATION Balance Sheet December 31, 2014 _____________________________________________________________________________ Assets Current assets Cash .................................................................... $15,900 Accounts receivable ............................................. 14,200 Prepaid insurance ................................................ 3,500 Total current assets.......................... $33,600 Property, plant, and equipment Equipment.............................................................. 56,000 Less: Accumulated depreciation—equipment ...... 17,600 38,400 Total assets......................................... $72,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 221

(Cont.)

Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................................... Salaries and wages payable....................................... Total current liabilities ................................ Stockholders' equity Common stock ........................................................... Retained earnings ...................................................... Total stockholders' equity .......................... Total liabilities and stockholders' equity .....

$15,300 3,000 $18,300 13,000 40,700 53,700 $72,000

Ex. 222 The Dobson Company gathered the following condensed data for the year ended December 31, 2014: Cost of goods sold $ 720,000 Net sales 1,249,000 Administrative expenses 289,000 Interest expense 68,000 Dividends paid 38,000 Selling expenses 45,000 Instructions Prepare an income statement for the year ended December 31, 2014. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 222

(10 min.) DOBSON COMPANY Income Statement For the Year Ended December 31, 2014

Revenues Net sales .......................................................................................

$1,249,000

Expenses Cost of goods sold ......................................................................... Administrative expenses ................................................................ Selling expenses ........................................................................... Interest expense ............................................................................ Total expenses ..................................................................... Net income ...................................................................................

$720,000 289,000 45,000 68,000 1,122,000 $ 127,000

A Further Look at Financial Statements

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Ex. 223 The following data are taken from the financial statements of Rosen, Inc. as of the end of the year 2014. The data are in alphabetical order. Accounts payable $ 28,000 Accounts receivable 66,000 Cash 24,000 Gross profit 160,000 Income before income taxes 54,000

Net income Other current liabilities Salaries and wages payable Total assets Total liabilities

$ 48,000 17,000 5,000 250,000 175,000

Additional information: The average common shares outstanding during the year was 40,000.

Instructions Compute the following: (a) Current ratio. (b) Working capital.

Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 223

(5 min.)

(a)

Current ratio = Current assets ÷ Current liabilities = $90,000 ÷ $50,000 = 1.8 : 1

(b)

Working capital = Current assets – Current liabilities = $90,000 – $50,000 = $40,000

(c)

Earnings per share = (Net income–Preferred dividends) ÷ Average common shares outstanding = $48,000 ÷ 40,000 = $1.20

(d)

Debt to assets ratio = Total debt ÷ Total assets = $175,000 ÷ $250,000 = 70%

Ex. 224 Use the following data to calculate the liquidity and profitability ratios listed below. Average common shares outstanding Capital expenditures Cash provided by operating activities Dividends paid Current assets Instructions Compute the following: (a) Current ratio. (b) Working capital. (c) Earnings per share.

10,000 $20,000 32,000 5,000 190,000

Current liabilities Net income Net sales Total liabilities Total assets

$100,000 21,000 150,000 126,000 210,000

(d) Debt to assets ratio. (e) Free cash flow.

Ans: N/A, LO: 2, 4, 5 Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 224

(15 min.)

(a)

Current ratio = Current assets ÷ Current liabilities = $190,000 ÷ $100,000 = 1.9 : 1

(b)

Working capital = Current assets – Current liabilities = $190,000 – $100,000 = $90,000

(c)

Earnings per share ratio = (Net income – Preferred stock dividends) ÷ Average common share outstanding = $21,000 ÷ 10,000 = $2.10

(d) (e)

Debt to assets ratio = Total debt ÷ Total assets = $126,000 ÷ $210,000 = 60% Free cash flow = Cash provided by operating activities – Capital expenditures – Dividends paid = $32,000 – $20,000 – $5,000 = $7,000.

Ex. 225 The following data are taken from the financial statements of Edington Company. The data are in alphabetical order. Accounts payable $ 28,000 Net sales 500,000 Accounts receivable 65,000 Other current liabilities 20,000 Average common shares out. 20,000 Salaries and wages payable 7,000 Cash 56,000 Stockholders’ equity 135,000 Gross profit 190,000 Total assets 300,000 Net income 50,000 Instructions Compute the following: (a) Current ratio. (b) Working capital.

Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 225

(10 min.)

(a)

Current ratio = Current assets ÷ Current liabilities = $121,000 ÷ $55,000 = 2.2 : 1

(b)

Working capital = Current assets – Current liabilities = $121,000 – $55,000 = $66,000

(c)

Earnings per share = Net income ÷ Average common shares outstanding = $50,000 ÷ 20,000 = $2.50

(d)

Debt to assets ratio

= Total debt ÷ Total assets = $165,000 ÷ $300,000 = 55% (Total debt = Total assets – Stockholders’ equity = $300,000 – $135,000)

A Further Look at Financial Statements

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Ex. 226 Comparative financial statement data for Arthur Corporation and Lancelot Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2014.

Net sales Cost of goods sold Operating expenses Interest expense Income tax expense

Arthur Corporation 2014 $1,850,000 1,225,000 303,000 9,000 85,000

Lancelot Corporation 2014 $620,000 365,000 98,000 3,800 36,800

Current assets Plant assets (net) Current liabilities Long-term liabilities

427,200 532,000 66,325 148,500

130,336 139,728 35,348 29,620

Additional Information: Cash from operating activities $153,000 Capital expenditures $90,000 Dividends paid $36,000 Average number of shares outstanding 100,000

$44,000 $20,000 $15,000 50,000

Instructions (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2014. (b) Comment on the relative solvency of the companies by computing the debt to assets ratio and the free cash flow for each company for 2014. Ans: N/A, LO: 2, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 226

(15 min.)

(a)

Arthur Company appears to be more profitable. Its net income for 2014 is $228,000 ($1,850,000 – $1,225,000 – $303,000 – $9,000 – $85,000). Its earnings per share is $2.28 ($228,000  100,000 shares outstanding). Lancelot's net income for 2014 is $116,400 ($620,000 – $365,000 – $98,000 – $3,800 – $36,800). Its earnings per share is $2.33 ($116,400  50,000 shares outstanding).

(b)

Arthur appears to be slightly more solvent. Arthur's 2014 debt to assets ratio of 22.4% ($214,825  $959,200)a is lower than Lancelot's ratio of 24.1% ($64,968  $270,064)b. The lower the percentage of debt to assets, the lower the risk that a company may be unable to pay its debts as they income due. Another measure of solvency, free cash flow, also indicates that Arthur is more solvent. Arthur had $27,000 ($153,000 – $90,000 – $36,000) of free cash flow while Lancelot had only $9,000 ($44,000 – $20,000 – $15,000). .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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Solution 226

(Cont.)

$214,825 ($66,325 + $148,500) is Arthur's 2014 total liabilities $959,200 ($427,200 + $532,000) is Arthur's 2014 total assets. b

$64,968 ($35,348 + $29,620) is Lancelot's 2014 total liabilities $270,064 ($130,336 + $139,728) is Lancelot's 2014 total assets. Ex. 227 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. Free cash flow

____

3. Debt to assets ratio

____

4. Earnings per share

____

5. Current ratio

Ans: N/A, LO: 2, 4, 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 227 P S S P L

1. 2. 3. 4. 5.

(5 min.)

Price-earnings ratio Free cash flow Debt to assets ratio Earnings per share Current ratio

A Further Look at Financial Statements

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Ex. 228 The following information is available from the annual reports of Marin Company and Nance Company. (amounts in millions) Marin Nance Sales $26,510 $34,512 Gross profit 6,610 8,887 Net income 565 1,221 Current assets 13,712 28,447 Beginning total assets 17,102 33,130 Ending total assets 22,088 36,167 Current liabilities 7,966 13,950 Total liabilities 16,136 29,222 Average common shares outstanding 250 480 Preferred stock dividends paid -0-0Instructions (a) For each company, compute the following ratios: 1. Current ratio 2. Debt to assets ratio 3. Earnings per share (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies. Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 228

(12 min.)

(a) 1. Current ratio 2. Debt to assets ratio 3. Earnings per share

Marin 1.72:1 ( $13,712 ÷ $7,966) 73% ($16,136 ÷ 22,088) $2.26 ($565 ÷ 250)

Nance______ 2.04:1 ($28,447 ÷ $13,950) 81% ($29,222 ÷ $36,167) $2.54 ($1,221 ÷ 480)

(b) Based on the current ratio, Nance is more liquid than Marin since its current ratio (2.04:1) is 19% higher than Marin’s ratio (1.72:1). However, Marin would be considered more solvent than Nance since its debt to assets ratio (73%) is 10% lower than Nance’s debt ratio (81%). A lower debt to assets ratio indicates a company is more solvent and better able to survive over a long period of time. Nance is more profitable than Marin since its earnings per share and is higher than Marin’s respective vaules. Nance’s earnings per share ($2.54) is 12.4% higher than Marin’s value.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 229 You are provide with the following information for Trent Company, effective as of its April 30, 2014, year-end. Accounts payable Accounts receivable Buildings, net of accumulated depreciation Cash Common stock Cost of goods sold Current portion of long-term debt Depreciation expense Dividends paid during the year Equipment, net of accumulated depreciation Income tax expense Income taxes payable Interest expense Inventory Land Long-term debt Prepaid expenses Retained earnings, beginning Service revenue Selling expenses Debt investments Salaries and wages expense Salaries and wages payable

834 810 3,537 770 900 2,500 450 335 475 1,220 265 265 400 967 1,600 3,500 12 1,600 9,600 310 1,200 700 222

Instructions Prepare an income statement and a retained earnings statement for Trent Company for the year ended April 30, 2014. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 229

(15 min.)

TRENT COMPANY Income Statement For the Year Ended April 30, 2014 _____________________________________________________________________________ Service revenue ................................................... Expense Cost of goods sold ...................................... Salaries and wages expense....................... Interest expense.......................................... Depreciation expense.................................. Selling expenses ......................................... Income tax expense .................................... Total expenses ..................................... Net income ........................................................... .

$9,600

$2,500 700 400 335 310 265 4,510 $5,090

A Further Look at Financial Statements

Solution 229

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(Cont.)

TRENT COMPANY Retained Earnings Statement For the Year Ended April 30, 2014 _____________________________________________________________________________ Retained earnings, May 1, 2013 ............................................ Add: Net income ................................................................... Less: Dividends...................................................................... Retained earnings, April 30, 2014……………………….………

$1,600 5,090 6,690 475 $6,215

Ex. 230 The chief financial officer (CFO) of SuperClean Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ration of at least 2:1. The preliminary balance sheet is as follows. SUPERCLEAN CORPORATION Balance Sheet December 30, 2014 Current assets Cash Accounts receivable

Current liabilities Accounts payable

$25,000 20,000

Salaries and wages

$ 20,000 10,000

$ 40,000

payable Prepaid insurance

15,000

$ 60,000

Long-term liabilities Notes payable

90,000

Total liabilities Property, plant, and equipment

210,000

130,000

Stockholders' equity

(net) Total assets

$270,000

Common stock Retained earnings Total liabilities and stockholders equity

100,000 40,000

140,000 $270,000

Instructions (a) Calculate the current ratio and working capital based on the preliminary balance sheet. (b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2014. Calculate the new current ratio and working capital after the company takes these actions. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 230 (a)

(10 min.)

Current ratio =

$60,000 $40,000

= 1.50:1

Working capital = $60,000 – $40,000 = $20,000 (b)

Current ratio =

$40,000* $20,000**

= 2.0:1

Working capital = $40,000 – $20,000 = $20,000 *$60,000 – $20,000

**$40,000 – $20,000

COMPLETION STATEMENTS 231. The rules and practices that are recognized as general guides for financial reporting are called ______________ _____________ _______________. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

232. In accounting, ____________ results when different companies use the same accounting principles. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

233. _______________ is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

234. The _______________ constraint relates to the fact that providing information is costly. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

235. The earnings per share value is calculated by dividing net income – preferred stock dividends by _______________ ______________ ______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

236. Assets that are expected to be converted to cash or used in the business within a relatively short period of time are called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

237. The ________________ is current assets divided by current liabilities. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A Further Look at Financial Statements

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238. A measurement to provide additional insight regarding a company’s cash-generating ability is _____________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Answers to Completion Statements 231. generally accepted accounting principles 232. comparability 233. materiality 234. cost 235. average common shares outstanding 236. current assets 237. current ratio 238. free cash flow

MATCHING 239. Match the items below by entering the appropriate code letter in the space provided. A. Relevance B. Liquidity ratios C. Comparability D. Consistency E. Intangible assets F. Free cash flow

G. H. I. J. K. L.

Working capital Current ratio Earnings per share Solvency ratios Economic entity assumption Materiality

____

1. Measures of the ability of the company to survive over a long period of time.

____

2. Current assets divided by current liabilities.

____

3. Information that has a bearing on a decision.

____

4. Economic events can be identified with a particular unit of accountability.

____

5. An item important enough to influence the decision of an investor or creditor.

____

6. Same accounting principles and methods used from year to year within a company.

____

7. Cash from operating activities less capital expenditures and cash dividends.

____

8. Noncurrent assets that do not have physical substance.

____

9. (Net income – preferred stock dividends) divided by average common shares outstanding.

____ 10. Different companies using the same accounting principles. ____ 11. Measures of the short-term ability of the enterprise to pay its maturing obligations. ____ 12. The excess of current assets over current liabilities. Ans: N/A, LO: 1-7, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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Answers to Matching 1. 5. 9.

J L I

2. 6. 10.

H D C

3. 7. 11.

A F B

4. 8. 12.

K E G

SHORT-ANSWER ESSAY QUESTIONS S-A E 240 Identify the two parts of stockholders' equity in a corporation and indicate the purpose of each. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 240 The two parts of stockholders' equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. S-A E 241 What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. Ans: N/A, LO: 2,4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

Solution 241 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time (c) Solvency ratios measure the company's ability to survive over a long period of time. S-A E 242 Give the definition of current assets, current liabilities and the current ratio. Ans: N/A, LO: 1, 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

A Further Look at Financial Statements

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Solution 242 Current assets are cash or other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, whichever is longer. Current liabilities are obligations reasonably expected to be paid from the existing current assets or through the creation of other current liabilities within the next year or operating cycle, whichever is longer. The current ratio is a measure used to evaluate a company’s liquidity and short-term debt paying ability, computed by dividing current assets by current liabilities. S-A E 243 Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. Ans: N/A, LO: 2, 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

Solution 243 The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. S-A E 244 Relevance and faithful representation are the fundamental qualities of useful information. (a) Briefly define each term. (b) Why are these characteristics important to users of financial statements? Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 244 (a) Relevance is the quality of information that makes a difference in a business decision. Information is considered relevant if it provides information that provides accurate expectations about future, and confirms or corrects prior expectations. Faithful representation means that information accurately depicts what really happened. Information must be complete, neutral and free from error to provide a faithful representation. (b) Relevance and faithful representation are important to the users of financial statements because these users do not have first hand knowledge of the operations of the business. In order for these users to make decisions, they must have assurances that the information provided by the company is relevant – makes a difference and faithfully representative – means what the company says. Without these assurances, the users cannot have confidence in the information provided to them.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 245 You and the CEO of your company are waiting on an elevator. You are going to the 25th floor and the CEO is going to the 35th floor. The CEO says “What is the difference between consistency and comparability?” You have two minutes to respond. What will you say? Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 245 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and methods each year. Decision makers can work with accounting information, knowing that the company is consistently applying with the principles and methods it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. S-A E 246 Comparability and consistency are enhancing qualities that make accounting information useful for decision-making purposes. Briefly explain the difference between these two qualities and explain how they are related to each other. Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 246 Comparability results when different companies use the same accounting principles and methods, while consistency results when one company uses the same principles and methods from year to year. The two qualities are related because information must possess relevance, faithful representation, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. S-A E 247 Identify and briefly explain the two fundamental qualities of useful information. Ans: N/A, LO: 7, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 247 Relevance and faithful representation are the two fundamental qualities of useful information. Relevance is the quality of information that indicates the information makes a difference in a decision. Faithful representation is information that is complete, neutral, and free from error.

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S-A E 248 What are three of the five enhancing qualities of useful information. Ans: N/A, LO: 7, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 248 The FASB and IASB describe the following enhancing qualities of useful information: comparability, consistency, verifiability, timeliness, and understandability. S-A E 249

(Ethics)

Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical. Required: Is a bonus system like the one at Metal Crafters unethical? Explain. Ans: N/A, LO: 4, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Performance Measurement

Solution 249 The bonus system described is not necessarily unethical, but it may be short-sighted. When employees are able to identify and address larger concerns (such as Sara's identification of the problem regarding the ability of a customer to pay) then such issues should probably become part of the system of bonuses. It is very difficult to set a bonus plan that allows for all contingencies, however. Since sales representatives are hired to generate sales, they most often are rewarded based on generating sales. Some of the future events, such as customers defaulting on payments, may not be the fault of the sales representative. For Sara Crown to create sales by soliciting customers with a poor payment record would be unethical on her part. She is required to use integrity, even when the possibility exists of her not using it, and even when she might gain by not using it.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 250

(Communication)

Sunshine Sugar grows sugar cane in Florida, California, and Hawaii. Its investment in land to grow sugar exceeds $2 million. Currently, land whose original cost was more than $300,000 in Florida is threatened by plans to flood the Everglades to reclaim the wetlands. Sunshine plans to fight vigorously to keep its land in production, particularly because most of the rest of its land is in California, which is threatened by water shortages. The land in Florida is also significantly more productive than that in California, and the wages paid to workers to process the sugar cane are substantially less. Current plans include litigation to prevent government seizure of the land, an extensive public education campaign, and intense lobbying efforts. Required: Sunshine has determined that a footnote disclosure should be made in the financial statements to alert the investors of the threat to the land. Carefully consider how much of the above information is appropriate for inclusion in the footnote. Write the footnote. Ans: N/A, LO: 7, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 250 NOTE: A portion of the most valuable land owned by the company is the subject of plans by the Environmental Protection Agency to flood the Florida Everglades to "reclaim" the so-called wetlands. The company is working with the United States Department of Agriculture and other agencies to prevent this result. The company will be spending money to educate the public about this issue. Currently, land costing around $300,000 is at risk. Usually the details of exactly why the land is so valuable to the company are not appropriate for inclusion. Footnotes need not be emotional or dramatic, either. There should be a systematic listing of at least the minimum amount the public has a right to know—how much land is at risk, and the nature of the risk.

A Further Look at Financial Statements

2-77

IFRS Questions 1.

The classified balance sheet is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with certain variations in format as compared to GAAP.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

IFRS requires the use of a. the term balance sheet. b. the term statement of financial position. c. neither 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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

IFRS a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP. b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP. c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP . d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Most companies that follow IFRS present balance sheet (statement of financial position) information in this order. a. current assets; investments; property; plant and equipment; intangible assets; current liabilities; long term liabilities; owners' equity. b. intangible assets; property; plant and equipment; investments; current assets; current liabilities; owners' equity; long term liabilities. c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity. d. noncurrent assets; current assets; equity; noncurrent liabilities; current liabilities.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS and under GAAP, current assets are listed in IFRS GAAP a. order of liquidity order of liquidity b. reverse order of liquidity order of liquidity c. order of liquidity reverse order of liquidity d. reverse order of liquidity reverse order of liquidity

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2-78 6.

Test Bank for Accounting: Tools for Business Decision Making, Fifth 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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Both IFRS and GAAP require disclosure about a. accounting policies followed. b. judgements that management has made in the process of applying the entity's accounting policies. c. the key assumptions and estimation uncertainty. d. all of the above.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS a. comparative prior-period information must be presented, but financial statements need not be provided annually. b. comparative prior-period information must be presented, and financial statements must be provided annually. c. comparative prior-period information is not required, but financial statements need not be provided annually. d. comparative prior-period information is not required, but financial statements must be provided annually.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The use of fair value to report assets a. is not allowed under GAAP or IFRS. b. is required by GAAP and IFRS. c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly. d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS a. companies can apply fair value to property, plant, and equipment and natural resources. b. companies can apply fair value to property, plant, and equipment but not to natural resources. c. companies can apply fair value to neither property, plant, and equipment nor natural resources. d. companies can apply fair value to natural resources but not to property, plant, and equipment.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 2 2 2 2 2 3

K C C C C K K K K K K

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

3 3 3 3 3 3 3 3 3 3 3

K K K K K K K K K K K

55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.

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 1 1 1 1 1 2 2

C C C C C C C C C C C C C C C C C C C C C C C C C C C C C AP AP C K K

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. 115. 116. 117. 118. 119. 120. 121. 122.

2 2 2 2 2 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

Item

4 5 5 5 5 5 6 6 6 6 6

K K K K K K K K K K K

45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

6 6 7 7 8 8 8 8 9 9

K K K K K C K C K K

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 5 8 6 6 6 6 6 6 6

K K K K K K K K K K C C K K K K K K K C AP AP AP C AP AP K K K K K K K K

191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.

6 5 6 6 6 6 7 6 7 7 7 7 7 8 7 7 8 8 8 8 8 8 8 8 8 8 9 9

K K K K K C K K K K K K K K AP AP K C C K K C K K C AN K K

True-False Statements 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

3 3 3 3 3 3 3 4 4 4 4

K K K K K K K K K K K

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Multiple Choice Questions K K K K K K K K K K K K K K K K K K K K C K C C C K K C C K K K K C

123. 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. 153. 154. 155. 156.

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 3 3 3 3 3

C C C K C C K C K K K K C C C K K C AP AP AP AP AP C C C C K K C C C C C

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. 182. 183. 184. 185. 186. 187. 188. 189. 190.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Brief Exercises 219. 220.

1 2

C C

221. 222.

3 3

K K

223. 224.

5 8

AP AP

225. 226.

5 1

C C

227. 228.

7 8

AP AP

247. 248. 249. 250. 251. 252.

5 5 5,7 5,8 7,8 7,8

AP AP AP AP AP AP

253. 254. 255. 256. 257 258.

8 8 8 8 8 8

AP AN AN AN AP AP

265. 266.

5 7

K K

267. 268.

6 8

K K

276. 277.

5 8

C C

278. 279.

2 8

E AN

Exercises 229. 230. 231. 232. 233. 234.

1 3 1 1 1 1

C K C AP AP AP

235. 236. 237. 238. 239. 240.

1 1 1,5,7 3 3 3

AP AP AP K K C

259. 260.

2 3

K K

261. 262.

3 3

K K

269.

1-8

270. 271.

1,4 3

K K

241. 242. 243. 244. 245. 246.

3 3 3 3 3 5

K K K C K AP

Completion Statements 263. 264.

4 5

K K

Matching Short Answer Essay 272. 273.

4, 5 2, 3

C C

274. 275.

3 3

C K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Learning Objective 1 Item Type Item Type

Item

Type

Item

Type

1. 2. 3. 4. 5. 55. 56. 57.

TF TF TF TF TF MC 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.

MC MC MC MC MC MC MC MC

82. 83. 84. 85. 86. 219. 226. 229.

MC MC MC MC MC BE BE Ex

231. 232. 233. 234. 235. 236. 237. 269.

Ex Ex Ex Ex Ex Ex Ex Ma

Item

Type

Item

Type

94. 220. 259.

MC BE CS

269. 273. 278.

Ma SA SA

MC MC MC MC MC MC MC MC

74. 75. 76. 77. 78. 79. 80. 81.

Item

Type

Item

Type

Learning Objective 2 Item Type Item Type

6. 7. 8.

TF TF TF

9. 10. 87.

TF TF MC

88. 89. 90.

MC MC MC

91. 92. 93.

MC MC MC

The Accounting Information System

3-3

Item

Type

Item

Type

Learning Objective 3 Item Type Item Type

Item

Type

Item

Type

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF

28. 29. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.

TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 221. 222. 230. 238.

MC MC MC MC MC MC MC MC MC MC MC MC MC BE BE Ex Ex

239. 240. 241. 242. 243. 244. 245. 260. 261. 262. 269. 271. 273. 274. 275.

Ex Ex Ex Ex Ex Ex Ex CS CS CS Ma SA SA SA SA

Item

Type

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143.

Item

Type

Item

Type

Learning Objective 4 Item Type Item Type

Item

Type

30. 31. 32. 33.

TF TF TF TF

34. 157. 158. 159.

TF MC MC MC

160. 161. 162. 163.

MC MC MC MC

263. 269. 270. 272.

CS Ma SA SA

MC MC MC MC

164. 165. 166. 167.

Item

Type

Item

Type

Learning Objective 5 Item Type Item Type

Item

Type

Item

Type

35. 36. 37. 38. 39. 168.

TF TF TF TF TF MC

169. 170. 171. 172. 173. 174.

MC MC MC MC MC MC

175. 176. 177. 178. 179. 180.

MC MC MC BE BE Ex

246. 247. 248. 249. 250. 264.

Ex Ex Ex Ex Ex CS

265. 269. 272. 276.

CS Ma SA SA

MC MC MC MC MC MC

181. 182. 192. 223. 225. 237.

Item

Type

Item

Type

Learning Objective 6 Item Type Item Type

Item

Type

Item

Type

40. 41. 42. 43.

TF TF TF TF

44. 45. 46. 184.

TF TF TF MC

185. 186. 187. 188.

MC MC MC MC

194. 195. 196. 198.

MC MC MC MC

267. 269.

CS Ma

Item

Type

Item

Type

249. 251. 252.

Ex Ex Ex

266. 269.

CS Ma

MC MC MC MC

189. 190. 191. 193.

Item

Type

Item

Type

Learning Objective 7 Item Type Item Type

47. 48. 197.

TF TF MC

199. 200. 201.

MC MC MC

202. 203. 205.

MC MC MC

206. 227. 237.

MC BE Ex

3-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Item

Type

Item

Type

Learning Objective 8 Item Type Item Type

Item

Type

Item

Type

49. 50. 51. 52. 183.

TF TF TF TF MC

204. 207. 208. 209. 210.

MC MC MC MC MC

211. 212. 213. 214. 215.

MC BE BE Ex Ex

253. 254. 255. 256. 257.

Ex Ex Ex Ex Ex

258. 268. 269. 277. 279.

Ex CS Ma SA SA

Item

Type

Item

Type

MC MC MC MC MC

216. 224. 228. 250. 252.

Item

Type

Item

Type

Learning Objective 9 Item Type Item Type

53.

54.

217.

Note: TF = True-False MC = Multiple Choice Ma = Matching

218.

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES 1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity. 2. Explain what an account is and how it helps in the recording process. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. 3. Define debits and credits and explain how they are used to record business transactions. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits. 4. Identify the basic steps in the recording process. The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger. 5. 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 effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 6. Explain what a ledger is and how it helps in the recording process. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. 7. Explain what posting is and how it helps in the recording process. Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. .

The Accounting Information System

3-5

8. Explain the purposes of a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements. 9. Classify cash activities as operating, investing, or financing. Operating activities are the types of activities the company performs to generate profits. Investing activities relate to the purchase or sale of long-lived assets used in operating the business, or to the purchase or sale of investment securities (stock and bonds of other companies). Financing activities are borrowing money, issuing shares of stock, and paying dividends.

TRUE-FALSE STATEMENTS 1.

Economic events that require recording in the financial statements are called accounting transactions.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Revenue increases stockholders’ equity and should be recorded whenever cash is received from customers.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Collection on an account receivable will increase both cash and accounts receivable.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The payment of a liability decreases both cash and accounts payable.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders’ equity.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A new account is opened for each transaction entered into by a business firm.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The recording process becomes more efficient and informative if all transactions are recorded in one account.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

An account consists of two parts: (1) a left or debit side and (2) a right or credit side.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For a T account, an account balance is the difference in total dollars between total debit amounts and total credit amounts.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-6 10.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

An account is often referred to as a T-account because of the way it is constructed.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11.

A debit to an account always indicates an increase in that account.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

If a revenue account is credited, the revenue account is increased.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

The normal balance of all accounts is a debit.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14.

Debit and credit can be interpreted to mean “bad” and “good”, respectively.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

A credit means that an account has been increased.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16.

A decrease in a liability account is recorded by a debit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17.

An increase in an asset is recorded by a debit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18.

The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19.

A credit balance in a liability account indicates that an error in recording has occurred.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

The normal balance of an asset is a credit.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

The normal balance of the dividend account is a credit.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

Assets are decreased with a credit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

23.

A debit means that an account has been decreased.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

24.

A decrease in a liability is recorded by a debit. .

The Accounting Information System

3-7

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

25.

An increase in an asset is recorded by a debit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

26.

Liabilities are increased with debits and decreased with credits.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

27.

The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28.

Revenues are a subdivision of stockholders’ equity.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

Under the double-entry system, revenues must always equal expenses.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31.

Source documents can provide evidence that a transaction has occurred.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

32.

Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

33.

Transactions are entered in the ledger accounts and then transferred to journals.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

34.

All business transactions must be entered first in the general ledger.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

35.

Transactions are recorded in alphabetical order in a journal.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

36.

The journal is a chronological record of all transactions.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

37.

A journal is an accounting record in which transactions are initially recorded.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

38.

The complete effect of a transaction on the accounts is disclosed in the journal. .

3-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39.

The account titles used in journalizing transactions need not be identical to the account titles in the ledger.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

40.

The chart of accounts is a special ledger used in accounting systems.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41.

A general ledger should be arranged in financial statement order beginning with the balance sheet accounts.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

42.

The entire group of accounts maintained by a company is referred to collectively as the journal.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43.

Prepaid expenses are assets.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44.

Salaries and wages payable is a type of expense.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45.

Dividends are classified as an expense.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46.

Unearned Service Revenue is classified as a liability on the balance sheet.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

Posting is the process of proving the equality of debits and credits in the trial balance.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

48.

Entering transactions into the journal is called posting.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

49.

A trial balance is prepared at the beginning of an accounting period.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

50.

A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

Ans: T, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Accounting Information System

51.

3-9

In a trial balance, all debits are listed before all credits.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52.

When the columns of the trial balance equal each other, it means that no errors have occurred in the recording and posting the transactions.

Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

53.

Operating activities are the types of activities the company performs to generate profits.

Ans: T, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

54.

Financing activities include the purchase or sale of long-lived assets or the purchase or sale of investment securities.

Ans: F, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.

T F F T F F F F T

10. 11. 12. 13. 14. 15. 16. 17. 18.

T F T F F F T T F

19. 20. 21. 22. 23. 24. 25. 26. 27.

F F F T F T T F F

28. 29. 30. 31. 32. 33. 34. 35. 36.

T F F T T F F F T

37. 38. 39. 40. 41. 42. 43. 44. 45.

T T F F T F T F F

46. 47. 48. 49. 50. 51. 52. 53. 54.

T F F F T F F T F

MULTIPLE CHOICE QUESTIONS 55.

If total liabilities decreased by $4,000, then a. stockholders’ equity must have decreased by $4,000. b. assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000. c. assets and stockholders’ equity each increased by $2,000. d. assets must have increased by $4,000.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

56.

Collection of a $600 Accounts Receivable a. increases an asset $600; decreases an asset $600. b. increases an asset $600; decreases a liability $600. c. decreases a liability $600; increases stockholders’ equity $600. d. decreases an asset $600; decreases a liability $600.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

3-10 57.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If an individual asset is increased, then a. there could be an equal decrease in a specific liability. b. there could be an equal decrease in stockholders’ equity. c. there could be an equal decrease in another asset. d. None of these answer choices are correct.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

58.

If services are rendered on account, then a. assets will decrease. b. liabilities will increase. c. stockholders’ equity will increase. d. liabilities will decrease.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59.

If services are rendered for cash, then a. assets will increase. b. liabilities will increase. c. stockholders’ equity will decrease. d. liabilities will decrease.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. stockholders’ equity will increase. d. assets will decrease.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

61.

An investment by the stockholders in a business increases a. assets and stockholders’ equity. b. assets and liabilities. c. liabilities and stockholders’ equity. d. assets only.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62.

The purchase of an asset for cash a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

The purchase of an asset on credit a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

64.

3-11

The payment of a liability a. decreases assets and stockholders’ equity. b. increases assets and decreases liabilities. c. decreases assets and increases liabilities. d. decreases assets and liabilities.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

The sale of an asset on credit for what it cost a. increases assets and liabilities. b. decreases assets and liabilities. c. leaves total assets unchanged. d. decreases assets and increases liabilities.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66.

When collection is made on Accounts Receivable, a. total assets will remain the same. b. stockholders equity will increase. c. total assets will increase. d. total assets will decrease.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67.

A revenue generally a. increases assets and liabilities. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. leaves total assets unchanged.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68.

A paid dividend a. decreases assets and stockholders’ equity. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. decreases assets and increases stockholders’ equity.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69.

Receiving payment of a portion of an accounts receivable will a. not affect total assets. b. increase liabilities. c. increase stockholders’ equity. d. decrease net income.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

An expense a. decreases assets and liabilities. b. decreases stockholders’ equity. c. leaves stockholders’ equity unchanged. d. is basically the same as a liability.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3-12 71.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following items has no effect on retained earnings? a. Expense b. Dividends c. Land purchase d. Revenue

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

72.

If a company buys a $700 machine on credit, this transaction will affect the a. income statement and retained earnings statement only. b. income statement only. c. income statement, retained earnings statement, and balance sheet. d. balance sheet only.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73.

A payment of a portion of an accounts payable will a. not affect total assets. b. increase liabilities. c. not affect stockholders’ equity. d. decrease net income.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74.

Powers Corporation received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. equity increased by $500. c. liabilities decreased by $500. d. Both assets and equity increased by $500.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

75.

Courtney Company purchased equipment for $1,800 cash. As a result of this event, a. equity decreased by $1,800. b. assets increased by $1,800. c. total assets remained unchanged. d. Both assets and equity decreased by $1,800.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76.

Comstock Company provided consulting services and billed the client $2,500. As a result of this event a. assets remained unchanged. b. assets increased by $2,500. c. equity increased by $2,500 d. Both assets and equity increased by $2,500.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

77.

3-13

Budke Corporation paid dividends of $5,000. As a result of this event, the a. Dividends account was increased by $5,000. b. Dividends account was decreased by $5,000. c. Cash account was increased by $5,000. d. Cash was increased and the Dividends account was decreased by $5,000.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

78.

If a company pays dividends of $10,000, a. stockholders' equity will be reduced by $10,000. b. net income will be reduced by $10,000. c. retained earnings will be reduced by $10,000. d. Both retained earnings and stockholders' equity will be reduced by $10,000.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79.

If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, a. assets will be increased by $10,000. b. equity will be reduced by $40,000. c. assets will be increased by $40,000. d. assets will be unchanged.

Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

80.

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash. b. No, the amount of revenue cannot be adequately determined until the company completes the work. c. Yes, The intent of the company is to perform the work and the customer is confident that the services will be completed. d. No, revenue cannot be recognized until the work is performed.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

81.

The receipt of cash in advance from a customer a. increases assets and stockholders' equity. b. increases assets and decreases stockholders' equity. c. increases assets and liabilities. d. none of these answer choices are correct.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3-14 82.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On March 1, 2014, Freeze Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not? a. Yes, the company is now obligated to pay the employee, thus that event must be recorded. b. No, hiring an employee is an important event; however it is not an economic event that should be recorded. c. Yes, failure to record the event would cause the financial statements to be misleading. d. No, the financial position of the company has been changed, however, the dollar amount of the transaction is not yet known.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83.

Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This transaction could have been a(n) a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance. b. investment of $5,000 cash in the business by the stockholders. c. purchase of office equipment for $5,000 cash. d. repayment of a $5,000 bank loan.

Ans: A, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

84.

Jamal Company began the year with $84,000 in its Common Stock account and a debit balance in Retained Earnings of $36,000. During the year, the company earned net income of $18,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $22,000. Based on this information, what should the transaction analysis show for the ending total of all stockholders' equity accounts? a. $154,000 b. $166,000 c. $82,000 d. $110,000

85.

Crawford Company started the year with $30,000 in its Common Stock account and a credit balance in Retained Earnings of $22,000. During the year, the company earned net income of $24,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $14,000. As a result, the amount of its retained earnings at the end of the year would be a. $80,000. b. $36,000. c. $66,000. d. $50,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $22,000 + $24,000 − $10,000 = $36,000

The Accounting Information System

86.

3-15

All of the following are characteristics of every accounting information system except it is a system a. that collects transaction data. b. that processes transaction data. c. that communicates financial information to decision makers. d. of data storage hardware for the chart of accounts.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

87.

The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

88.

Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

89.

An account is a part of the financial information system and is described by each one of the following except a. an account has a debit and credit side. b. an account is a source document. c. an account consists of three parts. d. an account has a title.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

90.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

91.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-16 92.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A T-account is a. a way of depicting the basic form of an account. b. a special account used instead of a journal. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

93.

Which statement about an account is true? a. In its simplest form, an account consists of two parts. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. c. There are separate account for specific assets and liabilities but only one account for stockholders’ equity items. d. The left side of an account is the credit or decrease side.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

94.

In its simplest form, an account consists of all of the following except a. right (credit) side. b. account title. c. left side. d. explanation column.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

95.

A debit to an asset account indicates a(n) a. error. b. credit was made to a liability account. c. decrease in the asset. d. increase in the asset.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

96.

Debits a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

97.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Accounting Information System

98.

3-17

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

99.

A credit is not the normal balance for which account listed below? a. Common Stock account b. Revenue account c. Liability account d. Dividends account

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

100.

The classification and normal balance of the Dividends account is a. revenue with a credit balance. b. an expense with a debit balance. c. a liability with a credit balance. d. stockholders’ equity with a debit balance.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

101.

Which of the following describes the classification and normal balance of the Retained Earnings account? a. Asset, debit b. Stockholders’ equity, credit c. Revenues, credit d. Expense, debit

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

102.

Which of the following describes the classification and normal balance of the Unearned Rent Revenue account? a. Asset, debit b. Liability, credit c. Revenues, credit d. Expense, debit

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

103.

A revenue account a. is increased by debits. b. is decreased by credits. c. has a normal balance of a debit. d. is increased by credits.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-18 104.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues c. Assets – Liabilities – Dividends = Common Stock + Revenues – Expenses d. Assets = Revenues + Expenses – Liabilities

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

105.

Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Common Stock Credit Revenues Debit Expenses Credit b. Assets Liabilities Common Stock Revenues Expenses

Debit Credit Credit Credit Credit

c. Assets Liabilities Common Stock Revenues Expenses

Credit Debit Debit Credit Debit

d. Assets Liabilities Common Stock Revenues Expenses

Debit Credit Credit Credit Debit

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106.

Which accounts normally have debit balances? a. Assets, expenses, and revenues b. Assets, expense, and retained earnings c. Assets, liabilities, and dividends d. Assets, expenses, and dividends

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

Which accounts normally have credit balances? a. Revenues, liabilities, and dividends b. Revenues, liabilities, and assets c. Revenues, liabilities, and retained earnings d. Revenues, liabilities, and expenses

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

108.

3-19

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

109.

In recording an accounting transaction in a double-entry system a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

110.

A debit is not the normal balance for which account listed below? a. Dividends b. Cash c. Accounts Receivable d. Service Revenue

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111.

An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit a stockholders’ equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

112.

An accountant has debited an asset account for $800 and credited a liability account for $700. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $100. b. Credit another liability account for $100. c. Credit a stockholders’ equity account for $100. d. Debit a stockholders’ equity account for $100.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

113.

An accountant has debited an asset account for $900 and credited a liability account for $600. What can be done to complete the recording of the transaction? a Debit a stockholders’ equity account for $300. b. Debit another asset account for $300. c. Credit a different asset account for $300. d. Nothing further must be done.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-20 114.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following accounts is increased with a debit? a. Dividends b. Service Revenue c. Interest Payable d. Common Stock

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

115.

Which of the following accounts is increased with a credit? a. Supplies Expense b. Supplies c. Sales Revenue d. Dividends

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116.

Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner? a. Dividends Payable and Rent Expense b. Utilities Expense and Notes Payable c. Prepaid Insurance and Advertising Expense d. Service Revenue and Equipment

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117.

Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner? a. Prepaid Insurance and Dividends b. Dividends and Interest Revenue c. Interest Payable and Common Stock d. Advertising Expense and Land

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

118.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Accounting Information System

120.

3-21

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

121.

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 increase liabilities and decrease assets.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122.

Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the same manner? a. Salaries and Wages Expense and Notes Payable b. Common Stock and Rent Expense c. Prepaid Rent and Advertising Expense d. Service Revenue and Equipment

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123.

Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner? a. Salaries and Wages Expense and Notes Payable b. Common Stock and Unearned Rent Revenue c. Prepaid Rent and Advertising Expense d. Service Revenue and Notes Payable

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

124.

A company that receives money in advance of performing a service a. debits Cash and credits Unearned Service Revenue. b. debits Unearned Service Revenue and credits Accounts Payable c. debits Cash and credits Prepaid Insurance. d. debits Cash and credits Accounts Receivable.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

125.

When a company performs a service but has not yet received payment, it a. debits Service Revenue and credits Accounts Receivable. b. debits Accounts Receivable and credits Service Revenue. c. debits Service Revenue and credits Accounts Payable. d. makes no entry until cash is received.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-22 126.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127.

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the Dividends account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

128.

If a company has overdrawn its bank balance, then a. its Cash account will show a debit balance. b. its Cash account will show a credit balance. c. the Cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the Cash account.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129.

Which account below is not a subdivision of stockholders’ equity? a. Dividends b. Revenues c. Expenses d. Liabilities

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130.

When a corporation distributes a dividend the a. most common form of distribution is a cash dividend. b. Dividends account will be increased with a credit. c. Retained Earnings account will be directly increased with a debit. d. Dividends account will be decreased with a debit.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

131.

The Dividends account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of stockholders’ equity.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

132.

3-23

A revenue account a. is increased with a debit. b. is decreased with a credit. c. is increased with a credit. d. has a normal balance of a debit.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

133.

Which of the following statements is not true? a. Expenses increase stockholders’ equity. b. Expenses have normal debit balances. c. Expenses decrease stockholders’ equity. d. Expenses are a negative factor in the computation of net income.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

134.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

135.

In the first month of operations, the total of the debit entries to the Cash account amounted to $1,400 and the total of the credit entries to the Cash account amounted to $800. The Cash account has a a. $800 credit balance. b. $1,400 debit balance. c. $600 debit balance. d. $600 credit balance.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,400 dr. − $800 cr. = $600 dr.

136.

In the first month of operations, the total of the debit entries to the Cash account amounted to $1,200 and the total of the credit entries to the Cash account amounted to $900. The Cash account has a a. $900 credit balance. b. $300 debit balance. c. $1,200 debit balance. d. $300 credit balance.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,200 dr. − $900 cr. = $300 dr.

3-24 137.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In the first month of operations, the total of the debit entries to the Cash account amounted to $1,000 and the total of the credit entries to the Cash account amounted to $600. The Cash account has a a. $600 credit balance. b. $1,000 debit balance. c. $400 debit balance. d. $600 credit balance.

138.

The Cash account has a credit balance. Which statement is true? a. This is the normal balance for cash. b. An error has occurred and must be corrected before financial statements can be prepared. c. The account needs to be analyzed to determine the reason for the credit balance. d. Debit postings exceed the credit postings for the accounting period.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

139.

Which statement is incorrect? a. Dividends represent a distribution by a corporation to its stockholders. b. Dividends are shown on the income statement. c. Dividends reduce stockholders’ equity, thus the Dividends account increases on the left side. d. The Dividends account has a normal debit balance.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

140.

Why are expenses increased with a debit? a. They are always paid by cash, which is credited. Thus expenses are debited. b. They decrease stockholders’ equity thus they increase with a debit. c. They have the same rules of debits and credits as the retained earnings account. d. None of the statements are correct.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

141.

Barnes Company showed the following balances at the end of its first year: Cash $14,000 Prepaid insurance 700 Accounts receivable 3,500 Accounts payable 2,800 Notes payable 4,200 Common stock 5,400 Dividends 700 Revenues 24,000 Expenses 17,500

The Accounting Information System

3-25

Mc. 141 (count) What did Barnes Company show as total credits on its trial balance? a. $37,100 b. $36,400 c. $35,700 d. $37,800 Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,800 + $4,200 + $5,400 + $24,000 = $36,400

142.

Winrow Company showed the following balances at the end of its first year: Cash $11,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 3,000 Common stock 5,000 Dividends 500 Revenues 17,000 Expenses 12,500 What did Winrow Company show as total credits on its trial balance? a. $27,500 b. $27,000 c. $26,500 d. $28,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,000 + $3,000 + $5,000 + $17,000 = $27,000

143.

During January 2014, its first month of operation, Osborn Enterprises earned net income of $1,700 and paid dividends to the owners of $500. At January 31, the balance in Retained Earnings will be a. $0. b. $1,700 credit. c. $1,200 credit. d. $500 debit.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,700 − $500 = $1,200

144.

On June 1, 2014, England Inc. reported a cash balance of $21,000. During June, England made deposits of $8,000 and made disbursements totaling $24,000. What is the cash balance at the end of June? a. $5,000 credit balance b. $29,000 debit balance c. $5,000 debit balance d. $3,000 credit balance

3-26 145.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At January 1, 2014, Troyer Industries reported Retained Earnings of $280,000. During 2014, Troyer had a net loss of $60,000 and paid dividends to the stockholders of $40,000. At December 31, 2014, the balance in Retained Earnings is a. $280,000 debit. b. $240,000 credit. c. $220,000 debit. d. $180,000 credit.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $280,000 − $60,000 − $40,000 = $180,000

146.

During January 2014, Carey Services Inc. paid a cash dividends of $2,000. This transaction a. reduces stockholders' equity by $2,000. b. increases stockholders' equity by $2,000. c. reduces net income by $2,000. d. increases expenses by $2,000.

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

147.

During February 2014, its first month of operations, the owner of Schwenn Enterprises invested cash of $40,000. Schwenn had cash sales of $8,000 and paid expenses of $14,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $6,000 credit b. $34,000 debit c. $48,000 debit d. $26,000 credit

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,000 + $8,000 − $14,000 = $34,000

148.

At September 1, 2014, Kern Enterprises reported a cash balance of $70,000. During the month, Kern collected cash of $30,000 and made disbursements of $50,000. At September 30, 2014, the cash balance is a. $20,000 credit. b. $50,000 credit. c. $100,000 debit. d. $50,000 debit.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $70,000 + $30,000 − $50,000 = $50,000 debit

149.

All of the following statements regarding the double-entry system are true except a. a two-sided effect of each transaction is recorded in appropriate accounts when using the double-entry system. b. the double-entry system provides a logical method for recording transactions. c. both sides of the accounting equation must be affected when recording a transaction using the double-entry system. d. when using the double-entry system, the sum of all debits to the accounts must equal the sum of all credits.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

The Accounting Information System

150.

3-27

Which of the following accounts has a normal debit balance? a. Accounts Payable b. Prepaid Rent c. Retained Earnings d. Common Stock

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

151.

Which of the following accounts has a normal credit balance? a. Prepaid Rent b. Notes Receivable c. Rent Revenue d. Rent Expense

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152.

During 2014, its first year of operations, Jane's Bakery had revenues of $65,000 and expenses of $33,000. The business paid cash dividends of $18,000. What is the balance in Retained Earnings at December 31, 2014? a. $0 b. $18,000 debit c. $14,000 credit d. $32,000 credit

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($65,000 + $33,000) − $18,000 = $14,000

153.

At January 31, 2014, the balance in Goebel Inc.'s supplies account was $700. During February. Goebel purchased supplies of $600 and used supplies of $800. At the end of February, the balance in the Supplies account should be a. $700 debit. b. $900 credit. c. $2,100 debit. d. $500 debit.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $700 + $600 − $800 = $500

154.

At December 1, 2014, Orear Company's Accounts Receivable balance was $5,600. During December, Orear had credit sales of $15,000 and collected accounts receivable of $12,000. At December 31, 2014, the Accounts Receivable balance is a. $5,600 debit b. $8,600 debit c. $20,600 debit d. $8,600 credit

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,600 + $15,000 − $12,000 = $8,600 debit

3-28 155.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At October 1, 2014, Metz Industries had an Accounts Payable balance of $70,000. During the month, the company made purchases on account of $50,000 and made payments on account of $80,000. At October 31, 2014, the Accounts Payable balance is a. $70,000 debit b. $10,000 credit c. $40,000 credit d. $80,000 credit

156.

At September 1, 2014, Baxter Inc. reported Retained Earnings of $282,000. During the month, Baxter generated revenues of $40,000, incurred expenses of $24,000, purchased equipment for $10,000 and paid dividends of $4,000. What is the balance in Retained Earnings at September 30, 2014? a. $282,000 debit b. $16,000 credit c. $284,000 credit d. $294,000 credit

157.

The usual sequence of steps in the transaction recording process is a. journalize, analyze, post to the ledger. b. analyze, journalize, post to the ledger. c. journalize, post to the ledger, analyze. d. post to the ledger, journalize, analyze.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

158.

In recording accounting transactions, evidence that a transaction has taken place is obtained from a. source documents. b. the Internal Revenue Service. c. the public relations department. d. the Securities and Exchange Commission.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

159.

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. stockholders’ equity. c. ledger accounts. d. financial statements.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

The Accounting Information System

160.

3-29

The first step in the recording process is to a. prepare financial statements. b. analyze the transaction in terms of its effect on the accounts. c. post to a journal. d. prepare a trial balance.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

161.

Which of the following is not part of the recording process? a. Analyzing transactions b. Preparing a trial balance c. Entering transactions in a journal d. Posting journal entries

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

162.

Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

163.

After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. general journal. d. ledger.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

164.

The usual sequence of steps in the recording process is to a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts. b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal. c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal. d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

165.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-30 166.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 4, 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 is not an example of a source document that provides evidence of a transaction? a. A cancelled check b. A sales slip c. A trial balance d. A cash register tape

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

168.

All of the following are significant contributions that the journal makes to the recording process except the journal a. discloses the complete effect of a transaction in one place. b. helps prevent or locate errors because debits and credits can be readily compared. c. keeps complete information about changes in a specific account balance in one place. d. provides a chronological record of transactions.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

169.

A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

170.

The basic format of a journal would not include a(n) a. brief explanation. b. account title column. c. T-account. d. date column.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

171.

Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Accounting Information System

172.

3-31

A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

173.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

174.

The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

175.

The basic form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

176.

Which of the following journal entries is recorded correctly and in the basic format? a. Salaries and Wages Expense 550 Cash 1,500 Advertising Expense 950 b. Salaries and Wages Expense Advertising Expense Cash

550 950 1,600

c. Cash

1,500 Salaries and Wages Expense Advertising Expense

550 950

d. Salaries and Wages Expense Advertising Expense Cash

550 950 1,500

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-32 177.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

When a company has performed a service but has not yet received payment, it a. debits accounts receivable and credits service revenue. b. debits revenue from services and credits accounts receivable. c. debits revenue from services and credits accounts payable. d. makes no entry until the cash is received.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

178.

A company that receives money in advance of performing a service a. debits cash and credits prepaid services. b. debits unearned fees and credits accounts payable. c. debits cash and credits unearned service revenue. d. debits cash and credits accounts receivable.

Ans: C, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

179.

When a company receives a utility bill but will not pay it right away, it should a. debit Utilities Expense and credit Accounts Receivable. b. debit Utilities Expense and credit Accounts Payable. c. debit Accounts Payable and credit Utilities Expense. d. make no entry until the bill is paid.

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

180.

When a service has been performed, but no cash has been received, which of the following statements is true? a. No journal entry is made. b. The entry includes a debit to accounts payable. c. The entry includes a credit to unearned revenue. d. The entry includes a debit to accounts receivable.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

181.

Equipment costing $20,000 machine is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a a. credit to Notes Payable. b. debit to Cash. c. credit to Notes Receivable. d. credit to Equipment.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

182.

Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a a. debit to Notes Payable. b. credit to Cash. c. credit to Notes Receivable. d. credit to Equipment.

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Accounting Information System

183.

3-33

An accounting record that includes a list of accounts and their balances at a given time is called a a. trial balance. b. general journal. c. general ledger. d. chart of accounts.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

184.

Typically the chart of accounts begins with a. asset accounts. b. liability accounts. c. revenue accounts. d. expense accounts.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

185.

The purpose of the ledger is to a. record chronologically the day’s transactions. b. keep a record of documentation to support each transaction. c. keep in one place all information about changes in specific account balances. d. make sure that all assets, liabilities, etc., have normal balances at all times.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186.

Which of the following accounts probably would be listed before the others in a chart of accounts? a. Accumulated Depreciation—Buildings b. Insurance Expense c. Dividends d. Notes Payable

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187.

Which of the following accounts probably would be listed after the others in a chart of accounts? a. Accumulated Depreciation—Buildings b. Insurance Expense c. Dividends d. Notes Payable

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

188.

The Unearned Service Revenue account is classified as a(n) a. asset. b. revenue. c. expense. d. liability.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3-34 189.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A ledger a. contains only asset and liability accounts. b. is a collection of the entire group of accounts maintained by a company. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

190.

Which of the following is an asset? a. Service Revenue b. Notes Payable c. Supplies Expense d. Prepaid Rent

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

191.

A person who wants to determine the balance of a particular account should refer to the a. ledger. b. source document. c. chart of accounts. d. journal.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

192.

A journal a. contains only asset and liability accounts. b. is a collection of the entire group of accounts maintained by a company. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

193.

The usual ordering of accounts in the general ledger is a. assets, liabilities, stockholders’ equity, revenues, and expenses. b. assets, liabilities, stockholders’ equity, expenses, and revenues. c. liabilities, assets, stockholders’ equity, revenues, and expenses. d. stockholders’ equity, assets, liabilities, expenses, and revenues.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

194.

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

195.

3-35

The ledger accounts are typically arranged in a. chronological order. b. alphabetical order. c. financial statement order. d. order of appearance in the journal.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

196.

Which statement is incorrect? a. A chart of accounts is a listing of accounts used by a business. b. New accounts can be added to the chart of accounts. c. Stockholders’ Equity is an account that is included in the chart of accounts. d. Account titles for the chart of accounts are used in general journal entries.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

197.

The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

198.

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 in the ledger. d. shows the balance of each account in the general ledger.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

199.

Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

200.

The principal purpose of posting is to a. help identify errors made in the journal. b. accumulate the effects of journalized transactions in the individual accounts. c. enter transactions directly into the ledger. d. help determine if the financial statements are ready to be prepared.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

201.

Posting is performed by transferring information from the a. source documents to the journal. b. ledger to the journal. c. source documents to the ledger. d. journal to the ledger.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-36 202.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Posting a. transfers journal entries to ledger accounts. b. transfers ledger transaction data to the journal. c. involves transferring all debits and credits on a journal page to the trial balance. d. provides a chronological record of transactions.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

203.

Posting a. transfers ledger transaction data to the journal. b. normally occurs before journalizing. c. accumulates the effects of journalized transactions in the individual accounts. d. enters transaction data in the journal.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

204.

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

205.

On January 14, Decker industries purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies.

Ans: A, LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

206.

On July 7, 2014, Shireman Enterprises received cash $1,400 for services rendered. The entry to record this transaction will include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400.

Ans: C, LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

207.

The primary purpose of the trial balance is to a. disclose the complete effect of a transaction in one place. b. make sure a journal entry is not posted twice. c. transfer journal entries to the ledger accounts. d. prove the equality of the debit and credit amounts after posting.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

208.

3-37

The accountant for Mega Stores, Inc. should have recorded the following correct entry: Jan. 15 Notes Receivable 243 Equipment 243 Instead, he misunderstood the transaction and recorded an incorrect entry. Which of the following wrong entries pertaining to this transaction could have been detected as erroneous when using a trial balance? a. Jan 15 Notes Payable 243 Cash 243 b. Jan 15 Notes Receivable 234 Equipment 234 c. Jan 15 Equipment 243 Notes Receivable 243 d. Jan 15 Notes Receivable 243 Equipment 234

Ans: D, LO: 8, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

209.

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation.

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

210.

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

211.

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

212.

A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized b. A journal entry that is posted twice c. Offsetting errors made in recording the transaction d. A transposition error when transferring the debit side of journal entry to the ledger

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3-38 213.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A trial balance proves a. the mathematical equality of debits and credits after the posting process. b. the ledger is posted correctly. c. that all transactions have been recorded correctly. d. that all transactions have been posted.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

214.

A trial balance a. is a list of accounts with their balances at a given point in time. b. will not balance if a correct journal entry is posted twice. c. will tell you if a transaction is not posted at all. d. proves the factual accuracy of journalized transactions.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

215.

A trial balance will not balance if a. a correcting journal entry is posted twice. b. a $50 cash dividend is debited to dividends for $500 and credit to cash for $50. c. a $300 payment on accounts payable is debited to accounts payable for $30 and credited to cash for $30. d. a transaction is not posted at all.

Ans: B, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

216.

Which of the following errors, each considered individually, would cause the trial balance to be out of balance? a. A payment of $148 to a creditor was posted as a debit to Accounts Payable and a debit of $148 to Cash. b. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable. c. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash. d. A transaction was not posted.

Ans: A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

217.

Borrowing money and issuing shares of stock are a. operating activities. b. investing activities. c. financing activities. d. None of these answer choices are correct.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

218.

The purchase or sale of long-lived assets used in operating the business is a. an operating activity. b. an investing activity. c. a financing activity. d. None of these answer choices are correct.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

3-39

Answers to Multiple Choice Questions 53. b 54. c 55. b 56. a 57. c 58. c 59. a 60. d 61. a 62. d 63. b 64. d 65. c 66. a 67. b 68. a 69. a 70. b 71. c 72. d 73. c 74. a 75. c 76. d

77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.

a d c d c b a c b d c b b d c a b d d c c a d d

101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124.

b b d b d d c c c d d d c a c c b b a b c c a a

125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148.

b b b b d a c c a a c b c c b b b b c c d a b d

149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172.

c b c c d b c d b a c b b c d a c c c c d c d b

173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.

b d c d a c b d a b a a c a b d b d a c a c c c

197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.

d c b b d a c c a c d d d c c d a a b c a b

BRIEF EXERCISES Be. 219 Presented here are five economic events. For each item, indicate whether the event increased (+), decreased (–), or had no effect (NE) on assets, liabilities, and stockholders’ equity.

Stockholders’ Equity _______

1. Received cash for services rendered.

Assets = _______

Liabilities ______

2. Purchased supplies on account.

_______

______

_______

3. Paid employees' salaries.

_______

______

_______

4. Dividends paid in cash.

_______

______

_______

5. Expenses paid in cash.

_______

______

_______

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

3-40

Solution 219

(5 min.) Assets + + – – –

1. Received cash for services rendered. 2. Purchased supplies on account. 3. Paid employees' salaries. 4. Dividends paid in cash. 5. Expenses paid in cash.

Liabilities NE + NE NE NE

Stockholders’ Equity + NE – – –

Be. 220 At June 1, 2014, Massoth Industries had an Accounts Receivable balance of $18,000. During the month, the company had credit sales of $25,000 and collected Accounts Receivable of $27,000. What is the balance in Accounts Receivable at June 30, 2014? Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 220 (5 min.) The balance at the end of the month is $16,000, calculated as follows: Beginning Accounts Receivable Add: Credit Sales Less: Collections Ending Accounts Receivable

$18,000 25,000 27,000 $16,000

Be. 221 For each item below, indicate whether a debit or credit applies. 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable

____ ____ ____ ____ ____

__ __ __ __ __

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 221 (5 min.) 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable

____Cr.__ ____Dr.__ ____Cr.__ ____Dr.__ ____Dr.__

The Accounting Information System

3-41

Be. 222 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–).

1. Salaries and Wages Expense. 2. Accounts Receivable.

Debit _______ _______

_Credit_ ______ ______

Normal Balance _______ _______

3. Service Revenue.

_______

______

_______

4. Dividends

_______

______

_______

5. Retained Earnings.

_______

______

_______

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 222

(5 min.)

1. Salaries and Wages Expense.

Debit __+_ _

_Credit_ ___–__ _

Normal Balance __Dr___

2. Accounts Receivable 3. Service Revenue.

__+__ _ __–__ _

___–__ ___+__

__Dr___ __Cr___

4. Dividends

__+__ _

___–__

__Dr___

5. Retained Earnings

__–_ __

___+__

__Cr___

Be. 223 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. 2. 3. 4. 5.

Owner invested $60,000 in exchange for common stock of the corporation. Hired an employee to be paid $400 per week, starting tomorrow. Paid two years’ rent in advance, $7,200. Paid the worker’s weekly wage. Recorded service revenue earned and received for the week, $1,500.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223 (5 min.) 1. Cash ........................................................................................ Common Stock ................................................................

60,000 60,000

No entry

Prepaid Rent ........................................................................... Cash ................................................................................

7,200

Salaries and Wages Expense ................................................... Cash ................................................................................

400

Cash ........................................................................................ Service Revenue .............................................................

1,500

7,200

400

1,500

3-42

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be 224 Prepare a corrected trial balance for Shafer Company. All accounts should have a normal balance Shafer Company Trial Balance For the Quarter Ended March 31, 2014 Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense

Debit $28,000

Credit $32,000

2,500 60,000 15,000 10,000 20,000 30,000 27,000 1,500 52,000 15,000 5,000 10,000 $157,500

$150,500

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 224 (5 min.) Shafer Company Trial Balance For the Quarter Ended March 31, 2014 Debit Credit Cash $28,000 Accounts Receivable 32,000 Prepaid Insurance 2,500 Equipment 60,000 Accounts Payable $15,000 Unearned Service Revenue 10,000 Notes Payable 20,000 Common Stock 30,000 Retained Earnings 27,000 Dividends 1,500 Service Revenue 52,000 Salaries and Wages Expense 15,000 Utilities Expense 5,000 Rent Expense 10,000 $154,000 $154,000

The Accounting Information System

3-43

Be. 225 For each of the following transactions of Woods Inc., identify the account to be debited and the account to be credited. 1. 2. 3. 4.

Purchased 18-month insurance policy for cash. Paid weekly payroll. Purchased supplies on account. Received utility bill to be paid at later date.

Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 225 Transaction 1 2 3 4

(5 min.) Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense

Credit Cash Cash Accounts Payable Accounts Payable

Be. 226 Identify the impact on the accounting equation of the following transactions. 1. 2. 3. 4.

Purchased 24-month insurance policy for cash. Purchased supplies on account. Received utility bill to be paid at later date. Paid utility bill previously accrued.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 226 (5 min.) 1. Net effect is no change: Increases assets and decreases assets. 2. Increases assets and increases liabilities. 3. Increases liabilities and decreases stockholders' equity. 4. Decreases assets and decreases liabilities. Be. 227 The transactions of the Stormont Store are recorded in the general journal below. You are to post the journal entries to T-accounts and compute the August 31, 2014 balances. General Journal ____________________________________________________________________________ Date Account Titles and Explanation Debit Credit ____________________________________________________________________________ 2014 Aug. 5 Accounts Receivable 2,500 Service Revenue 2,500 10 Cash 3,000 Service Revenue 3,000 19 Rent Expense 1,000 Cash 1,000 25 Cash 1,400 Accounts Receivable 1,400

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

3-44 Be. 227

(Cont.) General Ledger Cash

Accounts Receivable

Service Revenue

Rent Expense

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227

(5 min.) General Ledger Cash

8/10 8/25

3,000 1,400

8/31 Bal.

3,400

Accounts Receivable 8/19

1,000

8/5

2,500

8/31 Bal.

1,100

Service Revenue 8/5 8/10 8/31 Bal.

8/25

1,400

Rent Expense 2,500 3,000 5,500

8/19

1,000

8/31 Bal.

1,000

Be. 228 Prepare a trial balance from the ledger accounts of Swisher Company as of January 31, 2014. Accounts Payable Accounts Receivable Cash Common Stock Dividends

1,500 2,500 1,600 2,200 1,400

Rent Expense Service Revenue Supplies Salaries and Wages Expense

$ 500 3,500 200 1,000

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The Accounting Information System

Solution 228

3-45

(5 min.) Swisher Company Trial Balance January 31, 2014 Debit Cash Accounts Receivable Supplies Accounts Payable Common Stock Dividends Service Revenue Rent Expense Salaries and Wages Expense

Credit

$1,600 2,500 200 $1,500 2,200 1,400 3,500 500 1,000 $7,200

$7,200

Exercises Ex. 229 Selected transactions for the Sleezer Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity. Sample: Made initial cash investment in the business. The answer would be—Increase in assets and increase in stockholders’ equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in transaction 4. Dividends paid to owners. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 229 (10 min.) 1. Decrease in assets and decrease in stockholders’ equity. 2. No net change in assets. 3. Decrease in assets and decrease in stockholders’ equity. 4. Increase in assets and increase in stockholders’ equity. 5. No net change in assets. 6. Decrease in assets and decrease in stockholders’ equity. 7. Increase in liabilities and decrease in stockholders’ equity. 8. Decrease in assets and decrease in stockholders’ equity. 9. Increase in assets and increase in stockholders’ equity. .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

3-46 Ex. 230

Selected accounts from the ledger of McDaniel Corporation appear below. For each account, indicate the following: (a) In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset - A Expense - E

Liability - L Revenues - R

None of the above - N

(b) In the second column, indicate the normal balance by inserting Dr. or Cr. Type of Account

Normal Balance

1. Supplies ……………………………….. 2. Notes Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable……………………… Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 230

(5 min.)

1. Supplies ………………………………. 2. Note Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable………………………

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

Normal Balance Dr. Cr. Cr. Dr. Cr. Dr. Cr. Dr. Dr. Dr.

The Accounting Information System

3-47

Ex. 231 Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Stockholders’ Assets = Liabilities + Equity 1. Received cash for services rendered. _______ ______ _______ 2. Purchased office equipment on 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. Dividends were paid.

_______

______

_______

9. Obtained a loan from the bank.

_______

______

_______

10. Billed customers for services rendered.

_______

______

_______

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 231

(10 min.) Assets + + –

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. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services rendered.

Liabilities

Stockholders’ Equity +

+ –

+,– – – + – + +

– – + – + +

3-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 232 Sara Obermeyer decides to open a pizza parlor near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity. Transactions (1) Sara Obermeyer invests $25,000 cash in exchange for common stock to start a pizza parlor business on June 1. (2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30 days. (3) Purchased supplies for $1,200 cash. (4) Received a bill from Campus News for $200 for advertising in the campus newspaper. (5) Cash receipts from customers for pizza sales amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Tiger Football Team $300 for pizzas ordered. (8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4. (9) Sara Obermeyer was paid dividends of $1,200. (10) Incurred utility expenses for month on account, $100. TransAccounts Accounts Common Retained action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings (1) ___________________________________________________________________________________ Balance (2) ___________________________________________________________________________________ Balance (3) ___________________________________________________________________________________ Balance (4) ___________________________________________________________________________________ Balance (5) ___________________________________________________________________________________ Balance (6) ___________________________________________________________________________________ Balance (7) ___________________________________________________________________________________ Balance (8) ___________________________________________________________________________________ Balance (9) ___________________________________________________________________________________ Balance (10) ___________________________________________________________________________________ Totals Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The Accounting Information System

3-49

Solution 232 (20 min.) Transaction

Accounts Accounts Common Cash + Receivable + Supplies + Equipment = Payable + Stock +

Retained Earnings

(1) +$25,000 +$25,000 ___________________________________________________________________________________ Balance $25,000 $25,000 (2) – 2,000 +$4,000 +$2,000 ___________________________________________________________________________________ Balance $23,000 $4,000 $2,000 $25,000 (3) – 1,200 +$1,200 ___________________________________________________________________________________ Balance $21,800 $1,200 $4,000 $2,000 $25,000 (4) + 200 -$ 200 ___________________________________________________________________________________ Balance $21,800 $1,200 $4,000 $2,200 $25,000 -$ 200 (5) + 1,500 +1,500 ___________________________________________________________________________________ Balance $23,300 $1,200 $4,000 $2,200 $25,000 $1,300 (6) – 200 – 200 ___________________________________________________________________________________ Balance $23,100 $1,200 $4,000 $2,200 $25,000 $1,100 (7) +$300 + 300 ___________________________________________________________________________________ Balance $23,100 $300 $1,200 $4,000 $2,200 $25,000 $1,400 (8) – 200 – 200 ___________________________________________________________________________________ Balance $22,900 $300 $1,200 $4,000 $2,000 $25,000 $1,400 (9) – 1,200 – 1,200 ___________________________________________________________________________________ Balance $21,700 $300 $1,200 $4,000 $2,000 $25,000 $ 200 (10) + 100 – 100 ___________________________________________________________________________________ Totals

$21,700

$300

$1,200

$4,000

$2,100

$25,000

$ 100

3-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 233 Analyze the following transactions in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. (1) Issued stock to investors for $20,000 in cash. (2) Purchased supplies on credit for $700. (3) Billed customers $1,000 for services provided. (4) Paid for supplies purchased in transaction 2. (5) Paid dividends of $300 cash to stockholders. (6) Received half from customers billed in transaction 3. (7) Received and paid utility bill for $100. TransAccounts Accounts Common Retained action Cash + Receivable + Supplies = Payable + Stock + Earnings (1) _________________________________________________________________________ Balance (2) _________________________________________________________________________ Balance (3) _________________________________________________________________________ Balance (4) _________________________________________________________________________ Balance (5) _________________________________________________________________________ Balance (6) _________________________________________________________________________ Balance (7) _________________________________________________________________________ Totals Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The Accounting Information System

Solution 233

3-51

(15 minutes)

TransAccounts Accounts Common Retained action Cash + Receivable + Supplies = Payable + Stock + Earnings (1) +$20,000 +$20,000 ___________________________________________________________________________________ Balance $20,000 $20,000 (2) +$700 +$700 ___________________________________________________________________________________ Balance $20,000 $700 $700 $20,000 (3) $1,000 $1,000 ___________________________________________________________________________________ Balance $20,000 $1,000 $700 $700 $20,000 $1,000 (4) –700 –700 ___________________________________________________________________________________ Balance $19,300 $1,000 $700 0 $20,000 $1,000 (5) –300 –300 ___________________________________________________________________________________ Balance $19,000 $1,000 $700 $20,000 $700 (6) +500 –500 ___________________________________________________________________________________ Balance $19,500 $500 $700 $20,000 $700 (7) –100 –100 ___________________________________________________________________________________ Totals $19,400 $500 $700 $20,000 $ 600

Ex. 234 A tabular analysis of the transactions made during August 2014 by Baxter Company during its first month of operations is shown below. Each increase and decrease in stockholders' equity is explained. Assets Cash 1. +$30,000 2. 3. 4. 5. 6. 7. 8. 9. 10.

–1,000 –750 +2,400 –1,500 –1,000 –800 +450 –4,000

+ A/R

+ Supp.

= + Equip

+$5,000

Liab.+

= Accts Pay

Com. Stock +$30,000

+ Rev.

Stockholders' Equity Retained Earnings - Exp. - Div. Com. Stock

+$4,000

+$750 +$5,900

+8,300

Serv. Rev.

– 1,500 –1,000 –800

Div. Rent Exp.

–4,000 –500

Sal. Exp. Util. Exp.

–450 +500

Instructions (a) Determine how much stockholders' equity increased for the month. (b) Compute the net income for the month. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

3-52

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 234 (10 min.) (a) Issued common stock ................................................................. Service revenue .......................................................................... Dividends .................................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Increase in stockholders' equity .................................................. (b)

Service revenue .......................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Net income .................................................................................

$30,000 8,300 (1,000) (800) (4,000) (500) $32,000 8,300 (800) (4,000) (500) $ 3,000

Ex. 235 The tabular analysis of transactions for Baxter Company is presented below. Assets

Cash + A/R 1. +$30,000 2. –1,000 3. –950 4. +2,400 +$5,900 5. –1,500 6. –1,000 7. –800 8. +450 –450 9. –4,000 10.

+ Supp.

Liab. +

+ Equip.

Accts = Payable

+$11,000

+$10,000

Stockholders' Equity Retained Earnings

+ C/S +$30,000

+ Rev.

- Exp.

- Div. Com. Stock

+$950 +8,300

Serv. Rev.

–1,500 –1,000

+500

–800

Div. Rent Exp.

–4,000 –500

Sal. Exp. Util. Exp.

Instructions Prepare a retained earnings statement for August and a classified balance sheet at August 31, 2014. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 235

(10 min.)

BAXTER COMPANY Retained Earnings Statement For the Month Ended August 31, 2014 ___________________________________________________________________________ Retained earnings, August 1 ............................................................... $ 0 Add: Net income .................................................................................. 3,000* 3,000 Less: Dividends ................................................................................... 1,000 Retained earnings, August 31 ............................................................. $2,000 *$8,300 – $800 – $4,000 – $500

The Accounting Information System

Solution 235

3-53

(Cont.)

BAXTER COMPANY Balance Sheet August 31, 2014 ___________________________________________________________________________ Assets Current Assets: Cash .................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Total current assets ........................................................................ Equipment ........................................................................................... Total assets ...................................................................................

$23,600 5,450 950 $30,000 11,000 $41,000

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

$ 9,000 $30,000 2,000

32,000 $41,000

Ex. 236 The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2014. Accounts Receivable Accounts Payable Cash Equipment Utilities Expense Insurance Expense Notes Payable, due 2017

$11,400 7,400 15,940 59,360 950 600 31,450

Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2014)

$ 1,800 1,200 15,500 800 40,000 8,400 900 5,200

Instructions Prepare an income statement and a retained earnings statement for the month of July 2014, and a classified balance sheet for July 31. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

3-54

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 236

(10 min.)

DEPENDABLE DELIVERY SERVICE Income Statement For the Month Ended July 31, 2014 ___________________________________________________________________________ Revenues Service revenue ............................................................................. $15,500 Expenses Salaries and wages expense ......................................................... $8,400 Maintenance and repairs expense ................................................. 1,200 Gasoline expense .......................................................................... 950 Insurance expense ........................................................................ 600 Total expenses ........................................................................ 11,150 Net income .......................................................................................... $ 4,350 DEPENDABLE DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2014 ___________________________________________________________________________ Retained earnings, July 1 .................................................................... $5,200 Add: Net income .................................................................................. 4,350 9,550 Less: Dividends ................................................................................... 800 Retained earnings, July 31 .................................................................. $8,750 DEPENDABLE DELIVERY SERVICE Balance Sheet July 31, 2014 ___________________________________________________________________________ Assets Current Assets: Cash .............................................................................................. Accounts receivable ...................................................................... Prepaid insurance........................................................................... Total current assets .................................................................. Equipment ........................................................................................... Total assets ...................................................................................

$15,940 11,400 1,800 $29,140 59,360 $88,500

Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .......................................................................... Salaries and wages payable .......................................................... Total current liabilities .............................................................. Notes payable ..................................................................................... Total liabilities .......................................................................... Stockholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total stockholders' equity ............................................................... Total liabilities and stockholders’ equity ...................................

$ 7,400 900 $ 8,300 31,450 39,750 40,000 8,750 48,750 $88,500

The Accounting Information System

3-55

Ex. 237 Selected transactions for Stockton Corporation during its first month in business are presented below: Sept. 1 5 25 30

Issued common stock in exchange for $30,000 cash received from investors. Purchased equipment for $20,000, paying $2,000 in cash and the balance on account. Paid $6,000 cash on balance owed for equipment. Paid $1,000 cash dividend.

Stockton's chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends. Instructions (a) Prepare a tabular analysis of the September transactions. The column headings should be: Cash + Equipment = Accounts Payable + Stockholders' Equity. For transactions affecting stockholders' equity, provide explanations in the right margin. (b) Journalize the transactions. Do not provide explanations. (c) Post the transactions to T-accounts. Ans: N/A, LO: 1, 5, 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 237 (a)

(10min.)

Assets Cash 1 +$30,000 5 –2,000 25 –6,000 30 –1,000 $21,000

Sept.

+ Equipment

= Liabilities Accounts = Payable

+$20,000

+$18,000 –6,000

$20,000

$ 12,000

Stockholders' Equity Stockholders' + Equity +$30,000 Issued stock

–1,000 $29,000

Dividends

(b)

Date Sept. 1

General Journal Account Titles Debit Cash ................................................................................... 30,000 Common Stock .............................................................

30,000

Equipment........................................................................... 20,000 Cash ............................................................................. Accounts Payable .........................................................

2,000 18,000

Accounts Payable ............................................................... 6,000 Cash .............................................................................

6,000

Dividends ............................................................................ 1,000 Cash .............................................................................

1,000

J1 Credit

3-56

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 237 (c)

9/1

Bal.

9/5 Bal.

9/25

(Cont.)

Cash 30,000 9/5 9/25 9/30 21,000

Common Stock 9/1 Bal.

2,000 6,000 1,000

Equipment 20,000 20,000

9/30 Bal.

30,000 30,000

Dividends 1,000 1,000

Accounts Payable 6,000 9/5 18,000 Bal. 12,000

Ex. 238 For each item below, indicate whether a debit or credit applies. 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable

____ ____ ____ ____ ____ ____ ____ ____ ____ ____

__ __ __ __ __ __ __ __ __ __

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 238 (5 min.) 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable

____Dr.__ ____Dr.__ ____Cr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Cr.__ ____Cr.__ ____Cr.__ ____Cr.__

The Accounting Information System

3-57

Ex. 239 For each item below, indicate whether a debit or credit applies. 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Increase in Dividends 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Decrease in Accounts Receivable

____ ____ ____ ____ ____ ____ ____ ____ ____ ____

__ __ __ __ __ __ __ __ __ __

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 239 (5 min.) 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Increase in Dividends 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Decrease in Accounts Receivable

____Cr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Dr.__ ____Dr.__ ____Cr.__

3-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 240 The chart of accounts used by Norton Printing Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 1 Cash 8 Common Stock 2 Accounts Receivable 9 Retained Earnings 3 Supplies 10 Dividends 4 Equipment 11 Service Revenue 5 Accounts Payable 12 Advertising Expense 6 Notes Payable 13 Rent Expense 7 Unearned Service Revenue __________________________________________________________________________ Number(s) of account(s) debited 1.

Number(s) of account(s) credited

Stockholders invest $90,000 cash to start the business.

_______________________________________________________________________________________________________

Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder.

_______________________________________________________________________________________________________

Purchased $5,000 paper supplies on credit.

_______________________________________________________________________________________________________

Cash received for photocopy services amounted to $7,000.

_______________________________________________________________________________________________________

Paid $500 cash for radio advertising.

_______________________________________________________________________________________________________

Paid $800 on account for paper supplies purchased in transaction 3.

_______________________________________________________________________________________________________

Dividends of $1,500 were paid to stockholders.

_______________________________________________________________________________________________________

Paid $1,200 cash for rent for the current month.

_______________________________________________________________________________________________________

Received $2,000 cash advance from a customer for future copying.

_______________________________________________________________________________________________________

10.

Billed a customer for $450 for photocopy services completed.

_______________________________________________________________________________________________________ Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The Accounting Information System

3-59

Solution 240 (15 min.) ___________________________________________________________________________

Stockholders invest $90,000 cash to start the business.

Number(s) of account(s) debited

Number(s) of account(s) credited

_______________________________________________________________________________________________________

Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 10% note for the remainder.

1, 6

_______________________________________________________________________________________________________

Purchased $5,000 paper supplies on credit.

_______________________________________________________________________________________________________

Cash received for photocopy services amounted to $7,000.

_______________________________________________________________________________________________________

Paid $500 cash for radio advertising.

_______________________________________________________________________________________________________

Paid $800 on account for paper supplies purchased in transaction 3.

_______________________________________________________________________________________________________

Dividends of $1,500 were paid to stockholders.

_______________________________________________________________________________________________________

Paid $1,200 cash for rent for the current month.

_______________________________________________________________________________________________________

Received $2,000 cash advance from a customer for future copying.

_______________________________________________________________________________________________________

10.

Billed a customer for $450 for photocopy services completed.

_______________________________________________________________________________________________________

3-60

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 241 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.

_________________

An increase in Accounts Payable.

_________________

An increase in Prepaid Insurance.

_________________

An increase in Common Stock.

_________________

A increase in Supplies.

_________________

An increase in Dividends.

_________________

An increase in Service Revenue.

_________________

A decrease in Accounts Receivable.

_________________

An increase in Rent Expense.

_________________

10.

A decrease in Equipment.

_________________

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 241 (5 min.) 1. An increase in Salaries and Wages Expense.

Debit ______

An increase in Accounts Payable.

Credit ______

An increase in Prepaid Insurance.

Debit ______

An increase in Common Stock.

Credit ______

An increase in Supplies.

Debit ______

An increase in Dividends.

Debit ______

An increase in Service Revenue.

Credit ______

A decrease in Accounts Receivable.

Credit ______

An increase in Rent Expense.

Debit ______

10.

A decrease in Equipment.

Credit ______

The Accounting Information System

3-61

Ex. 242 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit

Accounts 1.

Service Revenue

_________________

Rent Expense

_________________

Accounts Receivable

_________________

Accounts Payable

_________________

Common Stock

_________________

Supplies

_________________

Insurance Expense

_________________

Dividends

_________________

Buildings

_________________

10.

Notes Payable

_________________

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 242

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

(5 min.) Normal Balance Debit or Credit Credit Debit Debit Credit Credit Debit Debit Debit Debit Credit

Accounts Service Revenue Rent Expense Accounts Receivable Accounts Payable Common Stock Supplies Insurance Expense Dividends Buildings Notes Payable

Ex. 243 During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. (1) (2) (3) (4) (5)

Advertising Expense Service Revenue Accounts Payable Accounts Receivable Common Stock

(6) (7) (8) (9) (10)

Dividends Cash Salaries and wages Expense Notes Payable Insurance Expense

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

3-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 243 (5 min.) (1) (a) (2) (b) (3) (c) (4) (c) (5) (b)

(6) (7) (8) (9) (10)

(a) (c) (a) (c) (a)

Ex. 244 Eight transactions are recorded in the following T-accounts:

(1) (7)

Cash 35,000 (2) 22,500 (3) (4) (6) (8)

(5)

Supplies 1,950

(3)

Common Stock (1)

(6)

3,500 1,950 2,225 8,000 4,500

(2)

Accounts Receivable 27,500 (7) 22,500

Equipment 13,500 Service Revenue (5)

35,000

Accounts Payable 8,000 (2) 10,000

(8)

27,500

Dividends 4,500

Salaries and Wages Expense (4) 2,225

Indicate for each debit and each credit: (a) whether an asset, liability, common stock, dividends, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction No.

Account Debited Type Effect

Account Credited Type Effect

__________________________________________________________________________ (1)

(Example)

Asset

Common Stock

__________________________________________________________________________ (2)

__________________________________________________________________________ (3)

__________________________________________________________________________ (4)

__________________________________________________________________________ (5)

__________________________________________________________________________ (6)

__________________________________________________________________________ (7)

__________________________________________________________________________ (8) Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The Accounting Information System

3-63

Solution 244 (15 min.) Transaction Account Debited Account Credited No. Type Effect Type Effect ___________________________________________________________________________ (1) (Example) Asset + Common Stock + ___________________________________________________________________________ (2) Asset + Asset – Liability + ___________________________________________________________________________ (3) Asset + Asset – ___________________________________________________________________________ (4) Expense + Asset – ___________________________________________________________________________ (5) Asset + Revenue + ___________________________________________________________________________ (6) Liability – Asset – ___________________________________________________________________________ (7) Asset + Asset – ___________________________________________________________________________ (8) Dividends + Asset – Ex. 245 For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, and Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash

1. 2. 3. 4.

a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts Payable Accounts Receivable Common Stock Dividends

Accounts 5. Service Revenue 6. Insurance Expense 7. Notes Payable 8. Equipment

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 245 (15 min.) 1. a. Liability Account. b. Debit decreases, credit increases. c. Normal balance – credit. 2. a. Asset Account. b. Debit increases, credit decreases. c. Normal balance – debit. 3. a. Stockholders’ Equity Account. b. Debit decreases, credit increases. c. Normal balance – credit. 4. a. Stockholders’ Equity Account. b. Debit increases, credit decreases. c. Normal balance – debit.

5. a. b. c. 6. a. b. c. 7. a. b. c. 8. a. b. c.

Revenue Account. Debit decreases, credit increases. Normal balance – credit. Expense Account. Debit increases, credit decreases. Normal balance – debit. Liability Account. Debit decreases, credit increases. Normal balance – credit. Asset Account. Debit increases, credit decreases. Normal balance – debit.

3-64

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 246 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. Stockholders invest $40,000 in cash in starting a real estate office operating as a corporation. 2. Purchased $500 of supplies on credit. 3. Purchased equipment for $25,000, paying $3,500 in cash and signed a 30-day, $21,500, note payable. 4. Real estate commissions billed to clients amount to $4,000. 5. Paid $700 in cash for the current month's rent. 6. Paid $250 cash on account for office supplies purchased in transaction 2. 7. Received a bill for $800 for advertising for the current month. 8. Paid $2,500 cash for office salaries. 9. Paid $1,200 cash dividends to stockholders. 10. Received a check for $2,000 from a client in payment on account for commissions billed in transaction 4. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 246 (15 min.) 1. Cash ........................................................................................ Common Stock ............................................................... 2.

10.

40,000 40,000

Supplies ................................................................................... Accounts Payable ...........................................................

500

Equipment ............................................................................... Cash ............................................................................... Notes Payable .................................................................

25,000

Accounts Receivable ............................................................... Service Revenue .............................................................

4,000

Rent Expense .......................................................................... Cash ...............................................................................

700

Accounts Payable .................................................................... Cash ...............................................................................

250

Advertising Expense ................................................................ Accounts Payable ...........................................................

800

Salaries and Wages Expense .................................................. Cash ...............................................................................

2,500

Dividends ................................................................................. Cash ...............................................................................

1,200

Cash ........................................................................................ Accounts Receivable .......................................................

2,000

500

3,500 21,500

4,000

700

250

800

2,500

1,200

2,000

The Accounting Information System

3-65

Ex. 247 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. 2. 3. 4. 5. 6. 7.

Received $50,000 from stockholders. Purchased equipment for $75,000, paying $15,000 in cash and giving a note payable for the remainder. Paid $3,000 rent for the month. Recorded $12,500 of services provided on account. Paid wages of $9,500. Received $7,000 in cash for services provided. Collected $2,000 from customers on account.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 247 (15 min.) 1. Cash ........................................................................................ Common Stock ................................................................ 2.

50,000 50,000

Equipment ................................................................................ Cash ................................................................................ Notes Payable .................................................................

75,000

Rent Expense ........................................................................... Cash ................................................................................

3,000

Accounts Receivable ................................................................ Service Revenue .............................................................

12,500

Salaries and Wages Expense ................................................... Cash ................................................................................

9,500

Cash ........................................................................................ Service Revenue .............................................................

7,000

Cash ........................................................................................ Accounts Receivable .......................................................

2,000

15,000 60,000

3,000

12,500

9,500

7,000

2,000

3-66

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 248 Transactions for the Hartman Company for the month of November are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. Stockholders invested an additional $40,000 cash in the business. 2. Purchased land costing $18,000 for cash. 3. Purchased equipment costing $45,000 for $4,500 cash and the remainder on credit. 4. Purchased supplies on account for $800. 5. Paid $3,000 for a one-year insurance policy. 6. Received $2,000 cash for services performed. 7. Received $5,000 for services previously performed on account. 8. Paid wages to employees for $2,500. 9. Paid dividends to stockholders of $400. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 248 (10 min.) 1. Cash ........................................................................................ Common Stock ............................................................... 2.

40,000 40,000

Land ........................................................................................ Cash ...............................................................................

18,000

Equipment ............................................................................... Cash ............................................................................... Accounts Payable ...........................................................

45,000

Supplies ................................................................................... Accounts Payable ...........................................................

800

Prepaid Insurance .................................................................... Cash ...............................................................................

3,000

Cash ........................................................................................ Service Revenue .............................................................

2,000

Cash ........................................................................................ Accounts Receivable .......................................................

5,000

Salaries and Wages Expense .................................................. Cash ...............................................................................

2,500

Dividends ................................................................................. Cash ...............................................................................

400

18,000

4,500 40,500

800

3,000

2,000

5,000

2,500

400

The Accounting Information System

3-67

Ex. 249 This information relates to Hanshew Real Estate Agency. Oct.

1 Stockholders invested $35,000 in exchange for common stock of the corporation. 2 Hires an administrative assistant at an annual salary of $36,000. 3 Buys equipment for $3,500 on account. 6 Sells a house and lot for M Springer; commissions due from Springer, $10,000 (not paid by Springer at this time). 10 Receives cash of $140 as commission for acting as rental agent renting an apartment. 27 Pays $700 on account for the equipment purchased on October 3. 30 Pays the administrative assistant $3,000 in salary for October.

Instructions (a) Journalize the transactions. Do not provide explanations. (b) Post the transactions to T accounts. Ans: N/A, LO: 5, 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 249

(15 min.)

(a)

General Journal

Date

Account Titles

Debit

Oct. 1

Cash ...................................................................... Common Stock ..................................................

35,000 35,000

No entry.

Equipment ............................................................. Accounts Payable ..............................................

3,500

Accounts Receivable ............................................. Service Revenue................................................

10,000

Cash ...................................................................... Service Revenue................................................

140

Accounts Payable .................................................. Cash ..................................................................

700

Salaries and Wages Expense ................................ Cash ..................................................................

3,000

6 10 27 30

Credit

3,500 10,000 140 700 3,000

3-68

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 249

(Cont.)

(b) Cash Oct.

1 10

Bal.

Accounts Payable

35,000 Oct. 27 140

700

Oct.

700

31,440

Bal.

3,500

Bal.

2,800

Common Stock

10,000

Oct.

10,000

Bal.

Equipment Oct.

3,000

Accounts Receivable Oct.

Oct.

35,000 35,000

Service Revenue

3,500

Oct.

3,500

10,000

140

Bal.

10,140

Salaries and Wages Expense Oct.

3,000

Bal.

3,000

Ex. 250 These T accounts summarize the ledger of Garner Gardening Company Inc. at the end of the first month of operations, April 2014. Cash Apr.

20,000

700

800

900

Apr.

Unearned Service Revenue 15

1,200

3,500

Apr.

Accounts Receivable Apr.

3,400

Apr.

800

Apr.

5,700

3,500

Apr.

20,000

Service Revenue

Account Payable Apr.

900

Common Stock

Supplies Apr.

3,400

700

Salaries and Wages Expense 4

5,700

Apr. .

1,200

The Accounting Information System

Ex. 250

3-69

(Cont.)

Instructions (a) Prepare in the order they occurred the journal entries (including explanations) that resulted in the amounts posted to the accounts. (b) Prepare a trial balance at April 30, 2014. Ans: N/A, LO: 5, 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 250 (15 min.) (a) General Journal Date

Account Titles and Explanation

Debit

Apr. 1

Cash ...................................................................... Common Stock .................................................. (Issued stock for cash)

20,000

Supplies ................................................................. Accounts Payable .............................................. (Purchased supplies on account)

5,700

Accounts Receivable ............................................. Service Revenue................................................ (Billed clients for services rendered)

3,400

Cash ...................................................................... Service Revenue................................................ (Received cash for revenue earned)

700

Salaries and Wages Expense ................................ Cash .................................................................. (Paid salaries)

1,200

Accounts Payable .................................................. Cash .................................................................. (Paid creditors on account)

3,500

Cash ...................................................................... Accounts Receivable ......................................... (Received cash in payment of account)

800

Cash ...................................................................... Unearned Service Revenue ............................... (Received cash for future services)

900

Credit

20,000

5,700

3,400

700

1,200

3,500

800

900

3-70

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 250

(Cont.)

(b) GARNER GARDENING COMPANY INC. Trial Balance April 30, 2014 Debit Cash................................................................................ Accounts Receivable ....................................................... Supplies .......................................................................... Accounts Payable............................................................ Unearned Service Revenue ............................................ Common Stock................................................................ Service Revenue ............................................................. Salaries and Wages Expense .........................................

Credit

$17,700 2,600 5,700 $ 2,200 900 20,000 4,100 1,200 $27,200

$27,200

Ex. 251 The transactions of the Speedy Delivery 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 ____________________________________________________________________________ Date Account Titles and Explanation Debit Credit ____________________________________________________________________________ 2014 Sept. 1 Cash 25,000 Common Stock 25,000 (Stockholders invested cash in business) 4

Equipment Cash Notes Payable (Paid cash and issued 2-year, 6%, note for delivery trucks)

60,000

Rent Expense Cash (Paid September rent)

1,000

Prepaid Insurance Cash (Paid one-year liability insurance)

1,400

Cash

4,500

10,000 50,000

1,000

Service Revenue (Received cash for delivery services)

1,400

4,500

The Accounting Information System

Ex. 251 20

3-71

(Cont.) Salaries and Wages Expense Cash (Paid salaries for current period)

500

Utilities Expense Accounts Payable (Received a bill for September utilities)

100

Dividends Cash (Paid dividends)

750

500

100

750

Accounts Receivable Service Revenue (Billed customer for delivery service)

1,000 1,000

General Ledger Cash

Accounts Receivable

Prepaid Insurance

Equipment

Accounts Payable

Notes Payable

3-72 Ex. 251

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) Common Stock

Dividends

Service Revenue

Rent Expense

Salaries and Wages Expense

Utilities Expense

SPEEDY DELIVERY SERVICE Trial Balance September 30, 2014 Accounts

Credit

Debit

Ans: N/A, LO: 7,8, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The Accounting Information System

Solution 251

(25 min.) Cash

Accounts Receivable

9/1

25,000

9/4

10,000

9/30

1,000

9/18

4,500

9/8

1,000

9/30

Bal. 1,000

9/15

1,400

9/20

500

9/30

750

9/30

3-73

Bal 15,850 Prepaid Insurance

Equipment

9/15

1,400

9/4

60,000

9/30

Bal. 1,400

9/30

Bal. 60,000

Accounts Payable

Notes Payable

9/25

100

9/4

50,000

9/30

Bal. 100

9/30

Bal. 50,000

Common Stock

Dividends

9/1

25,000

9/30

750

9/30

Bal. 25,000

9/30

Bal. 750

Service Revenue

Rent Expense

9/18

4,500

9/8

1,000

9/30

1,000

9/30

Bal. 1,000

9/30

Bal. 5,500

3-74

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Salaries and Wages Expense

Utilities Expense

9/20

500

9/25

100

9/30

Bal. 500

9/30

Bal. 100

SPEEDY DELIVERY SERVICE Trial Balance September 30, 2014 Accounts Credit Debit Cash $ 15,850 Accounts Receivable 1,000 Prepaid Insurance 1,400 Equipment 60,000 Accounts Payable $ 100 Notes Payable 50,000 Common Stock 25,000 Dividends 750 Service Revenue 5,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 100 Totals $80,600 $80,600 ____________________________________________________________________________ Ex. 252 Selected transactions from the journal of Giambi Inc. during its first month of operations are presented here. Date Account Titles Aug. 1 Cash Common Stock 10 Cash Service Revenue 12 Equipment Cash Notes Payable 25 Accounts Receivable Service Revenue 31 Cash Accounts Receivable

Debit 10,000

Credit 10,000

1,700 1,700 12,200 1,200 11,000 2,500 2,500 600 600

The Accounting Information System

Ex. 252

3-75

(Cont.)

Instructions (a) Post the transactions to T-accounts. (b) Prepare a trial balance at August 31, 2014. Ans: N/A, LO: 7, 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 252

(15 min.)

(a) Aug. 1 10 31 Bal.

Aug. 25 Bal.

Aug. 12 Bal.

Cash 10,000 Aug. 12 1,700 600 11,100

Accounts Receivable 2,500 Aug. 31 1,900

1,200

Notes Payable Aug. 12 Bal.

11,000 11,000

Common Stock Aug. 1 Bal.

10,000 10,000

Service Revenue Aug. 10 25 Bal.

1,700 2,500 4,200

600

Equipment 12,200 12,200

(b) GIAMBI INC. Trial Balance August 31, 2014 ___________________________________________________________________________ Debit Credit Cash ................................................................................................... $11,100 Accounts Receivable ........................................................................... 1,900 Equipment............................................................................................ 12,200 Notes Payable ..................................................................................... $ 11,000 Common Stock .................................................................................... 10,000 Service Revenue ................................................................................. 4,200 $25,200 $25,200

3-76

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 253 The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2014. Accounts Receivable Accounts Payable Cash Equipment Gasoline Expense Insurance Expense Notes Payable, due 2017

$16,400 12,400 ? 59,360 950 600 28,450

Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2014)

$ 1,800 1,200 13,500 800 50,000 6,400 900 5,200

Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the missing amount for Cash. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 253

(8 min.)

DEPENDABLE DELIVERY SERVICE Trial Balance July 31, 2014 ___________________________________________________________________________ Debit Credit Cash ($110,450 – Debit total without Cash $87,510) ........................... $22,940 Accounts Receivable ........................................................................... 16,400 Prepaid Insurance ................................................................................ 1,800 Equipment ........................................................................................... 59,360 Accounts Payable ................................................................................ $ 12,400 Salaries and Wages Payable .............................................................. 900 Notes Payable (due 2017) ................................................................... 28,450 Common Stock..................................................................................... 50,000 Retained Earnings ................................................................................ 5,200 Dividends ............................................................................................ 800 Service Revenue ................................................................................. 13,500 Salaries and Wages Expense .............................................................. 6,400 Gasoline Expense ................................................................................ 950 Maintenance and Repairs Expense ...................................................... 1,200 Insurance Expense............................................................................... 600 $110,450$110,450

The Accounting Information System

3-77

Ex. 254 The trial balance of the Gavin Company shown below does not balance. GAVIN COMPANY Trial Balance June 30, 2014 ____________________________________________________________________________ Debit Credit Cash ............................................................................................. $ 5,600 Accounts Receivable ..................................................................... 7,600 Supplies ........................................................................................ 600 Equipment ..................................................................................... 8,300 Accounts Payable ......................................................................... $ 12,766 Common Stock ............................................................................. 1,941 Dividends ...................................................................................... 1,500 Service Revenue ........................................................................... 15,200 Salaries and Wages Expense ....................................................... 3,800 Maintenance and Repairs Expense ............................................... 1,600 Totals ................................................................................... $29,000 $29,907 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $350 received from a customer on account was debited to Cash $530 and credited to Accounts Receivable $530. 3. Dividends of $300 paid to stockholders were posted as a credit to Dividends, $300, and a credit to Cash $300. 4. Salaries and Wages Expense of $300 was omitted from the trial balance. 5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700. 6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51. 7. A payment on account for $215 was credited to Cash for $215 and credited to Accounts Payable for $251. Instructions Prepare a correct trial balance. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA

3-78

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 254

(25 min.)

GAVIN COMPANY Trial Balance June 30, 2014 ____________________________________________________________________________ Debit Credit Cash [5,600 – 180 (2)] .................................................................... $ 5,420 Accounts Receivable [7,600 + 180 (2)] ........................................... 7,780 Supplies ......................................................................................... 600 Equipment [8,300 + 700 (5)] ........................................................... 9,000 Accounts Payable [9,766 – 251–215 (7)] ........................................ $12,300 Common Stock............................................................................... 1,941 Dividends [1,500 + 300 + 300 (3)] .................................................. 2,100 Service Revenue [15,200 + 459 (6)] ............................................... 15,659 Salaries and Wages Expense [3,800 + 300 (4)].............................. 4,100 Maintenance and Repairs Expense [1,600 – 700 (5)] ..................... 900 Totals ...................................................................................... $29,900 $29,900 Ex. 255 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700. 2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34. 3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 255 (5 min.) 1. The trial balance totals will be unequal. The credit column will be $630 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be unequal. The debit column will be $4,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal.

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Ex. 256 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A collection on account of $400 was journalized and posted as a debit to Cash $400 and a credit to Service Revenue $400. 2. A $950 purchase of supplies on account was recorded as a debit of $950 to Equipment and a credit of $950 to Accounts Payable. 3. A purchase of equipment for $3,500 on account was not recorded. 4. A $270 receipt on account was recorded as a $720 debit to Cash and a $270 credit to Accounts Receivable. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 256 (5 min.) 1. The trial balance totals will be misstated but not unequal. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be misstated but not unequal. 4. The trial balance totals will be unequal. The debit column will be $450 larger than the credit column. Ex. 257 Sue Sloan and Associates is a financial planning service. The account balances at December 31, 2014 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Common Stock Equipment Land Notes Payable Notes Receivable Supplies

$34,000 16,000 120,000 24,500 167,700 79,300 47,000 95,000 9,100 800

Instructions Prepare a trial balance with the accounts arranged in financial statement order. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 257

(10 min.) SUE SLOAN AND ASSOCIATES Trial Balance December 31, 2014

Cash .............................................................................................. Notes Receivable .......................................................................... Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Buildings ....................................................................................... Land .............................................................................................. Accounts Payable .......................................................................... Notes Payable ............................................................................... Common Stock .............................................................................. Totals ....................................................................................

Debit $ 24,500 9,100 16,000 800 79,300 120,000 47,000

$296,700

Credit

$ 34,000 95,000 167,700 $296,700

Ex. 258 The ledger accounts of the Get Fit Gym at July 31, 2014 are shown below: Accounts Payable Accounts Receivable Buildings Common Stock Cash Equipment Notes Payable Supplies Dividends

$ 12,100 1,050 55,400 65,100 9,000 45,900 45,000 350 10,500

Instructions Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The Accounting Information System

Solution 258

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(10 min.) GET FIT GYM Trial Balance July 31, 2014

Cash ............................................................................................. Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Buildings ....................................................................................... Accounts Payable ......................................................................... Notes Payable ............................................................................... Common Stock ............................................................................. Dividends ...................................................................................... Totals ...................................................................................

Debit $ 9,000 1,050 350 45,900 55,400

Credit

$ 12,100 45,000 65,100 10,500 $122,200

$122,200

COMPLETION STATEMENTS 259.

An _______________ is an individual accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

260.

The act of entering an amount on the left side of an account is called _______________ the account, and making an entry on the right side is called _________________ the account.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

261.

_____________, ______________, and _______________ have debit normal account balances whereas _______________, ______________, ______________, and ________________ have credit normal account balances.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

262.

The five subdivisions of stockholders’ equity are ______________, _______________, _________________, __________________, and _________________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

263.

The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ______________, and transfer the _______________ information to appropriate accounts in the ________________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

3-82 264.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

265.

An accounting record where transactions are initially recorded in chronological order is called a ________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

266.

Posting is the procedure of transferring journal entries to ________________.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

267.

The entire group of accounts and their balances maintained by a company is called the ________________.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

268.

A two column list of all accounts and their balances at a given time is a ______________.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 259. account 260. debiting, crediting 261. assets, expenses, dividends, common stock, liabilities, revenues, retained earnings 262. common stock, retained earnings, dividends, revenues, expenses

263. 264. 265. 266. 267. 268.

analyze, journal, journal, ledger source documents journal ledger accounts general ledger trial balance

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MATCHING 269. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Account Normal account balance Debit Revenue account Ledger

F. G. H. I. J.

Journal Posting Chart of accounts Trial balance Source document

____

1. The entire group of accounts maintained by a company.

____

2. Transferring journal entries to ledger accounts.

____

3. The side which increases an account.

____

4. A list of all the accounts used by a company.

____

5. An accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.

____

6. Left side of an account.

____

7. Evidence that a transaction has taken place.

____

8. Shows the debit and credit effects of specific transactions.

____

9. A list of accounts and their balances at a given time.

____ 10. Has a credit normal balance Ans: N/A, LO: 1-8, 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.

E G B H A

6. 7. 8. 9. 10.

C J F I D

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS

S-A E 270 Describe the accounting information system and the steps in the recording process. Ans: N/A, LO: 1, 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Applications

Solution 270 The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system. The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts (2) Enter the transaction information in a journal (book of original entry) (3) Transfer the information to the appropriate accounts in the ledger (book of accounts). S-A E 271 A student is considering dropping his accounting class because he cannot understand the rules of debits and credits. Can the student be successful in the course without an understanding of the rules of debits and credits? Explain the rules of debits and credits in a way that will help him understand them. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Applications

Solution 271 Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: Make sure that you understand the accounting equation. Assets equal the total of liabilities and stockholders’ equity. Stockholders’ equity is not an account but rather a group of accounts that includes common stock, retained earnings, revenues, expenses, and dividends. Common stock, retained earnings, and revenues cause stockholders’ equity to increase while expenses and dividends cause stockholders’ equity to decrease. Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.

The Accounting Information System

Solution 271

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(Cont.)

Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account – when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, common stock, retained earnings, and revenues are all increased with credits. Expenses and dividends are the two accounts that cause stockholders’ equity to decrease, thus they must be increased with a debit. Finally, you must work examples, exercises and problems to apply these rules of debits and credits. The more you work with these rules, the quicker they will become as natural as the multiplication tables. S-A E 272 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise. Ans: N/A, LO: 4, 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Applications

Solution 272 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. S-A E 273 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance. Ans: N/A, LO: 2, 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 273 An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, stockholders’ equity, revenue, and expense. Accounts with a normal debit balance, such as assets and expenses, are increased when debited and decreased when credited. Accounts with a normal credit balance, such as liabilities and revenues, are increased when credited and decreased when debited. S-A E 274 Why is the Dividends account increased by a debit? stockholders’ equity.

Explain in terms of its relationship to

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Applications

Solution 274 Dividends represent a decrease in stockholders’ equity. According to the rules of debit and credit, a decrease in stockholders’ equity is recorded as a debit. S-A E 275 Steve Rondelli, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Steve correct? Explain. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 275 Steve is incorrect, the double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. In other words, for each transaction, debits must equal credits. S-A E 276 (a) Can accounting transaction debits and credits be recorded directly in the ledger accounts? (b) What are the advantages of first recording transactions in the journal and then posting to the ledger? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 276 (a) Yes, debits and credits could be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. S-A E 277 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain. Ans: N/A, LO: 8, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

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Solution 277 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. S-A E 278 (Ethics) Robert Harder, Jr. was appointed the manager of Westbrook Properties, a recently formed company that manages residential rental properties. Maria Valdez is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Harder believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Robert Harder, Sr. the elder Mr. Harder has set up Westbrook Properties in order to test his son's management skills before allowing him to manage a more lucrative commercial property business. Mr. Harder, Sr. provided the capital for Westbrook, and maintains close contact with the company. He allowed his son, however, to hire his own employees. Mr. Harder has asked Ms. Valdez to name the Travel and Entertainment account Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Valdez resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Valdez agree to the change in the Travel and Entertainment account to Property Development? Explain. Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: FSA

Solution 278 1. The stakeholders in this situation include Mr. Harder, Jr. Maria Valdez Mr. Harder, Sr. Bankers and others who might rely on the financial statements. 2. Ms. Valdez definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Valdez was hired by Mr. Harder, Jr., and though she may agree with his business methods, she cannot be a party to such deceit.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 279 (Communication) The following trial balance was obtained from Gentry Company's computer system. RPT DPT PRIORITY RUN BY SEQUENCE

TR BAL ACC MGR 2 R.HAMES 997411

ACCOUNT BAL CASH 18700 SUPPLIES 5600 ACC PAY 7500NOTE PAY 1200COMMON STOCK 10000DIVIDENDS 500 SERVICE REVENUE 11000SAL AND WAG EXP 3500 RENT EXP 900 OTHER EXP 500 BAL 0 ***TRIAL BALANCE IS IN BALANCE***

Required: 1. What features make this trial balance difficult to read? 2. Prepare an improved trial balance. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 279 1. The trial balance is difficult to read because a. The title is not explanatory b. Account abbreviations are used c. The numbers are not shown in standard currency format d. Debits and credits are not separately shown, but are indicated by a "-" for credits e. Extraneous information is provided. 2.

GENTRY COMPANY Trial Balance Debit $18,700 5,600

Cash Supplies Accounts Payable Note Payable Common Stock Dividends Service Revenue Salaries and Wages Expense Rent Expense Other Expenses

Credit $ 7,500 1,200 10,000

500 11,000 3,500 900 500 $29,700

$29,700

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IFRS QUESTIONS 1.

Which of the following are the same under both GAAP and IFRS? a. The account. b. Debit and credit rules. c. Steps in the recording process. d. All of these answer choices are correct.

Ans: D LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

Which of the following are the same under both GAAP and IFRS? a. The journal. b. The ledger. c. The chart of accounts. d. All of these answer choices are correct.

Ans: D LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

Which of the following is true? a. Transaction analysis is completely different under IFRS and GAAP. b. Most transaction are recorded differently under IFRS and GAAP. c. Transaction analysis is the same under IFRS and GAAP, but some transactions are recorded differently. d. All transaction are recorded the same under IFRS and GAAP.

Ans: C LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

European companies rely a. less on historical cost and more on fair values than U.S companies. b. less on fair values and more on historical cost than U.S companies. c. completely on fair values for financial reporting. d. completely on historical cost for financial reporting.

Ans: A LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

The double-entry accounting system is the basis of accounting systems a. worldwide. b. worldwide, except for the U.S. c. in the U.S. only d. neither internationally nor in the U.S.

Ans: A LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

Under IFRS, the trial balance a. follow the same format as under GAAP. b. shows credits on the left and debits on the right. c. include less accounts than under GAAP. d. include more accounts than under GAAP.

Ans: A LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting

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 regulation. d. all of these answer choices are correct.

Ans: D LO10 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FN: Reporting IMA: Reporting IMA: Reporting

3-90 8.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following statements is true regarding the recording process? a. Because IFRS (International Financial Reporting Standards) rely more on fair value and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS (International Financial Reporting Standards) is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of these answer choices are correct.

Ans: B, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. share Capital – Ordinary is referred to as Retained Earnings. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS (International Financial Reporting Standards).

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 4 ACCRUAL ACCOUNTING CONCEPTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

BT Item LO BT Item True-False Statements

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 1 1 1 2 2 3

K K K K K K K K C K K

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

3 3 3 3 3 3 3 3 3 3 3

5 5 5 6 6 7 7 7 7 7 7

K K K K K K K K K K K

45. 46. 47. 48. 49. 50. 51. 52. *53.

7 7 7 8 8 8 8 8 10

K K K K K K K K K

54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

1 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 2 2 2 2

K K K K K K K K K K K K K K K C C C C C C K K C AP AP AP AP AP AP AP AP 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. 117. 118. 119. 120. 121. 122. 123.

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 4 4 4 4 4 4 4 4

K 23. 3 K 34. K 24. 4 K 35. K 25. 4 C 36. K 26. 4 K 37. K 27. 4 K 38. K 28. 4 K 39. K 29. 4 K 40. K 30. 4 K 41. K 31. 4 K 42. K 32. 4 K 43. C 33. 5 K 44. Multiple Choice Questions C 128. 4 K 165. K 129. 4 K 166. K 130. 4 C 167. K 131. 4 AP 168. K 132. 4 C 169. K 133. 4 C 170. C 134. 4 K 171. K 135. 4 C 172. K 136. 4 C 173. C 137. 4 K 174. K 138. 4 C 175. K 139. 4 C 176. K 140. 4 C 177. C 141. 4 C 178. K 142. 4 K 179. K 143. 4 AP 180. K 144. 4 AP 181. C 145. 4 AN 182. C 146. 4 AP 183. K 147. 4 AP 184. K 148. 4 K 185. K 149. 5 AP 186. K 150. 5 AP 187. K 151. 4 K 188. K 152. 4 K 189. K 153. 4 C 190. K 154. 4 K 191. K 155. 4 K 192. K 156. 4 K 193. AP 157. 4 K 194. AP 158. 4 K 195. AP 159. 4 AP 196. K 160. 4 C 197.

4 4 4 4 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 6 6 6

AP AP AP AP AP AP AN AN AP AP C C C C AP AP AP AP AN AP AP AP AP AP AP AN AP AP AP AP K K K

202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227. 228. 229. *230. *231. *232. *233. *234.

6 6 6 7 6 7 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8 9 10 10 10 10 10

K AP AP AP AP AP K K C K K K K K K K K AP AP AP AP AP K K K K K C K K K K K

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

87. 88. 89. 90.

2 2 2 2

AP C K K

124. 125. 126. 127.

4 4 4 4

AP AP AP K

235. 236. 237. 238.

2 3 3 4, 5

K AP AP K

239. 240. 241.

3, 4 4, 5 4

K AN AP

251. 252. 253. 254. 255. 256. 257.

2 2 2 2 2 4, 5 4, 5

AN AN AP C AP AP AP

258. 259. 260. 261. 262. 263. 264.

4, 5 4, 5 4, 5 4, 5 4 4 4, 5

279. 280. 281.

1 1 1

K K K

282. 283.

1 3

290.

1-7

291. 292.

2 2

C C

161. 4 C 162. 4 C 163. 4 AN 164. 4 AN Brief Exercises 242. 4 AP 243. 4 AP 244. 5 AP

198. 199. 200. 201.

6 6 6 6

K K K K

245. 246. 247.

4, 5 4 5

K AP AP

4, 5 5 5 4, 5 4 6 7

AP AP AP AP AP AP AP

5 6

3 6

Exercises K 265. 4, 5 AP 272. K 266. 4, 5 AP 273. AP 267. 4, 5 AP 274. AP 268. 4, 5 AP 275. C 269. 4, 5 AP 276. AP 270. 4, 5 AN 277. AP 271. 4, 5 K 278. Completion Statements K 284. 4 K 286. K 285. 4 K 287.

248. 249. 250.

6 6 7

AP AP K

K K

288. 289.

7 7

K K

K C

299. 300.

3 3

E C

Matching

293. 294.

1, 2 3, 4, 5

C C

Short Answer Essay 295. 3 K 297. 296. 3 C 298.

*This topic is dealt with in an Appendix to the chapter.

Accrual Accounting Concepts

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE L.O. 1 Item 1. 2. 3. 4. 5. 6. 7. 8. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 65. 66. 67. 68. 69. 70. 71. 72. 279. 280. 281. 282. 283.

Type TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC C C C C C

L.O. 2 Item 9. 10. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 235. 251. 252. 253. 254. 255.

L.O. 3

Type TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Ex Ex Ex Ex Ex

Item 11. 12. 13. 14. 15. 16. 17. 18. 19. 22. 23. 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. 117. 118. 119. 236. 237. 239.

Type TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be

L.O. 4 Item Type 24. TF 25. TF 26. TF 27. TF 28. TF 29. TF 30. TF 31. TF 32. TF 120. MC 121. MC 122. MC 123. MC 124. MC 125. MC 126. MC 127. MC 128. MC 129. MC 130. MC 131. MC 132. MC 133. MC 134. MC 135. MC 136. MC 137. MC 138. MC 139. MC 140. MC 141. MC 142. MC 143. MC 144. MC 145. MC 146. MC 147. MC 148 MC 149. MC 150. MC 151. MC 152. MC 152. MC 153. MC 154. MC

L.O. 4 (cont.) Item 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 238. 239. 240. 241. 242. 243. 245. 246. 256. 257. 258. 259. 260. 261. 262. 263. 264. 265. 266. 267. 268. 269. 270. 271. 272. 275. 276.

Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex

4-3

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-4

L.O. 4 (cont.)

L.O. 5 (cont.)

Item 284. 285.

Item 259. 260. 261. 264. 265. 266. 267. 268. 269. 270. 271. 272. 273. 274. 275. 286.

Type C C

L.O. 5

L.O. 6

Type Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex C

33. 34. 35. 36. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 238. 240. 244. 245. 247. 256. 257. 258.

TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Ex Ex Ex

Note:

TF = True-False MC = Multiple Choice

Item 37. 38. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 206. 208. 248. 249. 277. 287. 288.

Type TF TF MC MC MC MC MC MC MC MC MC MC MC MC Be Be Ex Ex C

L.O. 7 Item 39. 40. 41. 42. 43. 44. 45. 46. 47. 205. 207. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 250. 278. 288. 289.

Type TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Ex C C

L.O. 8 Item 48. 49. 50. 51. 52. 224. 225. 226. 227. 228.

Type TF TF TF TF TF MC MC MC MC MC

L.O. 9 Item 229.

Type MC

L.O.*10 Item 53. 230. 231. 232. 233. 234.

Type TF MC MC MC MC MC

C = Completion Ex = Exercise

The chapter also contains one set of ten Matching questions and ten Short-Answer Essay questions. .

Accrual Accounting Concepts

4-5

CHAPTER LEARNING OBJECTIVES 1. Explain the revenue recognition principle and the expense recognition principle. The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues. 2. Differentiate between the cash basis and the accrual basis of accounting. Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged. 3. Explain why adjusting entries are needed, and identify the major types of adjusting entries. Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. 4. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period. 5. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 6. Describe the nature and purpose of the adjusted trial balance. An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. 7. Explain the purpose of closing entries. One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to “zero-out” all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies “close” all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. 8. Describe the required steps in the accounting cycle. The required steps in the accounting cycle are (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an adjusted trial balance, (g) prepare financial statements, (h) journalize and post closing entries, and (i) prepare a post-closing trial balance.

4-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9. Understand the causes of differences between net income and cash provided by operating activities. Net income is based on accrual accounting, which relies on the adjustment process. Net cash provided by operating activities is determined by adding cash received from operating the business and subtracting cash expended during operations. *10. Describe the purpose and the basic form of the worksheet. The worksheet is a device to make it easier to prepare adjusting entries and the financial statements. Companies often prepare a worksheet using on a computer spreadsheet. The sets of columns of the worksheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.

Accrual Accounting Concepts

4-7

TRUE-FALSE STATEMENTS 1.

The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

The periodicity assumption is often referred to as the expense recognition principle.

Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

Expense recognition is tied to revenue recognition.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

The expense recognition principle requires that efforts be related to accomplishments.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

Recognizing when an expense contributes to the production of revenue is critical.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

The expense recognition principle is frequently referred to as the matching principle.

Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Ans: F, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

10.

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

11.

Adjusting entries are often made because some business events are not recorded as they occur.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

12.

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

13.

Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

4-8 14.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

An adjusting entry would be made to the revenue account only when cash is received.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

15.

An adjusting entry to a prepaid expense is required to recognize expired expenses.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

16.

An adjusting entry always involves two balance sheet accounts.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

17.

An adjusting entry always involves a balance sheet account and an income statement account.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

18.

Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

19.

Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

20.

Accrued revenues are revenues that have been received but not yet recognized.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

21.

Accrued revenues are revenues that have been recognized but not yet recorded.

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22.

The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

Ans: F, LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

23.

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

24.

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

25.

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Ans: F, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

26.

Accumulated Depreciation is a liability account and has a credit normal account balance.

Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27.

A liability—revenue account relationship exists with an unearned rent revenue adjusting en.

Accrual Accounting Concepts

4-9

try. Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

28. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same. Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

29.

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

30.

The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

31.

Asset prepayments become expenses when they expire.

Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

32.

A contra asset account is subtracted from a related account in the balance sheet.

Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

33.

Accrued revenues are revenues that have been recognized but cash has not been received before financial statements have been prepared.

Ans: F, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

34.

The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

Ans: F, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

35.

The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at an interest rate of 6% is $150 on December 31, 2013.

Ans: F, LO 5, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

36.

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders’ equity are overstated.

Ans: T, LO 5, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

37.

Financial statements can be prepared from the information provided by an adjusted trial balance.

Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-10 38.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

An adjusted trial balance must be prepared before the adjusting entries can be recorded.

Ans: F, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

39.

Closing entries deal primarily with the balances of permanent accounts.

Ans: F, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

40.

The only accounts that are closed are temporary accounts.

Ans: T, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

41.

When closing entries are prepared, each income statement account is closed directly to retained earnings.

Ans: F, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

42.

Cash is a temporary account.

Ans: F, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

43.

The post-closing trial balance will contain only permanent—balance sheet—accounts.

Ans: T, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

44.

Accounts receivable is a permanent account.

Ans: T, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

45.

The Dividends account is closed to the Income Summary account at the end of each year.

Ans: F, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

46.

A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

Ans: F, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

47.

An expense account is closed with a credit to the expense account and a debit to the Income Summary account.

Ans: T, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

48.

Financial statements must be prepared before the closing entries are made.

Ans: T, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

49.

In the accounting cycle, closing entries are prepared before adjusting entries.

Ans: F, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

50.

Closing entries result in the transfer of net income or net loss into the Retained Earnings ac.

Accrual Accounting Concepts

4-11

count. Ans: T, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

51.

The post closing trial balance will have fewer accounts than the adjusted trial balance.

Ans: T, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

52.

The accounting cycle begins with the journalizing of the transactions.

Ans: F, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*53.

A 10-column worksheet is a permanent accounting record.

Ans: F, LO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.

T F T T T T T T F

10. 11. 12. 13. 14. 15. 16. 17. 18.

T T F F F T F T F

19. 20. 21. 22. 23. 24. 25. 26. 27.

T F T F F T F F T

28. 29. 30. 31. 32. 33. 34. 35. 36.

F T F T T F F F T

37. 38. 39. 40. 41. 42. 43. 44. 45.

T F F T F F T T F

46. 47. 48. 49. 50. 51. 52. 53.

F T T F T T F F

4-12

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

MULTIPLE CHOICE QUESTIONS 54.

The periodicity assumption states that: a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.

Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

55.

One of the accounting concepts upon which adjustments for prepayments and accruals are based is: a. expense recognition. b. cost. c. monetary unit. d. economic entity.

Ans: A, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

56.

An accounting time period that is one year in length is called: a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.

Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

57.

Adjustments would not be necessary if financial statements were prepared to reflect net income from: a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.

Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

58.

Management usually wants ________ 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, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

59.

Expenses are recognized when: .

Accrual Accounting Concepts

a. b. c. d.

4-13

they contribute to the production of revenue. they are paid. they are billed by the supplier. the invoice is received.

Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

60.

Which of the following is not generally an accounting time period? a. A week. b. A month. c. A quarter. d. A year.

Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

61.

The revenue recognition principle dictates that revenue should be recognized in the accounting records: a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.

Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

62.

In a service-type business, revenue is recognized: a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.

Ans: C, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

63.

The expense recognition principle matches: a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.

Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

64.

Otto’s Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized? a. August 31 b. August 1 c. September 5 d. September 6

Ans: A, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

65.

A company spends $20 million dollars for an office building. Over what period should the cost .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

be written off? a. When the $20 million is expended in cash. b. All in the first year. c. After $20 million in revenue is earned. d. None of these answer choices are correct. Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Business Economics

66.

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that: a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends should be matched with stockholder investments. d. cash payments should be matched with cash receipts.

Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

67.

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a. Cost principle. b. Periodicity principle. c. Revenue recognition principle. d. Expense recognition principle.

Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

68.

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized? a. December 5 b. December 10 c. November 30 d. December 1

Ans: C, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

69.

A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in: a. January. b. February. c. the period when the workers receive their checks. d. either January or February depending on when the pay period ends.

Ans: A, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

70.

Which is not an application of revenue recognition? .

Accrual Accounting Concepts

4-15

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, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

71.

Why do generally accepted accounting principles require the application of the revenue recognition principle? a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue. b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. c. Recording revenue when cash is received is an objective application of the revenue recognition principle. d. Accounting software has made the revenue recognition easy to apply.

Ans: A, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Business Economics

72.

On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $48,000 for the calendar year ending December 31, 2013. Which accounting principle has been violated? a. Depreciation principle. b. No principle has been violated. c. Cash principle. d. Expense recognition principle.

Ans: D, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

73.

Under the cash basis of accounting: a. revenue is recognized when services are performed. b. expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue.

Ans: C, LO 2, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

74.

Under the accrual basis of accounting: a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Ans: C, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

75.

Using accrual accounting, expenses are recorded and reported only: .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

a. b. c. d.

when they are incurred whether or not cash is paid. when they are incurred and paid at the same time. if they are paid before they are incurred. if they are paid after they are incurred.

Ans: A, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

76.

A small company may be able to justify using a cash basis of accounting if they have: a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.

Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

77.

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, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

78.

The following is selected information from L Corporation for the fiscal year ending October 31, 2014. Cash received from customers Revenue earned Cash paid for expenses Cash paid for computers on November 1, 2013 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers

$300,000 390,000 170,000 48,000 216,000 100,000

Based on the accrual basis of accounting, what is L Corporation’s net income for the year ending October 31, 2014? a. $204,000 b. $174,000 c. $158,000 d. $220,000 Ans: B, LO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $390,000 − $216,000 = $174,000

Accrual Accounting Concepts

79.

4-17

The following is selected information from C Corporation for the fiscal year ending October 31, 2014. Cash received from customers Revenue earned Cash paid for expenses Cash paid for computers on November 1, 2013 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers

$150,000 195,000 85,000 24,000 119,000 50,000

Based on the accrual basis of accounting, what is C Corporation’s net income for the year ending October 31, 2014? a. $102,000 b. $86,000 c. $76,000 d. $110,000 Ans: C, LO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting , AICPA PC: Problem Solving, IMA: Reporting Solution: $195,000 − $119,000 = $76,000

80.

La More Company had the following transactions during 2013: • Sales of $4,500 on account • Collected $2,000 for services to be performed in 2014 • Paid $1,875 cash in salaries for 2013 • Purchased airline tickets for $250 in December for a trip to take place in 2014 What is La More’s 2013 net income using accrual accounting? a. $2,875 b. $4,875 c. $4,625 d. $2,625

Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,500 − $1,875 = $2,625

81.

La More Company had the following transactions during 2013. • Sales of $4,500 on account • Collected $2,000 for services to be performed in 2014 • Paid $1,325 cash in salaries • Purchased airline tickets for $250 in December for a trip to take place in 2014 What is La More’s 2013 net income using cash basis accounting? a. $5,175 b. $675 c. $4,925 d. $425

Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution: $2,000 − $1,325 − $250 = $425

82.

Wang Company had the following transactions during 2013: • Sales of $10,800 on account • Collected $4,800 for services to be performed in 2014 • Paid $3,100 cash in salaries for 2013 • Purchased airline tickets for $600 in December for a trip to take place in 2014 What is Wang’s 2013 net income using accrual accounting? a. $8,300 b. $13,100 c. $12,500 d. $7,700

Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $10,800 − $3,100 = $7,700

83.

Wang Company had the following transactions during 2013: • Sales of $10,800 on account • Collected $4,800 for services to be performed in 2014 • Paid $3,100 cash in salaries • Purchased airline tickets for $600 in December for a trip to take place in 2014 What is Wang’s 2013 net income using cash basis accounting? a. $1,100 b. $2,300 c. $12,500 d. $1,700

Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,800 − $3,100 − $600 = $1,100

84.

Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue earned $16,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $6,500 b. $11,000 c. $4,700 d. $6,950

Ans: C, LO 2, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($16,000 − $3,000) − ($7,250 − $750) − $1,800 = $4,700

Accrual Accounting Concepts

85.

4-19

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue earned $16,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $8,750 b. $11,000 c. $6,500 d. $9,200

Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $16,000 − $7,250 = $8,750

86.

Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Cash received from customers $48,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $22,000 b. $31,000 c. $24,000 d. $15,000

Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000 − $26,000 − $7,000 = $15,000

87.

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $48,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $22,000 b. $31,000 c. $24,000 d. $15,000

Ans: B, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000 + $12,000 − $26,000 − $3,000 = $31,000

88.

Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n): a. revenue. b. liability. c. expense. .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

d. prepaid expense. Ans: A, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Accrual Accounting Concepts

89.

4-21

Which of the following would be unethical? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording backdated revenue. d. Recording prepaid expense adjustments.

Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor

90.

Why was Apple required to spread their iPhone revenues over a two year period? a. Because of its newness, their returns might exceed the normal level of returns. b. Because they were required to provide software updates over that two year period. c. Because that was the estimated life of the iPhone. d. Because they needed to defer revenue recognition since they had a swap program available for future models.

Ans: B, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

91.

According to some U.S. companies what gives foreign firms a competitive advantage in the capital market? a. The foreign companies don’t have standards similar to GAAP. b. The foreign companies don’t have strict ethical codes. c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms. d. The foreign companies don’t have to be audited.

Ans: C, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

92.

The primary difference between prepaid and accrued expenses is that prepaid expenses have: a. been incurred and accrued expenses have not. b. not been paid and accrued expenses have. c. been recorded and accrued expenses have not. d. not been recorded and accrued expenses have.

Ans: C, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

93.

The primary difference between accrued revenues and unearned revenues is that accrued revenues have: a. not been recognized and accrued revenues have been. b. been paid and unearned revenues have not. c. been recorded and unearned revenues have not. d. not been recorded and unearned revenues have.

Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

94.

The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is: a. contra asset. b. prepayment. c. asset. d. accrued.

Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-22 95.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Accounts often need to be adjusted because: a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.

Ans: B, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

96.

Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which the performance obligation is satisfied. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of these answer choices are correct.

Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

97.

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, LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

98.

Each of the following is a major type (or category) of adjusting entry except: a. earned expenses. b. prepaid expenses. c. accrued expenses. d. accrued revenues.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

99.

Adjusting entries are required: a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are earned. d. None of these answer choices are correct.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

100.

4-23

Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Ans: D, LO 3, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

101.

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, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

102.

Adjusting entries are: a. the same as correcting entries. b. needed to ensure that the expense recognition principle is followed. c. optional. d. rarely needed.

Ans: B, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

103.

The preparation of adjusting entries is: a. straightforward because the accounts that need adjustment will be out of balance. b. needed to ensure that the expense recognition principle is followed. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.

Ans: B, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

104.

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, LO 3, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

105.

An asset–expense relationship exists with: .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

a. b. c. d.

liability accounts. revenue accounts. prepaid expense adjusting entries. accrued expense adjusting entries.

Ans: C, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

106.

A liability–revenue relationship exists with: a. asset accounts. b. revenue accounts. c. unearned revenue adjusting entries. d. accrued expense adjusting entries.

Ans: C, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

107.

Adjusting entries can be classified as: a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.

Ans: B, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

108.

Adjusting entries can be classified as: a. postponements and advances. b. accruals and advances. c. deferrals and postponements. d. accruals and deferrals.

Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

109.

Accrued expenses are: a. incurred but not yet paid or recorded. b. paid and recorded in an asset account after they are used or consumed. c. paid and recorded in an asset account before they are used or consumed. d. incurred and already paid or recorded.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110.

Accrued revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.

Ans: C, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

111.

Prepaid expenses are: .

Accrual Accounting Concepts

a. b. c. d.

4-25

paid and recorded in an asset account before they are used or consumed. paid and recorded in an asset account after they are used or consumed. incurred but not yet paid or recorded. incurred and already paid or recorded.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

112.

Goods purchased for future use in the business, such as supplies, are called: a. prepaid expenses. b. revenues. c. stockholders’ equity. d. liabilities.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

113.

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, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

114.

Unearned revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.

Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

115.

Adjusting entries affect at least: a. one revenue and one expense account. b. one asset and one liability account. c. one revenue and one balance sheet account. d. one income statement account and one balance sheet account.

Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

116.

An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause: a. revenues to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

Ans: D, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

117.

An adjusting entry can include a: a. debit to an asset and a credit to a liability. b. debit to a revenue and a credit to an asset. .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

c. debit to a liability and a credit to a revenue. d. debit to an expense and a credit to a revenue. Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

118.

A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause: a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

Ans: D, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

119.

On January 1, 2013, M. Johanson Company purchased equipment for $36,000. The company is depreciating the equipment at the rate of $500 per month. The book value of the equipment at December 31, 2013 is: a. $0. b. $6,000. c. $30,000. d. $36,000.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $36,000 − ($500  12) = $30,000

120. The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,000 on hand. The adjusting entry that should be made by the company on June 30 is: a. debit Supplies Expense, $1,000; credit Supplies, $1,000. b. debit Supplies, $5,500; credit Supplies Expense, $5,500. c. debit Supplies, $1,000; credit Supplies Expense, $1,000. d. debit Supplies Expense, $5,500; credit Supplies, $5,500. Ans: D, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $6,500 − $1,000 = $5,500

121.

Greese Company purchased office supplies costing $4,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,500 still on hand. The appropriate adjusting journal entry to be made at the end of the pe.

Accrual Accounting Concepts

4-27

riod would be: a. debit Supplies Expense, $1,500; credit Supplies, $1,500. b. debit Supplies, $2,500; credit Supplies Expense, $2,500. c. debit Supplies Expense, $2,500; credit Supplies, $2,500. d. debit Supplies, $1,500; credit Supplies Expense, $1,500. Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $4,000 − $1,500 = $2,500

122.

A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $3,900; credit Supplies, $3,900. b. debit Supplies, $900; credit Supplies Expense, $900. c. debit Supplies Expense, $2,100; credit Supplies, $2,100. d. debit Supplies, $2,100; credit Supplies Expense, $2,100.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $3,000 − $900 = $2,100

123.

Unearned revenue is classified as a(n): a. asset account. b. revenue account. c. contra revenue account. d. liability.

Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

124.

Boyce Company purchased office supplies costing $5,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $3,200; credit Supplies, $3,200. b. debit Supplies, $1,800; credit Supplies Expense, $1,800. c. debit Supplies Expense, $1,800; credit Supplies, $1,800. d. debit Supplies, $3,200; credit Supplies Expense, $3,200.

Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $5,000 − $1,800 = $3,200

125.

On July 1 the Fisher Shoe Store paid $18,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is: .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

a. b. c. d.

debit Rent Expense, $18,000; credit Prepaid Rent, $3,000. debit Prepaid Rent, $3,000; credit Rent Expense, $3,000. debit Rent Expense, $3,000; credit Prepaid Rent, $3,000. debit Rent Expense, $18,000; credit Prepaid Rent, $15,000.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $18,000  1/6 = $3,000

126.

The balance in the prepaid rent account before adjustment at the end of the year is $15,000 and represents three months rent paid on December 1. The adjusting entry required on December 31 is: a. debit Prepaid Rent, $5,000; credit Rent Expense $5,000. b. debit Prepaid Rent, $10,000; credit Rent Expense, $10,000. c. debit Rent Expense, $15,000; credit Prepaid Rent, $15,000. d. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000.

Ans: D, LO 4, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $15,000  1/3 = $5,000

127.

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 Service Revenue and credit Cash. b. debit Unearned Service Revenue and credit Service Revenue. c. debit Unearned Service Revenue and credit Prepaid Expense. d. debit Unearned Service Revenue and credit Accounts Receivable.

Ans: B, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

128.

Accumulated Depreciation is a(n): a. expense account. b. stockholders’ equity account. c. liability account. d. contra asset account.

Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

129.

4-29

The Harris Company purchased equipment for $9,000 on December 1. It is estimated that annual depreciation on the computer will be $1,800. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. debit Depreciation Expense, $1,800; credit Accumulated Depreciation, $1,800. b. debit Depreciation Expense, $150; credit Accumulated Depreciation, $150. c. debit Depreciation Expense, $7,200; credit Accumulated Depreciation, $7,200. d. debit Equipment, $9,000; credit Accumulated Depreciation, $9,000.

Ans: B, LO 4, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,800  12 = $150

130.

Adjustments for unearned revenue: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.

Ans: A, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

131.

Leyland Realty Company received a check for $15,000 on July 1, which represents a 6month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $15,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31: a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500. b. debit Rent Revenue, $2,500; credit Unearned Rent Revenue, $2,500. c. debit Unearned Rent Revenue, $15,000; credit Rent Revenue, $15,000. d. debit Cash, $15,000; credit Rent Revenue, $15,000.

Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting Solution: $15,000  6 = $2,500

132.

As prepaid expenses expire with the passage of time, the correct adjusting entry will be a: a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account.

Ans: B, LO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

133.

Ans: A, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-30 134.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Payments of expenses that will benefit more than one accounting period are identified as: a. expenses. b. revenues. c. prepaid expenses. d. liabilities.

Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

135.

A company usually determines the amount of supplies used during a period by: a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

Ans: D, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

136.

If a company fails to make an adjusting entry to record supplies expense, then: a. stockholders’ equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.

Ans: B, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

137.

Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies: a. remaining. b. purchased. c. used. d. either used or remaining.

Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

138.

If a company fails to adjust for accrued revenues: a. liabilities will be understated and revenues will be understated. b. liabilities will be overstated and revenues will be understated. c. assets will be overstated and revenues will be understated. d. assets will be understated and revenues will be understated.

Ans: D, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

139.

If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be overstated and net income and stockholders’ equity will be understated. c. Assets will be overstated and net income and stockholders’ equity will be understated. d. Assets will be overstated and net income and stockholders’ equity will be overstated.

Ans: D, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

140.

4-31

If a company fails to adjust an Unearned Rent Revenue account for rent that has been earned, what effect will this have on that month’s financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated.

Ans: C, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

141.

If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be understated and net income and stockholders’ equity will be overstated. c. Assets will be overstated and net income and stockholders’ equity will be under-stated. d. Assets will be overstated and net income and stockholders’ equity will be overstated.

Ans: B, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

142.

On January 1, 2013, Leardon Inc. purchased equipment for $60,000. The company is depreciating the equipment at the rate of $800 per month. At January 31, 2014, the balance in Accumulated Depreciation is: a. $800 debit. b. $9,600 credit. c. $10,400 credit. d. $53,200 debit.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800  13 mon. = $10,400

143.

At December 31, 2014, before any year-end adjustments, Dallis Company's Prepaid Insurance account had a balance of $2,900. It was determined that $1,300 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be: a. $1,300. b. $1,600. c. $2,900. d. $1,400.

Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

144.

At December 31, 2014, before any year-end adjustments, Janus Company's Prepaid Insurance account had a balance of $2,800. It was determined that $1,200 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance for the year would be: a. $1,200. b. $1,600. c. $3,800. d. $2,800.

Ans: B, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $2,800 − $1,200 = $1,600

4-32 145.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true? a. Net income will be overstated for the current year. b. Total assets will be understated at the end of the current year. c. The balance sheet and income statement will be misstated but the Retained Earnings statement will be correct for the current year. d. Total expenses will be overstated at the end of the current year.

Ans: A, LO 4, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

146.

The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2014 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense

$ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500

0 $6,500

If, on December 31, 2014, supplies on hand were $20, the adjusting entry would contain a: a. debit to Supplies for $20. b. credit to Supplies for $20. c. debit to Supplies Expense for $120. d. credit to Supplies Expense for $120. Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $140 − $20 = $120

Accrual Accounting Concepts

147.

4-33

$ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500

0 $6,500

If, on December 31, 2014, the insurance still unexpired amounted to $10, the adjusting entry would contain a: a. debit to Prepaid Insurance for $50. b. credit to Prepaid Insurance for $10. c. debit to Insurance Expense for $50. d. debit to Prepaid Insurance for $10. Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $60 − $10 = $50

4-34 148.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

$ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500

0 $6,500

If the estimated depreciation for equipment were $800, the adjusting entry would contain a: a. credit to Accumulated Depreciation, Equipment for $800. b. credit to Depreciation Expense, Equipment for $800. c. debit to Accumulated Depreciation, Equipment for $800. d. credit to Equipment for $800. Ans: A, LO 4, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

149.

4-35

$ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500

0 $6,500

If as of December 31, 2014, rent of $120 for December had not been recorded or paid, the adjusting entry would include a: a. credit to Accumulated Rent for $120. b. credit to Cash for $120. c. debit to Rent Payable for $120 d. debit to Rent Expense for $120 Ans: D, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-36 150.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

$ 300 500 60 140 4,000 $ 800 300 1,000 1,400 3,000 1,000 500 $6,500

0 $6,500

If service for $125 had been performed but not billed, the adjusting entry to record this would include a: a. debit to Service Revenue for $125. b. credit to Unearned Service Revenue for $125. c. credit for Service Revenue for $125. d. debit to Unearned Revenue for $125. Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

151.

Depreciation is the process of: a. valuing an asset at its fair 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, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

152.

The difference between the balance of a plant asset account and the related accumulated depreciation account is termed: a. market value. b. contra asset. c. book value. d. liability.

Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

153.

4-37

A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows: Dr. Cr. Depreciation Expense …………………….. .............. 800 Cash .............................................................. 800 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, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

154.

From an accounting standpoint, the acquisition of long-lived assets is essentially a(n): a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepaid expense.

Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

155.

If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit: a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue.

Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

156.

An accumulated depreciation account: a. is a contra liability account. b. increases on the debit side. c. is offset against total assets on the balance sheet. d. has a normal credit balance.

Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

157.

The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the: a. market value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.

Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

158.

Which of the following would not result in unearned revenue? .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

a. b. c. d.

Rent collected in advance from tenants. Services performed on account. Sale of season tickets to football games. Sale of two-year magazine subscriptions.

Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

159.

The policy at Adler Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,100 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do? a. Debit Supplies and credit Supplies Expense for $1,100. b. Nothing, company policy says to expense supplies when purchased. c. Convince management to change its policy to avoid problems in the future. d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.

Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

160.

Which statement is correct? a. Accumulated Depreciation should always have a debit balance in the adjusted trial balance. b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet. c. Accumulated Depreciation, Equipment represents the total cost of equipment that has expired up to the date of the balance sheet. d. Accumulated Depreciation is used to reveal the value of the related asset on the date of the balance sheet.

Ans: C, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

161.

Walton Company collected $9,600 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be: a. $0. b. $7,200. c. $9,600. d. $2,400.

Ans: B, LO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $9,600  3/4 = $7,200

162.

Skypress Company collected $8,400 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be: a. $0. b. $6,300. c. $8,400. d. $2,100.

Ans: B, LO 4, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $8,400  3/4 = $6,300

163.

Masterfalls Corporation purchased a one-year insurance policy in January 2013 for $30,000. The insurance policy is in effect from March 2013 through February 2014. If the company .

Accrual Accounting Concepts

4-39

neglects to make the proper year-end adjustment for the expired insurance: a. net income and assets will be understated by $25,000. b. net income and assets will be overstated by $25,000. c. net income and assets will be understated by $5,000. d. net income and assets will be overstated by $5,000. Ans: B, LO 4, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,000  10/12 = $25,000

164.

James & Younger Corporation purchased a one-year insurance policy in January 2013 for $48,000. The insurance policy is in effect from March 2013 through February 2014. 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 $8,000. d. net income and assets will be overstated by $8,000.

Ans: B, LO 4, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000  10/12 = $40,000

165.

At March 1, 2014, Candy Inc. had supplies on hand of $1,500. During the month, Candy purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the supplies account? a. $1,500 b. $1,600 c. $2,800 d. $2,900

Ans: B, LO 4, BT: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,500 + $2,900 − $2,800 = $1,600

166.

Darting Company purchased a computer system for $7,200 on January 1, 2014. 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. $200. c. $2,400. d. $7,200.

Ans: B, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($7,200  3)  12 = $200

167.

Fleet Services Company purchased equipment for $9,000 on January 1, 2014. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

reported on the December 31, 2014 balance sheet for Accumulated Depreciation? a. $0 because Accumulated Depreciation is reported on the Income Statement. b. $1,800 c. $7,200 d. $9,000 Ans: B, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $9,000  5 = $1,800

168.

Green Realty Company received a check for $30,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $30,000. Financial statements will be prepared on July 31. Green Realty should make the following adjusting entry on July 31: a. debit Unearned Rent Revenue, $5,000; credit Rent Revenue, $5,000. b. debit Rent Revenue, $5,000; credit Unearned Rent Revenue, $5,000. c. debit Unearned Rent Revenue, $30,000; credit Rent Revenue, $30,000. d. debit Cash, $30,000; credit Rent Revenue, $30,000.

Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $30,000  6 = $5,000

169.

Oakville Inc. purchased a 12-month insurance policy on March 1, 2014 for $1,800. At March 31, 2014, the adjusting journal entry to record expiration of this asset will include: a. a debit to Prepaid Insurance and a credit to Cash for $1,800. b. a debit to Prepaid Insurance and a credit to Insurance Expense for $180. c. a debit to Insurance Expense and a credit to Prepaid Insurance for $150. d. a debit to Insurance Expense and a credit to Cash for $150.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,800  12 = $150

170.

Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2014 for $7,200. The December 31, 2014 balance sheet would report Prepaid Insurance of: a. $0 because Prepaid Insurance is reported on the Income Statement. b. $2,800. c. $4,400. d. $7,200.

Ans: C, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $7,200  11/18 = $4,400

171.

At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company .

Accrual Accounting Concepts

4-41

purchased supplies for $950 and consumed supplies of $700. If no adjusting entry is made for supplies: a. stockholders' equity will be overstated by $700. b. expenses will be understated by $950. c. assets will be understated by $450. d. net income will be understated by $700. Ans: A, LO 4, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

172.

Regions Inc. pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $4,000 and net income and stockholders' equity will be understated by $4,000. c. Assets will be overstated by $8,000 and net income and stockholders' equity will be understated by $8,000. d. Assets will be overstated by $4,000 and net income and stockholders' equity will be overstated by $4,000.

Ans: D, LO 4, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000  12 = $4,000

173.

An adjusting entry can include a: a. debit to an asset and a credit to a revenue. b. debit to a revenue and a credit to an asset. c. credit to an expense and a debit to a revenue. d. debit to an expense and a credit to a revenue.

Ans: A, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

174.

A revenue–asset relationship exists with: a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.

Ans: D, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

175.

The accounts of a business before an adjusting entry is made to record accrued revenue reflect an: a. understated liability and an overstated revenue. b. overstated asset and an understated revenue. c. understated expense and an overstated revenue. d. understated asset and an understated revenue.

Ans: D, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-42 176.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Adjustments for accrued revenues: a. increase assets and increase revenues. b. increase assets and increase liabilities. c. decrease assets and increase revenues. d. decrease liabilities and increase revenues.

Ans: A, LO 5, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

177.

Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.

Ans: C, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

178.

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause: a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.

Ans: B, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

179.

An adjusting entry made to record accrued interest on a note receivable due next year consists of a: a. debit to Interest Expense and a credit to Interest Payable. b. debit to Interest Receivable and a credit to Interest Revenue. c. debit to Interest Expense and a credit to Notes Payable. d. debit to Interest Expense and a credit to Cash.

Ans: B, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

180.

Raxon Company borrowed $40,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: a. debit Interest Expense, $2,400; credit Interest Payable, $2,400. b. debit Interest Expense, $200; credit Interest Payable, $200. c. debit Note Payable, $2,400; credit Cash, $2,400. d. debit Cash, $600; credit Interest Payable, $600.

Ans: B, LO 5, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40,000  .06  1/12 = $200

Accrual Accounting Concepts

181.

4-43

Nacron Company borrowed $10,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: a. debit Interest Expense, $50; credit Interest Payable, $50. b. debit Interest Expense, $600; credit Interest Payable, $600. c. debit Note Payable, $600; credit Cash, $600. d. debit Cash, $50; credit Interest Payable, $50.

Ans: A, LO 5, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $10,000  .06  1/12 = $50

182.

Mary Richardo has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Mary make? a. Debit Cash and credit Unearned Service Revenue b. Debit Accounts Receivable and credit Unearned Service Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Service Revenue and credit Service Revenue

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

183.

Mary Richardo, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments? a. Debit Unearned Service Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue

Ans: B, LO 5, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

184.

Amos Real Estate signed a four-month note payable in the amount of $16,000 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. $480. b. $120. c. $1,440. d. $160.

Ans: B, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $16,000  .09  1/12 = $120

185.

DeNova Real Estate signed a four-month note payable in the amount of $8,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is: a. $480. b. $120. c. $40. d. $90.

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-44

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution: $8,000  .06  1/12 = $40

186.

A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense 300 Interest Payable 300 b. Interest Expense 450 Interest Payable 450 c. Interest Expense 300 Cash 300 d. Interest Expense 450 Note Payable 450

Ans: A, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $30,000  .06  2/12 = $300

187.

Ye Olde Christmas shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on October 1 in the amount of $20,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense 100 Interest Payable 100 b. Interest Expense 200 Interest Payable 200 c. Interest Expense 300 Interest Payable 300 d. Interest Expense 1,200 Note Payable 1,200

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $20,000  .06  3/12 = $300

188.

Snelling Tables 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 $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense 900 Salaries and Wages Payable 900 b. Salaries and Wages Expense 4,500 Salaries and Wages Payable 4,500 c. Salaries and Wages Expense 2,700 Salaries and Wages Payable 2,700 d. No adjusting entry is required.

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $900  3 = $2,700

Accrual Accounting Concepts

189.

4-45

Jill Clown earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Jill’s employer October 31 is: a. No entry is required. b. Salaries and Wages Expense 500 Salaries and Wages payable 500 c. Salaries and Wages Expense 500 Cash 500 d. Salaries and Wages Payable 500 Cash 500

Ans: B, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

190.

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true? a. Salaries and Wages Expense for the year is overstated. b. Liabilities at the end of the year are understated. c. Assets at the end of the year are understated. d. Stockholders’ equity at the end of the year is understated.

Ans: B, LO 5, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

191.

A company shows a balance in Salaries and Wages Payable of $40,000 at the end of the month. The next payroll amounting to $60,000 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 60,000 Salaries and Wages Payable 60,000 b. Salaries and Wages Expense 60,000 Cash 60,000 c. Salaries and Wages Expense 20,000 Cash 20,000 d. Salaries and Wages Payable 40,000 Salaries and Wages Expense 20,000 Cash 60,000

Ans: D, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

192.

De Meaning Corporation issued a one-year 6% $300,000 note on April 30, 2014. Interest expense for the year ended December 31, 2014 was: a. $18,000. b. $13,500. c. $12,000. d. $10,500.

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000  .06  8/12 = $12,000

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193.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Bluing Corporation issued a one-year 9% $300,000 note on April 30, 2014. Interest expense for the year ended December 31, 2014 was: a. $27,000. b. $20,250. c. $18,000. d. $15,750.

Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $300,000  .09  8/12 = $18,000

194.

Employees at Biquell Corporation are paid $9,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salaries and wages expense should be recorded two days later on January 2? a. $9,000 b. $5,400 c. None, expense recognition requires the weekly salary to be accrued on December 31. d. $3,600

Ans: D, LO 5, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $9,000  2/5 = $3,600

195.

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, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

196.

Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized.

Ans: D, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

197.

4-47

Which statement is incorrect concerning the adjusted trial balance? a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance lists the account balances in order of their magnitude. d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

Ans: C, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

198.

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, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

199.

The primary source used in the preparation of the financial statements is the: a. trial balance. b. post-closing trial balance. c. general trial balance. d. adjusted trial balance.

Ans: D, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

200.

Which of the following accounts will reflect the account’s beginning balance on the adjusted trial balance? a. Prepaid rent b. Retained earnings c. Prepaid insurance d. Unearned revenue

Ans: B, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

201.

The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet? a. Retained earnings b. Accounts receivable c. Common stock d. Notes payable

Ans: A, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-48

202.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which trial balance will consist of the greatest number of accounts? a. Post-closing trial balance b. Trial balance c. Adjusted trial balance d. All of the above will contain the same number of accounts.

Ans: C, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

203.

Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance? Service revenue $4,300 Equipment $7,400 Cash 1,525 Prepaid insurance 1,225 Unearned service rev. 5,320 Depreciation expense 640 Salaries and wages expense 1,050 Accum. depreciation 1,280 Common stock 390 Retained earnings 550 a. $10,150 b. $11,840 c. $10,560 d. $11,430

Ans: B, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,300 + $5,320 + $390 + $1,280 + $550 = $11,840

Accrual Accounting Concepts

204.

4-49

Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Total Net income for the year is: a. $98. b. $270. c. $324. d. $496.

Debit $1,562 2,098 3,124 86 300

Credit

52 82 122 206 6,610 268 56 160 66 $7,396

$7,396

Ans: A, LO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $268 + $56 − $160 − $66 = $98

205.

Given the following adjusted trial balance: Debit Credit Cash $1,562 Accounts receivable 2,098 Inventory 3,124 Prepaid rent 86 Equipment 300 Accumulated depreciation-equipment 52 Accounts payable 82 Unearned service revenue 122 Common stock 206 Retained earnings 6,610 Service revenue 268 Interest revenue 56 Salaries and wages expense 160 Travel expense 66 Total $7,396 $7,396 After closing entries have been posted, the balance in retained earnings will be: a. $6,340. b. $6,512. c. $6,880. d. $6,708.

Ans: D, LO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution: $6,610 + $268 + $56 − $160 − $66 = $6,708

206.

Debit $781 1,049 1,562 43 150

Credit

26 41 61 103 3,305 134 28 80 33 $3,698

$3,698

Ans: A, LO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $134 + $28 − $80 − $33 = $49

207.

Given the following adjusted trial balance: Debit $781 1,049 1,562 43 150

Credit

Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment 26 Accounts payable 41 Unearned service revenue 61 Common stock 103 Retained earnings 3,305 Service revenue 134 Interest revenue 28 Salaries and wages expense 80 Travel expense 33 Total $3,698 $3,698 After closing entries have been posted, the balance in retained earnings will be: a. $3,256. b. $3,170. c. $3,440. d. $3,354. Ans: D, LO 7, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

4-51

Solution: $3,305 + $134 + $28 − $80 − $33 = $3,354

208.

Which statement is correct concerning the adjusted trial balance? a. An adjusted trail balance eliminates the need for the preparation of financial statements. b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger. c. An adjusted trial balance will contain only permanent—balance sheet—accounts. d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

Ans: B, LO 6, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

209.

Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

Ans: C, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

210.

The closing entry process consists of closing: a. all asset and liability accounts. b. out the Retained Earnings account. c. all permanent accounts. d. all temporary accounts.

Ans: D, LO 7, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

211.

Which account will have a zero balance after closing entries have been journalized and posted? a. Service revenue. b. Supplies. c. Prepaid Insurance. d. Accumulated Depreciation.

Ans: A, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

212.

A post-closing trial balance will show: a. zero balances for all accounts. b. zero balances for balance sheet accounts. c. only balance sheet accounts. d. only income statement accounts.

Ans: C, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

213.

Which types of accounts will appear in the post-closing trial balance? a. Permanent accounts. b. Temporary accounts. c. Accounts shown in the income statement columns of a work sheet. d. None of these answer choices are correct.

Ans: A, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-52 214.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The purpose of the post-closing trial balance is to: a. prove that no mistakes were made. b. prove the equality of the permanent account balances that are carried forward into the next accounting period. c. prove the equality of the temporary account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference.

Ans: B, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

215.

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, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

216.

Which of the following account’s balance will change between the adjusted trial balance and the post-closing trial balance? a. Common stock b. Prepaid rent c. Unearned service revenue d. Retained earnings

Ans: D, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

217.

Which type of accounts will not appear in the post-closing trial balance? a. Asset accounts b. Permanent accounts c. Liability accounts d. Temporary accounts

Ans: D, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

218.

There are usually how many closing journal entries? a. 5 b. 4 c. 3 d. 2

Ans: B, LO 7, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

219.

4-53

Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Totals a. b. c. d.

Debit $1,562 2,098 3,124 86 300

Credit

160 66 $7,396

52 82 172 206 6,610 218 56

$7,396

$7,396 $7,118 $7,344 $7,170

Ans: D, LO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,562 + $2,098 + $3,124 + $86 + $300 = $7,170

4-54 220.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Debit $ 781 1,049 1,562 43 150

Credit

26 41 86 103 3,305 109 28

80 33 $3,698

$3,698

$3,585 $3,559 $3,698 $3,672

Ans: A, LO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $781 + $1,049 + $1,562 + $43 + $150 = $3,585

221. The following information is from the Income Statement of the Dirt Poor Laundry Service: __________________________________________________________________________ Revenues Service Revenue $5,500 Expenses Salaries and wages expense $ 1,950 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 3,050 Net Income $2,450 The entry to close the Service Revenue account includes a: a. debit to Service Revenue for $5,500. b. credit to Service Revenue for $5,500. c. debit to Income Summary for $5,500. d. debit to Retained Earnings for $5,500. Ans: A, LO 7, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

4-55

222. The following information is from the Income Statement of the Dirt Poor Laundry Service: ___________________________________________________________________________ Revenues Service Revenue $5,500 Expenses Salaries and Wages expense $ 1,950 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 3,050 Net Income $2,450 The entry to close the expense accounts includes a: a. credit to Income Summary for $3,050. b. debit to Income Summary for $3,050. c. debit to Salaries and Wages Expense for $1,950. d. credit to Retained Earnings for $3,050. Ans: B, LO 7, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

223. The following information is from the Income Statement of the Dirt Poor Laundry Service: ___________________________________________________________________________ Revenues Service Revenue $5,500 Expenses Salaries and Wages expense $ 1,950 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses 3,050 Net Income $2,450 The entry to close the Income Summary includes a: a. credit to Income Summary for $2,450. b. debit to Income Summary for $2,450. c. debit to Retained Earnings for $2,450. d. credit to Common Stock for $2,450. Ans: B, LO 7, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

224.

The final step in the accounting cycle is to prepare: a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries.

Ans: C, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-56 225.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

All of the following are required steps in the accounting cycle except: a. journalizing and posting closing entries. b. preparing an adjusted trial balance. c. preparing a post-closing trial balance. d. preparing a work sheet.

Ans: D, LO 8, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

226.

The first required step in the accounting cycle is: a. adjusting entries. b. journalizing transactions. c. analyzing transactions. d. posting transactions.

Ans: C, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

227.

How many required steps are there in the accounting cycle? a. 11 b. 9 c. 7 d. 5

Ans: B, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

228.

Which of the following steps in the accounting cycle usually occurs only at the end of a company’s annual accounting period? a. Step 3: Post to the ledger accounts. b. Step 7: Prepare financial statements. c. Step 6: Prepare adjusting trial balance. d. Step 9: Prepare a post-closing trial balance.

Ans: D, LO 8, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

229.

The Accounts Receivable account has a beginning balance of $52,000 and an ending balance of $69,000. If $42,000 was sold on account during the year, what were the total collections on account? a. $25,000 b. $59,000 c. $69,000 d. $79,000

Ans: A, LO 9, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($52,000 + $42,000) − $69,000] = $25,000

*230. The worksheet is: .

Accrual Accounting Concepts

a. b. c. d.

4-57

part of the journal. a financial statement. part of the ledger. none of these answer choices are correct.

Ans: D, LO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*231. The worksheet starts with two columns for the: a. adjustments. b. financial statements. c. trial balance. d. adjusted trial balance. Ans: C, LO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*232. The worksheet does not contain columns for the: a. income statement. b. statement of retained earnings. c. balance sheet. d. adjusted trial balance. Ans: B, LO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*233. The worksheet contains columns for the: a. statement of retained earnings. b. statement of cash flows. c. post-closing trial balance. d. balance sheet. Ans: D, LO 10, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*234. Net income is recorded on the worksheet under the: a. debit column of the adjusted trial balance and the credit column of retained earnings. b. debit column of the income statement and the credit column of the balance sheet. c. credit column of the adjusted trial balance and the debit column of retained earnings. d. credit column of the income statement and the debit column of the balance sheet. Ans: B, LO 10, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Answers to Multiple Choice Questions 54. d 55. a 56. a 57. d 58. b 59. a 60. a 61. b 62. c 63. b 64. a 65. d 66. b 67. d 68. c 69. a 70. b 71. a 72. d 73. c 74. c 75. a 76. c 77. b 78. b 79. c 80. d 81. d

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. 107. 108. 109.

d a c a d b a c b c c d d b d b a a d c b b c c c b d a

110. 111. 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. 137.

c a a c a d d c d c d c c d a c d b d b a a b a c d b c

138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165.

d d c b c a b a c c a d c c c c d c d c b a c b b b b b

166. 167 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193.

b b a c c a d a d d a c b b b a c b b c a c c b b d c c

194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221.

d b d c b d b a c b a d a d c c d a c a b b d d b d a c

222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234.

d a b b c a b d d c b d b

Accrual Accounting Concepts

4-59

BRIEF EXERCISES Be. 235 Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Show the dollar amount and the effect (+, –, N). Retained _Cash__ Earnings 1. 2. 3. 4. 5.

Purchases capital asset for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900.

Solution 235

1. 2. 3. 4. 5.

_______ _______

_______

_Cash__

Retained Earnings

$-3,000_ $ -_200

__ N__ __ N _

___N__

$ -110_

$ + 600

__N__

_N _

$ - 900_

(5 min.)

Ans: N/A, LO 2, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-60 Be. 236

Before month-end adjustments are made, the February 28 trial balance of Cole’s Enterprise contains revenue of $11,000 and expenses of $8,900. Adjustments are necessary for the following items: • • • • •

Depreciation for February is $1,200. Revenue earned but not yet billed is $2,800. Accrued interest expense is $900. Revenue collected in advance that is now earned is $2,500. Portion of prepaid insurance expired during February is $500.

Instructions: Calculate the correct net income for Cole's Enterprise for February 3. Solution 236

(5 min.)

Net Income before Adjustments ($11,000 – 8,900)

$ 2,100

Add: Unearned Revenues Accrued Revenues

$2,500 2,800

Subtract: Depreciation Expense Interest Expense Insurance Expense

1,200 900 500

Net Income after Adjustments

5,300 7,400

2,600 $ 4,800

Ans: N/A, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 237 Before month-end adjustments are made, the September 30 trial balance of Horton Enterprise contains revenue of $9,200 and expenses of $6,500. Adjustments are necessary for the following items: • • • • •

Depreciation for September is $300. Revenue earned but not yet billed is $2,100. Accrued interest expense is $800. Revenue collected in advance that is now earned is $3,400. Portion of prepaid insurance expired during September is $300.

Instructions: Calculate the correct net income for Horton’s Enterprise for September.

Accrual Accounting Concepts

Solution 237

(5 min.)

Net Income before Adjustments ($9,200 – 6,500) Add:

4-61

$ 2,700

Unearned Revenues Accrued Revenues

$3,400 2,100

Subtract: Depreciation Expense Interest Expense Insurance Expense

300 800 300

Net Income after Adjustments

5,500 8,200

1,400 $ 6,800

Ans: N/A, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Be. 238 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____

Failure to record revenue recognized but not yet received.

_____

Failure to record expired prepaid rent.

_____

Failure to record accrued interest on the bank savings account.

_____

Failure to record depreciation.

_____

Failure to record accrued wages.

_____

Failure to record the recognized portion of unearned revenues.

Solution 238 1. 2. 3. 4. 5. 6.

(5 min.)

U O U O NA NA

Ans: N/A, LO 4 & 5, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-62

Be. 239 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. 2. 3. 4. 5.

Unrecorded interest on savings bonds is $245. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200.

Solution 239 1. 2. 3. 4. 5.

(5 min.)

AR AE UR PE AE

Ans: N/A, LO 3, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Be. 240 Identify the impact on the balance sheet for that month if the following information is not used to adjust the accounts. 1. 2. 3. 4.

Supplies consumed during the month totalled $3,000. Interest accrues on notes payable at the rate of $200 per month. Insurance of $450 expired during the month. Plant and equipment are depreciated at the rate of $1,200 per month.

Solution 240 1. 2. 3. 4.

Assets overstated and Stockholders' Equity overstated by $3,000. Liabilities understated and Stockholders' Equity overstated by $200. Assets overstated and Stockholders' Equity overstated by $450. Assets overstated and Stockholders' Equity overstated by $1,200.

Ans: N/A, LO 4 & 5, BT: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 241 On January 1, the Biddle & Biddle, CPAs received a $7,500 cash retainer for accounting services to be provided rateably over the next 3 months. The full amount was credited to the liability account Service Unearned Revenue. Assuming that the revenue is recognized rateably over the 3 month period, what adjusting journal entry should be made at January 31? .

Accrual Accounting Concepts

4-63

Solution 241 Unearned Service Revenue Service Revenue

2,500 2,500

Ans: N/A, LO 4, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving , IMA: Business Economics

Be. 242 On February 1, the Acts Tax Service received a $3,600 cash retainer for tax preparation services to be provided rateably over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 4 month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue? Solution 242 Revenue recognized monthly = $3,600/ 4 months = $900 per month Feb 28 balance in Unearned Service Revenue = $3,600 – $900 revenue recognized in February = $2,700 Ans: N/A, LO 4, BT: AP, Difficulty: Easy, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Be. 243 Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2013. The magazine is published monthly. The new subscribers received their first magazine in January, 2014. 1. 2.

What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? What amount will be reported on the January 2014 balance sheet for Unearned Subscription Revenue?

Solution 243 1.

Unearned Sales Revenue Sales Revenue

3,500 3,500

Unearned Sales Revenue at January 31: $42,000 - $3,500 = $38,500

Ans: N/A, LO 4, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 244 .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-64

River Ridge Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 244 Interest Expense (30,000  6%  1/12) Interest Payable

150 150

Ans: N/A, LO 5, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 245 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ___

1. A revenue not yet recognized; collected in advance.

___

2. An expense incurred; not yet paid or recorded.

___

3. A revenue recognized; not yet collected or recorded.

___

4. An expense not yet incurred; paid in advance.

Solution 245 1. 2. 3. 4.

(5 min.)

B D C A

Ans: N/A, LO 4, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Be. 246 .

Accrual Accounting Concepts

4-65

Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.

Depreciation on equipment is $800 for the accounting period. There was no beginning balance of supplies and purchased $600 of office supplies during the period. At the end of the period $120 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unexpired.

Solution 246

(5 min.)

1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................

800

2. Supplies Expense ......................................................................... Supplies ................................................................................ ($600 – $120)

480

3. Rent Expense ................................................................................ Prepaid Rent ........................................................................ ($1,000 – $300)

700

800

480

700

Ans: N/A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 247 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.

Unrecorded interest accrued on savings bonds is $200. Property taxes incurred but not paid or recorded amount to $900. Salaries incurred by year end but not yet paid or recorded amounted to $600.

Solution 247

(5 min.)

1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

200

2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................

900

5. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ................................................

600

200

900

600

Ans: N/A, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Be. 248 .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-66

The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare an income statement for the year ended December 31, 2014. Solution 248

(5 min.)

WARBOCKS CORPORATION Income Statement For the Year Ended December 31, 2014 __________________________________________________________________________ Revenues Service Revenue Expenses Salaries and Wages Expense Rent Expense Insurance Expense Depreciation Expense Supplies Expense Total Expenses Net Income

$ 30,000 $15,000 4,500 2,000 1,000 500 23,000 $ 7,000

Ans: N/A, LO 6, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Be. 249 The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year. Solution 249

(5 min.)

WARBOCKS CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 __________________________________________________________________________ Retained Earnings, January 1 Plus: Net Income Less: Dividends Retained Earnings, December 31

$12,600 7,000 19,600 5,000 $14,600

Ans: N/A, LO 6, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Be. 250 .

Accrual Accounting Concepts

4-67

The following selected accounts appear in the adjusted trial balance for Blender Company. Identify the accounts that would be included in the post-closing trial balance. 1. 2. 3. 4.

Accumulated Depreciation Depreciation Expense Retained Earnings Dividends

Solution 250

5. 6. 7.

Supplies Accounts Payable Service Revenue

(5 min.)

The following are accounts that would be included in the post-closing trial balance. 1. 3. 5. 6.

Accumulated Depreciation Retained Earnings Supplies Accounts Payable

Ans: N/A, LO 7, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

EXERCISES Ex. 251 The balance sheets of Palle’ Company include the following: 12/31/14 $4,300 5,000 3,700 -0-

Interest Receivable Supplies Salaries and Wages Payable Unearned Service Revenue The income statement for 2014 shows the following: Interest Revenue Service Revenue Supplies Expense Salaries and Wages Expense Instructions: Calculate the following for 2014: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. 4. Cash received for service revenue.

Solution 251

(15 min.) .

$17,500 78,700 10,700 48,000

12/31/13 $ -03,900 3,800 4,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-68

1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received

$13,200 $17,500 4,300 $13,200

2. Cash paid for supplies = Supplies Expense Less: Supplies (2013)

$11,800 $10,700 3,900 6,800 5,000 $11,800

Add: Supplies (2014) Cash Paid 3. Cash paid for salaries and wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2013)

$48,100

Less: Salaries and Wages Payable (2014) Cash Paid

$48,000 3,800 51,800 3,700 $48,100

4. Cash received for service revenue = Service Revenue Less: Unearned Service Revenue (2013) Cash Received

$78,700 4,000 $74,700

$74,700

Ans: N/A, LO 2, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 252 The 2014 income statement for Moring Company showed rent expense of $9,500 and wages expense of $8,600. The related balance sheet account balance at year-end last year and this year were as follows: 2014 2013 Prepaid Rent $900 $300 Salaries and Wages Payable 500 400 Calculate the following for 2014: 1. Cash paid for rent. 2. Cash paid for wages.

Accrual Accounting Concepts

Solution 252

4-69

(10 min.)

1. Cash paid for rent = Rent Expense Less: Prepaid rent (2013)

$10,100 $9,500 300 9,200 900 $10,100

Add: Prepaid rent (2014) Cash Paid 2. Cash paid for wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2013)

$8,500 $8,600 400 9,000 500 $8,500

Less: Salaries and Wages Payable (2014) Cash Paid

Ans: N/A, LO 2, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 253 A company using the cash basis of accounting reports net income for 2014 of $45,460. If the company had used the accrual basis of accounting it would have reported the following year-end balances: 2014 Accounts receivable $3,850 Supplies 1,740 Salaries and wages payable 3,600 Other unpaid amounts 2,400

2013 $5,100 1,950 2,250 2,100

Instructions: Determine the company’s net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below. Explanation

Amount

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-70

Solution 253

(10 min.)

Explanation Cash basis net income The decrease in accounts receivable would be included in cash basis net income, but not accrual basis net income The decrease in supplies would not be included in cash basis net income The increase in wages payable would be deducted in accrual basis net income The increase in other unpaid amounts would be deducted in accrual basis net income Accrual basis net income

Amount $45,460

(1,250) ( 210) (1,350) ( 300) $42,350

Ans: N/A, LO 2, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 254 Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the company’s suppliers require payment for their goods and services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last month’s utility bill. Instructions: Explain how cash and accrual basis accounting would handle each of the events described above. Use the column heading s shown below. Event Cash Basis Accrual Basis

Accrual Accounting Concepts

Solution 254

4-71

(10 min.)

Event Cash Basis 90 days for customers Revenue would be to pay recorded when the cash was received.

Accrual Basis Revenue would be recorded when the service was performed.

30 days to pay suppliers

Expenses would be recorded when the cash was paid.

Until the item purchased was used it would be recorded as an asset. When used, it would then be expensed.

Prepaid rent of 12 months

It would expensed when paid.

It would be recorded as an asset when paid and then expensed as time passes.

Unpaid utilities

It would not be expensed until paid.

It would be expensed in the month incurred.

Ans: N/A, LO 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Ex. 255 Hooper Company prepared the following income statement using the cash basis of accounting: HOOPER COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2013 Service revenue (does not include $40,000 of services rendered on account because the collection will not be until 2014) .................................................... Expenses (does not include $20,000 of expenses on account because payment will not be made until 2014) .............................................................. Net income ............................................................................................................

$380,000 220,000 $160,000

Additional data: 1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above. 2. On January 1, 2013, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above. Instructions: (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b)

Explain which basis (cash or accrual) provides a better measure of income.

4-72

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 255 (a)

(15 min.)

HOOPER COMPANY Income Statement For the Year Ended December 31, 2013 Service revenue ............................................................................................. Expenses ....................................................................................................... Net income ....................................................................................................

$420,000 246,200 $173,800

Service revenue should include the $40,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($380,000 + $40,000 = $420,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,600 insurance premium since $800 applies to 2013. The other $800 is an asset and should be reflected on the balance sheet as prepaid insurance. The $7,000 of depreciation for the automobile is included as an expense in 2013. ($220,000 + $20,000 – $800 + $7,000 = $246,200). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when the performance obligation is satisfied and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when the performance obligation is satisfied and expenses when incurred. Additionally, expenses are not matched with revenues when recognized; therefore, the expense recognition principle is violated. Ans: N/A, LO 2, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

4-73

Ex. 256 On December 31, 2014, Çolski 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 $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders’ equity, $70,000. The data for the three adjusting entries were: (1)

Depreciation of $9,000 was not recorded on equipment.

(2)

Salaries and Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.

(3)

Rent of $8,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.

Instructions: Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Incorrect balances Effects of: Depreciation

Net Income $ 40,000

Total Assets $130,000

Total Liabilities Stockholders’ Equity $ 60,000 $ 70,000

Total Assets $130,000

Total Liabilities Stockholders’ Equity $60,000 $70,000

Salaries and Wages Rent Correct Balances Solution 256

(10 min.)

Item Net Income Incorrect balances $40,000 Effects of: Depreciation (9,000) Salaries and Wages (10,000) Rent (4,000) Correct Balances $17,000

(9,000) 10,000 (4,000) $117,000

$70,000

(9,000) (10,000) (4,000) $47,000

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-74

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 257 The Downtown Company accumulates the following adjustment data at December 31. 1. Revenue of $1,100 collected in advance has been recognized. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $400 has expired. 4. Supplies of $550 have been used. 5. Revenue recognized but unbilled totals $750. 6. Utility expenses of $300 are unpaid. 7. Interest of $250 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 $22,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.

Type of Adjustment

Account Relationship

Account Balances Before Adjustment (Understatement or Overstatement)

Adjusting Entry

FOR INSTRUCTOR USE ONLY

Income Effect Increase (Decrease)

Accrual Accounting Concepts

Solution 257

(20 min.)

(a)

Account Balances Before Adjustment (Understatement or Overstatement) Adjusting Entry Liab. O Unearned Ser Rev. Rev. U Service Revenue

Type of Account Adjustment Relationship 1. Unearned revenue L/R 2. Accrued expense 3. Prepaid expense 4. Prepaid expense 5. Accrued revenue 6. Accrued expense 7. Accrued expense Codes: A = L = E = (b)

4-75

E/L E/A E/A A/R E/L E/L

Asset Liability Expense

R = O = U =

Income Effect Increase (Decrease) 1,100

Exp. U Liab. U

Salaries and Wages Expense Salaries and Wages Payable

(600)

Exp. U Asset O

Rent Expense Prepaid Rent

(400)

Exp. U Asset O

Supplies Expense Supplies

(550)

Asset U Rev. U

Accounts Receivable Service Revenue

750

Exp. U Liab. U

Utilities Expense Accounts Payable

(300)

Exp. U Liab. U

Interest Expense Interest Payable

(250)

Revenue Overstatement Understatement

Net income before adjustments .................................................. Add: Unearned service revenue (1) ......................................... Accrued revenue (5) ........................................................ Less: Accrued salaries (2) ........................................................ Prepaid rent expired (3) .................................................. Supplies used (4) ............................................................ Accrued utilities (6) ......................................................... Accrued interest (7) ......................................................... Adjusted net income ...................................................................

$22,500 $1,100 750 600 400 550 300 250

1,850 24,350

2,100 $22,250

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-76

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 258 The adjusted trial balance of Masters Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries and Wages Payable 7. Unearned Service Revenue Solution 258

(10 min)(cont.)

Balance Sheet Account

(a) Type of Adjusting Entry

(b) Related Account

1. Supplies

Prepaid Expense

Supplies Expense

2. Accounts Receivable

Accrued Revenue

Service Revenue

3. Prepaid Insurance

Prepaid Expense

Insurance Expense

4. Accumulated Depreciation— Equipment

Prepaid Expense

Depreciation Expense

5. Interest Payable

Accrued Expense

Interest Expense

6. Salaries and Wages Payable

Accrued Expense

Salaries and Wages Exp.

7. Unearned Service Revenue

Unearned Revenue

Service Revenue

Ans: N/A, LO 4 & 5, BT: K, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

4-77

Ex. 259 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ____ 1. A revenue not yet recognized; collected in advance. ____ 2. Office supplies on hand that will be used in the next period. ____ 3. Subscription revenue collected; not yet recognized. ____ 4. Rent not yet collected; already recognized. ____ 5. An expense incurred; not yet paid or recorded. ____ 6. A revenue recognized; not yet collected or recorded. ____ 7. An expense not yet incurred; paid in advance. ____ 8. Interest expense incurred; not yet paid. Solution 259 1. 2. 3. 4. 5. 6. 7. 8.

(5 min.)

B A B C D C A D

Ans: N/A, LO 4 & 5, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-78

Ex. 260 A review of the ledger of Wilde Co. at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries: (a) Salaries and Wages Payable $0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of $800, and three employees earn a weekly salary of $700. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. (b) Unearned Rent Revenue $58,000: The company had several lease contracts during the year as shown below: Rent Term per Number of Date (in months) lease leases Oct. 1 12 $ 8,000 3 Dec. 1 12 18,000 2 (c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2014, with a 6% interest rate. Instructions: Prepare the adjusting entries at December 31, 2014. Show all computations. Solution 260 (a)

(b)

(c)

Dec. 31 Salaries and Wages Expense Salaries and Wages Payable (5 X $800 X 2/5 = $1,600) (3 X $700 X 2/5 = $ 840)

2,440

31 Unearned Rent Revenue Rent Revenue (3/12 X $8,000 X 3 = $6,000) (1/12 X $18,000 X 2 = $3,000)

9,000

31 Interest Receivable Interest Revenue ($90,000 X .06 X 2/12 = $900)

900

2,440

9,000

900

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

4-79

Ex. 261 A review of the ledger of Weakly Service Co. at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries: (a) Notes Payable $80,000: This is a 9-month note, dated September 1, 2014, with a 9% interest rate. (b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2014 it signed 10 leases as shown below:

Date Sept. 1 Nov. 1

Term (in months) 8 12

Monthly Rent $ 4,500 7,000

Number of Leases 4 6

(c) Unearned Service Revenue $171,000. During 2014 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner. Date Aug. 1 Oct. 1

Service Period (in months) 9 6

Amount Per Contract $12,600 15,000

Number of Contracts 8 5

Instructions: Prepare the adjusting entries at December 31, 2014. Show all computations. Solution 261 (a)

(b)

(c)

Dec. 31 Interest Expense 2,400 Interest Payable ($80,000 X .09 X 4/12 = $2,400) 31 Rent Expense Prepaid Rent (4 X $4,500 X 4 = $72,000) (2 X $7,000 X 6 = $84,000)

156,000

31 Unearned Service Revenue Service Revenue (5/9 X $12,600 X 8 = $56,000) (3/6 X $15,000 X 5 = $37,500)

93,500

2,400

156,000

93,500

Ans: N/A, LO 4 & 5, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-80

Ex. 262 The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transactions: (a)

Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the sixmonth period October 1 through March 31.

(b)

Collected $450,000 cash from sales of season tickets for the team's 30 home games. This amount was credited to Unearned Ticket Revenue.

(c)

During the month of October, the Scarlet Pages played five home games.

Instructions: Prepare the adjusting entries required at October 31 for the transactions above. Solution 262

(5 min.)

(a) Rent Expense .............................................................................. Prepaid Rent ..................................................................... ($150,000  6 = $25,000) (b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($450,000  30 = $15,000; $15,000  5 = $75,000)

25,000 25,000

75,000 75,000

Ans: N/A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

Ex. 263 The Jacquers, 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) (b)

(c)

Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the sixmonth period April 1 through September 30. Collected $600,000 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 Jacquers played four home games and five road games.

Instructions: Prepare the adjusting entries required at April 30 for the transactions above.

Accrual Accounting Concepts

Solution 263

4-81

(5 min.)

(a) Rent Expense .............................................................................. Prepaid Rent ...................................................................... ($120,000  6 = $20,000) (b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($600,000  20 = $30,000; $30,000  4 = $120,000)

20,000 20,000

120,000 120,000

Ans: N/A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 264 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5.

Depreciation on equipment is $1,340 for the accounting period. Interest owed on a loan but not paid or recorded is $275. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $100 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had expired. Accrued salaries at the end of the period amounted to $900.

Solution 264

(10 min.)

1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................

1,340

2. Interest Expense ........................................................................... Interest Payable ....................................................................

275

3. Supplies Expense ......................................................................... Supplies ................................................................................ ($550 – $100)

450

4. Rent Expense ................................................................................ Prepaid Rent ........................................................................

700

900

Salaries and Wages Expense ..................................................... Salaries and Wages Payable .................................................

1,340

275

450

700

900

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-82

Ex. 265 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5.

Unrecorded interest accrued on savings bonds is $410. Property taxes incurred but not paid or recorded amount to $800. Unearned service revenue of $4,000 was collected in advance. By year end $700 was still unearned. Prepaid insurance had a $750 debit balance prior to adjustment. By year end, 60 percent was still unexpired. Salaries incurred by year end but not yet paid or recorded amounted to $650.

Solution 265

(10 min.)

1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

410

2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................

800

3. Unearned Service Revenue ........................................................... Service Revenue .................................................................. ($4,000 – $700)

3,300

4. Insurance Expense ....................................................................... Prepaid Insurance ................................................................. ($750 x .40)

300

5. Salaries and Wages Expense ....................................................... Salaries and Wages Payable .................................................

650

410

800

3,300

300

650

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 266 Prepare year-end adjustments for the following transactions. Omit explanations. 1. 2. 3. 4. 5. 6. 7.

Accrued interest on notes receivable is $30. $1,000 of unearned service revenue has been recognized. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year. Services totaling $2,900 had been performed but not yet billed at the end of the year. Depreciation on equipment totaled $6,500 for the year. Supplies purchased totaled $850. By year end, only $250 of supplies remained. Salaries owed to employees at the end of the year total $960

Accrual Accounting Concepts

Solution 266

(10 min.)

1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

2. Unearned Service Revenue ........................................................... Service Revenue ..................................................................

1,000

Rent Expense .............................................................................. Prepaid Rent ........................................................................ ($45,000  3 = $15,000)

15,000

Accounts Receivable ................................................................... Service Revenue.....................................................................

2,900

Depreciation Expense ................................................................ Accumulated Depreciation—Equipment ...............................

6,500

6. Supplies Expense ......................................................................... Supplies ................................................................................ ($850 – $250)

600

7. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ..............................................

960

4. 5.

4-83

1,000

15,000

2,900 6,500

600

960

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 267 Janus Coat Company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000 each year. Janus Coat Company prepares monthly financial statements. Instructions: (a)

Prepare the general journal entry to record the acquisition of the delivery truck on June 1st.

(b)

Prepare any adjusting journal entries that should be made on June 30th.

(c)

Show how the delivery truck will be reflected on Janus Coat Company's balance sheet on June 30th.

4-84

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 267

(10 min.)

(a) June 1 Equipment ................................................................... Notes Payable ..................................................... Cash ................................................................... (To record acquisition of delivery truck and signing of a 2-month, 6% note)

30,000

(b) June 30 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ............... (To record monthly depreciation) $6,000  12 = $500/month

500

30 Interest Expense .......................................................... Interest Payable .................................................. (To accrue interest on notes payable) $20,000  6%  1/12 = $100

100

20,000 10,000

500

100

$30,000 500

$29,500

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accrual Accounting Concepts

4-85

Ex. 268 Sunkan Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September. SUNKAN COMPANY Trial Balance (Selected Accounts) September 30, 2014 ___________________________________________________________________________ Supplies .............................................................................................. Prepaid Insurance ............................................................................... Equipment ........................................................................................... Accumulated Depreciation—Equipment .............................................. Unearned Rent Revenue ....................................................................

Debit $ 2,700 4,800 16,200

Credit

$ 1,000 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of office supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for $4,800. 3. Office equipment depreciates $3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $300. Instructions: Using the information given, prepare the adjusting entries that should be made by Sunkan Company on September 30.

4-86

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 268

(10 min.)

1. Supplies Expense ......................................................................... 1,700 Supplies ............................................................................... (To record the amount of office supplies used $2,700 – 1,000) 2. Insurance Expense ....................................................................... Prepaid Insurance ................................................................ (To record insurance expired $4,800  24)

200

3. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ............................... (To record monthly depreciation $3,000  12)

250

4. Unearned Rent Revenue ............................................................... Rent Revenue ...................................................................... (To record rent revenue recognized $1,200 – $300)

900

1,700

200

250

900

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

Ex. 269 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 The Thoma Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry has been made until year end. Case 2 The Leno Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each month. No adjusting entry has been made until year end. Case 3 Yeats Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in the $1,000 per month apartment had not paid their December rent as of December 31st.

Accrual Accounting Concepts

Solution 269

4-87

(10 min.)

Case 1—December 31 Supplies Expense ............................................................ Supplies ................................................................ (To record supplies used during the year) Case 2—December 31 Depreciation Expense ....................................................... Accumulated Depreciation—Equipment................. (To record depreciation expense for six months) $200  6 months = $1,200 Depreciation Case 3—December 31 Accounts Receivable ........................................................ Rent Revenue ....................................................... (To accrue rent recognized but not yet received) [(2 x $900) + $1,000)]

8,300 8,300

1,200 1,200

2,800 2,800

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4-88

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 270 Greenstream 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. GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 __________________________________________________________________________ Revenues Service Revenue ........................................................................ $40,000 Expenses Salaries and Wages Expense .................................................... $12,000 Advertising Expense ................................................................... 800 Rent Expense ............................................................................. 4,200 Depreciation Expense ................................................................ 2,800 Total Expenses .......................................................................... 19,800 Net Income ......................................................................................... $20,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions: Prepare a corrected income statement.

Accrual Accounting Concepts

Solution 270

4-89

(15 min.)

GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 ___________________________________________________________________________ Revenues Service Revenue ($40,000 + $2,000) .......................................... $42,000 Expenses Salaries and Wages Expense ($12,000 + $5,300) ...................... $17,300 Rent Expense ............................................................................. 4,200 Depreciation Expense ($2,800 + $500) ...................................... 3,300 Supplies Expense ($0 + $2,800) ................................................. 2,800 Utilities Expense ($0 + $1,200) ................................................... 1,200 Advertising Expense ................................................................... 800 Total expenses .................................................................. 29,600 Net Income ......................................................................................... $12,400 Ans: N/A, LO 4 & 5, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Ex. 271 One part of an adjusting entry is given below. Instructions: Indicate the account title for the other part of the entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense on equipment is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 271 1. 2. 3. 4.

(5 min.)

Service Revenue 5. Rent Expense 6. Service Revenue 7. Accumulated Depreciation—Equipment 8.

Utilities Payable Interest Expense Accounts Receivable or Unearned Service Revenue Interest Revenue

Ans: N/A, LO 4 & 5, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-90 Ex. 272

The following ledger accounts are used by the Heartland Race Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Sales Revenue Sales Revenue Advertising Expense Rent Expense 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 November 30, the end of the fiscal year. (a)

On November 1, paid rent on the track facility for three months, $150,000.

(b)

On November 1, sold season tickets for admission to the racetrack. The racing season is yearround with 25 racing days each month. Season ticket sales totaled $960,000.

(c)

On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable due in three months.

(d)

On November 5, programs for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,000.

(e)

The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Heartland and will be remitted by December 10.

Solution 272

(15 min.)

(a) Journal Entry Prepaid Rent ........................................................................ Cash ............................................................................ Adjusting Entry Rent Expense ....................................................................... Prepaid Rent ................................................................ ($150,000   = $50) (b) Journal Entry Cash ..................................................................................... Unearned Sales Revenue ............................................. Adjusting Entry Unearned Sales Revenue ..................................................... Sales Revenue ............................................................ ($960,000  12 = $80,000)

150,000 150,000

50,000 50,000

960,000 960,000

80,000 80,000

Accrual Accounting Concepts

4-91

Solution 272 (cont.) (c) Journal Entry Cash ..................................................................................... Note Payable ............................................................... Adjusting Entry Interest Expense ................................................................... Interest Payable ........................................................... ([$250,000  6%]  12 = $1,250) (d) Journal Entry Prepaid Advertising .............................................................. Cash ............................................................................ Adjusting Entry Advertising Expense ............................................................. Prepaid Advertising ...................................................... ($3,000  20  60 = $1,000)

250,000 250,000

1,250 1,250

3,000 3,000

1,000 1,000

(e) Journal Entry None Adjusting Entry Accounts Receivable ............................................................ Sales Revenue ............................................................

14,000 14,000

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 273 Dallison Company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,200 Tuesday June 29 2,800 Wednesday June 30 2,900 Thursday July 1 3,000 Friday July 2 2,600 Instructions: (a)

Prepare any necessary adjusting journal entries that should be made at year end on June 30.

(b)

Prepare the journal entry to record the payment of the weekly payroll on July 2.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-92

Solution 273

(10 min.)

(a) June 30 Salaries and Wages Expense ...................................... Salaries and Wages Payable .............................. (To accrue salaries incurred but not yet paid)

8,900

(b) July 2

8,900 5,600

Salaries and Wages Payable ....................................... Salaries and Wages Expense ...................................... Cash ................................................................... (To record payment of July 2 payroll)

8,900

14,500

Ans: N/A, LO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Ex. 274 On Friday of each week, Prawn Company pays its personnel weekly wages amounting to $45,000 for a five-day work week. Instructions: (a)

Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.

(b)

Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year.

Solution 274 (a) Dec. 31

(b) Jan. 2

(5 min.) Salaries and Wages Expense ....................................... Salaries and Wages Payable ............................... ([$45,000    3 = $27,000)

27,000

Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash ...................................................................

27,000 18,000

27,000

45,000

Ans: N/A, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

4-93

Ex. 275 Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December 31. STABLER COMPANY Trial Balance December 31 ___________________________________________________________________________ Before Adjustment Dr. Cr. $ 3,000 2,800 2,100 1,200 18,000

Cash Accounts Receivable Prepaid Rent Supplies Equipment Accumulated Depreciation— Equipment Accounts Payable Notes Payable Interest Payable Salaries and Wages Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense Supplies Expense Depreciation Expense Interest Expense Totals

After Adjustment Dr. Cr. $ 3,000 3,700 1,500 700 18,000

$ 1,300 2,700 10,000

$ 1,500 3,000 10,000 120 800 4,060 8,200

4,460 8,200 3,200

3,200 8,000

2,060 1,800 500

$34,660

9,300 2,860 2,100 1,100 500 200 120 $36,980

$36,980

Instructions: Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 275

(20 min.)

Accounts Receivable .......................................................................... Service Revenue ........................................................................ (To record revenue recognized but not yet collected)

900

Rent Expense ..................................................................................... Prepaid Rent .............................................................................. (To record expiration of prepaid rent)

600

Supplies Expense ............................................................................... Supplies ..................................................................................... (To record supplies used)

500

Depreciation Expense ......................................................................... Accumulated Depreciation—Equipment ..................................... (To record depreciation expense)

200

Salaries and Wages Expense ............................................................. Salaries and Wages Payable ..................................................... (To record salaries owed, not yet paid)

800

Interest Expense ................................................................................. Interest Payable ......................................................................... (To record accrued interest payable)

120

Unearned Service Revenue ................................................................ Service Revenue ........................................................................ (To record revenue recognized)

400

Utilities Expense ................................................................................. Accounts Payable ....................................................................... (To record receipt of utility bill)

300

900

600

500

200

800

120

400

300

Ans: N/A, LO 4 & 5, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

4-95

Ex. 276 The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent $ 18,000 Buildings 42,000 Accumulated Depreciation—Buildings 5,500 Unearned Ticket Revenue 600 Other data: 1. Three months' rent had been prepaid on April 1. 2. The buildings are being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers. Instructions: (a)

(b)

Calculate the following: 1. Monthly rent expense. 2. The age of the fencing in months. 3. The number of tickets sold on April 1. Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30.

Solution 276 (a)

(15 min.)

1. $9,000. The $18,000 balance on the adjusted trial balance reflects two months remaining on the prepaid rent. This indicates that the monthly rent is $9,000. 2. The buildings is 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500 which means that depreciation has been taken for 11 months. 3. 170 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The adjusted trial balance shows a balance of $600 indicating that 150 tickets are still outstanding. By adding the 20 used in April to the 150 still remaining to be used, 170 tickets must have been sold on April 1.

(b)

1. Rent Expense ....................................................................... Prepaid Rent ................................................................

9,000

2. Depreciation Expense ........................................................... Accumulated Depreciation—Buildings .........................

500

3. Unearned Ticket Revenue .................................................... Ticket Revenue ............................................................ (20  $4 = $80)

9,000 500 80

Ans: N/A, LO 4, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-96

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 277 The adjusted trial balance of Nicks Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement; 2. a retained earnings statement; and 3. a balance sheet. NICKS FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2014 __________________________________________________________________________ Debit Credit Cash ................................................................................................... $ 15,400 Accounts Receivable .......................................................................... 2,200 Supplies .............................................................................................. 1,800 Equipment ........................................................................................... 15,500 Accumulated Depreciation—Equipment .............................................. $ 4,000 Accounts Payable ............................................................................... 3,000 Unearned Service Revenue ................................................................ 5,000 Common Stock .................................................................................... 15,000 Retained Earnings .............................................................................. 7,400 Dividends ............................................................................................ 3,500 Service Revenue ................................................................................. 9,500 Supplies Expense ............................................................................... 1,100 Depreciation Expense ......................................................................... 2,500 Rent Expense ..................................................................................... 1,900 $43,900 $43,900 Solution 277

(20 min.)

NICKS FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2014 __________________________________________________________________________

Revenues Service Revenue ........................................................................ Expenses Depreciation Expense ................................................................ Rent Expense ............................................................................. Supplies Expense ....................................................................... Total Expenses ..................................................................... Net Income ..........................................................................................

$ 9,500 $2,500 1,900 1,100 5,500 $ 4,000

Accrual Accounting Concepts

Solution 277

4-97

(cont.)

NICKS FINANCIAL PLANNERS Retained Earnings Statement For the Month Ended December 31, 2014 ___________________________________________________________________________

Retained Earnings, December 1 ......................................................... Plus: Net Income ...............................................................................

$7,400 4,000 11,400 3,500 $7,900

Less: Dividends ................................................................................. Retained Earnings, December 31 .......................................................

NICKS FINANCIAL PLANNERS Balance Sheet December 31, 2014 ___________________________________________________________________________

Assets Cash .................................................................................................... Accounts Receivable ........................................................................... Supplies .............................................................................................. Equipment ........................................................................................... Less: Accumulated Depreciation—Equipment .................................. Total Assets ............................................................................... Liabilities and Stockholders’ Equity Liabilities Accounts Payable ....................................................................... Unearned Service Revenue ........................................................ Total Liabilities ...................................................................... Stockholders’ Equity Common Stock ............................................................................ Retained Earnings ...................................................................... Total Liabilities and Stockholders’ Equity ..............................

$15,400 2,200 1,800 $15,500 4,000

11,500 $30,900

$3,000 5,000 $ 8,000 15,000 7,900

22,900 $30,900

Ans: N/A, LO 6, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 278 The adjusted trial balance shown below is for Rich Company at the end of its fiscal year: RICH COMPANY Trial Balance March 31, 2014 __________________________________________________________________________ Debit Credit Cash ................................................................................................... $ 12,900 Accounts Receivable .......................................................................... 9,400 Supplies .............................................................................................. 700 Prepaid Insurance ............................................................................... 2,500 Equipment ........................................................................................... 16,000 Accumulated Depreciation—Equipment .............................................. $ 4,800 Accounts Payable ............................................................................... 5,800 Salaries and Wages Payable .............................................................. 1,100 Unearned Rent Revenue .................................................................... 600 Common Stock .................................................................................... 15,000 Retained Earnings .............................................................................. 5,600 Dividends ............................................................................................ 5,800 Service Revenue ................................................................................. 34,600 Rent Revenue ..................................................................................... 14,400 Salaries and Wages Expense ............................................................. 18,100 Supplies Expense ............................................................................... 1,800 Rent Expense ..................................................................................... 12,000 Insurance Expense ............................................................................. 1,500 Depreciation Expense .......................................................................... 1,200 $81,900 $81,900 Instructions: Prepare the closing entries for the temporary accounts at March 31.

Accrual Accounting Concepts

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Solution 278 March 31

Service Revenue ............................................................. 34,600 Rent Revenue .................................................................. 14,400 Income Summary .......................................................

49,000

Income Summary............................................................. 34,600 Salaries and Wages Expense ..................................... Rent Expense ............................................................. Supplies Expense ....................................................... Insurance Expense ..................................................... Depreciation Expense.................................................

18,100 12,000 1,800 1,500 1,200

Income Summary............................................................. Retained Earnings ....................................................

14,400 14,400

Retained Earnings .................................................................... Dividends ..........................................................

5,800

31 31

5,800

Ans: N/A, LO 7, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

COMPLETION STATEMENTS 279.

The ______________ assumption states that the economic life of a business can be divided into artificial time periods.

Ans: time period, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

280.

The ______________ principle gives accountants guidance as to when revenue is to be recorded.

Ans: revenue recognition, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving

281.

In a service company, revenue is earned when the service is _______________.

Ans: performed, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

282.

The

expense

recognition

principle

attempts

match

______________

with

______________. Ans: expenses, revenues, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

4-100 283.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

284.

Failure to adjust a prepaid expense account for the amount expired will cause _______________ to be understated and ________________ to be overstated.

Ans: expenses, assets, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

285.

Depreciation is an __________________ concept, not a ________________ concept.

Ans: allocation, valuation, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

286.

An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages Expense has been ________________ but has not yet been ________________ or recorded.

Ans: incurred, paid, LO 5, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

287.

An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.

Ans: equality, adjusting, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

288.

In addition to updating Retained Earnings, ______________ entries produce a zero balance in each ______________ account.

Ans: closing, temporary, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

289.

After all closing entries are journalized and posted, a _________________ trial balance is prepared from the ledger.

Ans: post-closing, LO 7, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

Answers to Completion Statements 279. 280. 281. 282. 283. 284.

periodicity revenue recognition performed expenses, revenues prepaid expenses, unearned revenue expenses, assets

285. 286. 287. 288. 289.

allocation, valuation incurred, paid equality, adjusting closing, temporary post-closing

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-102

MATCHING 290. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Periodicity assumption Cash basis Revenue recognition principle Prepaid expenses Expense recognition principle

F. G. H. I. J.

Accrued revenues Depreciation Post-closing trial balance Accrued expenses Book value

___

1. Events recorded only in periods the company receives or pays cash

___

2. Expenses paid before they are incurred

___

3. Cost less accumulated depreciation

___

4. The economic life of a business can be divided into artificial time periods

___

5. Efforts are related to accomplishments

___

6. Includes only permanent—balance sheet—accounts

___

7. Revenue is recognized when the performance obligation is satisfied.

___

8. Revenues earned but not yet received

___

9. Expenses incurred but not yet paid

___ 10. A cost allocation process

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

B D J A E

6. 7. 8. 9. 10.

H C F I G

Ans: N/A, LO 1, 2, 3, 4, 5, 6, & 7, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

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SHORT-ANSWER ESSAY QUESTIONS S-A E 291 You are part of a group of individuals (incorporators) who want to form a new corporation. During discussions on forming the business, Mark Adams makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Mark and the other incorporators. Solution 291 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when the performance obligation is satisfied and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the balance sheet. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were recognized. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the balance sheet. Thus, the user can see that these assets are available for future use. Also, generally accepted accounting principles require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. Ans: N/A, LO 2, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 292 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the periodicity assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 292 The periodicity assumption assumes that the financial and operating life of an accounting entity, such as a business enterprise, can be broken up into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under the accrual basis of accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized, that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses, that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. Ans: N/A, LO 1 & 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 293 As a recent graduate in accounting, and the financial director of a political candidate in a current election, you have been asked to explain many questions concerning how governmental accounting differs from corporate accounting. Required: (a) Discuss the differences between cash basis and accrual−basis accounting. (b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of accounting.

Accrual Accounting Concepts

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Solution 293 (a)

The cash basis of accounting recognizes revenues and expenses when cash is received and paid. This can lead to misleading financial statements by simply speeding up or delaying the cash from sales and expense transactions. The accrual basis of accounting recognizes revenues and expenses when those items occur. Information presented on an accrual basis reveals relationships that are useful in predicting future results.

(b)

TO: Candidate FROM: Financial director SUBJECT: Governmental Accounting Practice Governments favor the cash basis of accounting because expenses are only recognized when paid. This results in a large number of unrecorded liabilities that if recorded, would make the government’s deficits even larger than currently reported. No elected official or governmental bureaucrat wants to be held accountable for increasing the deficit because of changing to the accrual basis of accounting.

Ans: N/A, LO 1 & 2, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 294 The long-term liability section of Alpha Corporation’s Balance Sheet includes the following accounts Notes Payable Mortgage Payable Salaries and Wages Payable Accumulated Depreciation Total Long-Term Liabilities

$100,000 250,000 75,000 125,000 $550,000

Alpha Corporation is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities. Solution 294 Salaries and Wages Payable should not be reported as a long-term liability. This represents the amounts owed to employees. If the corporation does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the balance sheet. Are all of the notes payable, including the mortgage, actually long-term (due after one year)? If not, the portion due within one year should be reported as a current liability instead. Ans: N/A, LO 3, 4, & 5, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 295 What is the purpose of the preparation of adjusting entries? Solution S-A E 295 Adjusting entries are needed to ensure that the revenue recognition and expense recognition principles are followed. The use of adjusting entries makes it possible to produce accurate financial statements at the end of the period. Their purpose is to bring all accounts up to date. Ans: N/A, LO 3, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

S-A E 296 Briefly distinguish between a deferral and an accrual. Solution 296 A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has arisen but that has not yet been recorded, and cash has not been paid or received. Ans: N/A, LO 3, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

S-A E 297 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 297 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. Deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are salaries and wages payable, interest payable, and interest receivable. Ans: N/A, LO 3, BT: K, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Medium, AICPA PC: Problem Solving, IMA: Business Economics

Accrual Accounting Concepts

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S-A E 298 Companies are continually under pressure to “Make the Numbers” – to have earnings that are in line with expectations. Explain the terms earnings management and quality of earnings. Solution 298 Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers. Quantity of earnings indicates the level of full and transport information that a company provides to users of financial statements. Ans: N/A, LO 6, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 299

(Ethics)

Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-OPen, as the product was named, was an overwhelming success. The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 299 1. The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. 2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. Ans: N/A, LO 3, BT: E, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 300

(Communication)

A new sales representative, Eddy Wherli, 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 e.wherli@sbd

Required: Write a response to send to Eddy. (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.)

Accrual Accounting Concepts

4-109

Solution 300 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: Eddy—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, Eddy—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 us (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. (Take heart—It'll seem like Christmas all over again) Thanks again for actually using the system. Talk to me again sometime . . . Reply to

Ans: N/A, LO 3, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4-110

International Financial Reporting Standards True-False Statements 1.

The cash basis of accounting is not in accordance with IFRS.

Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

The expense recognition principle requires that efforts be matched with accomplishments.

Ans: T, LO1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).

Ans: T, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

Multiple Choice Questions 4.

Which of the following are in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting

Ans: a, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Wong Ho Company had the following transactions during 2013: • • • •

Sales of ¥11,000 on account Collected ¥4,000 for services to be performed in 2014 Paid ¥1,250 cash in salaries Purchased airline tickets for ¥500 in December for a trip to take place in 2014

What is Wong Ho’s 2013 net income using accrual accounting? a. ¥9,750. b. ¥13,750. c. ¥13,250. d. ¥9,250. Ans: a, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving, IMA: Business Economics

Under International Financial Reporting Standards (IFRS) a. The cash-basis method of accounting is accepted. b. Events are recorded in the period in which the event occurs. c. Interim period financial statements are either a calendar year or a fiscal year. d. A fiscal year is an accounting time period encompassing less than 12 months.

Ans: b, LO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving, IMA: Business Economics

Accrual Accounting Concepts

4-111

What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 20,500, and unexpired amounts per analysis of policies of €4,000? a. Debit Insurance Expense, € 4,000; Credit Prepaid Insurance, € 4,000. b. Debit Insurance Expense, € 20,500; Credit Prepaid Insurance, € 20,500. c. Debit Prepaid Insurance, € 16,500; Credit Insurance Expense, € 16,500. d. Debit Insurance Expense, € 16,500; Credit Prepaid Insurance, € 16,500.

Ans: d, LO 4, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. How will the adjusting entry impact Karcan, Inc.’s statement of financial position at December 31, 2014? a. Decreased assets ₤1,100. b. Increased equity ₤1,100. c. Increased liabilities ₤1,400. d. Decreased assets ₤1,400.

Ans: d, LO 4, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. If Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2014? a. Assets overstated by ₤ 1,400. b. Equity understated by ₤ 1,400. c. Equity overstated by ₤ 1,100. d. Assets overstated by ₤ 1,100.

Ans: a, LO 4, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

10.

Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP include all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods. d. The form and content of financial statements are very similar under IFRS and U.S. GAAP.

Ans: b, LO 7, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

4-112

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Brief Exercises 11.

The statements of financial position of Rocky Acre Spread Ltd. include the following: 12/31/14 12/31/13 Interest Receivable €4,300 € -0Supplies 5,000 3,000 Salaries and Wages Payable 3,600 3,800 Unearned Service Revenue -04,000 The income statement for 2014 shows the following: Interest Revenue €14,400 Service Revenue 75,700 Supplies Expense 8,700 Salaries and Wages Expense 36,000 Instructions Calculate the following for 2014: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. 4. Cash received for service revenue.

Solution 11 (15 min.) 1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received

€10,100 €14,400 4,300 €10,100 €10,700

2. Cash paid for supplies = Supplies Expense Less: Supplies (2013)

€8,700 3,000 5,700 5,000 €10,700

Add: Supplies (2014) Cash Paid 3. Cash paid for salaries and wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2013)

€36,200

Less: Salaries and Wages Payable (2014) Cash Paid

€36,000 3,800 39,800 3,600 €36,200

4. Cash received for revenue = Service Revenue Less: Unearned Service Revenue (2013) Cash Received

€75,700 4,000 €71,700

€71,700

LO 2, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving, IMA: Reporting

Accrual Accounting Concepts

12.

4-113

Use the following income statement for the year 2013 for Haggrad Ltd. to prepare entries to close the revenue and expense accounts for the company. Service revenue Expenses: Salaries and Wages Expense Rent Expense Insurance Expense Total expenses Net income (loss)

€90,300 €45,000 25,000 6,500 76,500 €13,800

Ans: N/A, SO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: No

Solution 12 (5 min.) Service Revenue........................................................... Income Summary ..............................................

90,300

Income Summary .......................................................... Salaries and Wages Expense............................ Rent Expense .................................................... Insurance Expense............................................

76,500

90,300

45,000 25,000 6,500

CHAPTER 5 MERCHANDISING OPERATIONS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

4 4 4 4 4 4 4 4 4 4 5

C K K K K K K K K C K

45. 46. 47. 48. 49. 50. 51. 52.

5 6 6 6 7 7 *8 *8

K AP C K K K K K

3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 6 6 4 6 6 4 4 6

AN C K K K K K K K K K K K K K K K K K K AP AP AP AP AP AP AP AP AP

169. 170. 171. 172. 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.

6 4 4 6 6 4 4 5 5 5,6 5,6 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6

AP AP AP AP AP C K C C AP AP AP AP K K AN K AP AP K AP K K K C AP AP AP AP

True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 1 1 1 1 1 1

K K K K K C C K C K K

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

1 1 1 1 2 2 2 2 2 2 2

53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.

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 1 1

K K K K K K K K K K K K C K K K K K K K K K K K K C K K C

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. 107. 108. 109. 110.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3

K K K K K K K K K AP C

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

3 3 3 3 3 3 3 3 3 3 3

K K K K K K K C K AP K

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Multiple Choice Questions K AP AP C AP C C AP AP K AN AP AP AN AP AN K AP C C AP AP K K K K K AP AP

111. 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. 137. 138. 139.

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 K K AP AP AP AP AP K AP C C K K C AP AP AP K AP AP AP AP K K K AP AP

140. 141. 142. 143. 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.

5-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Multiple Choice Questions (Cont.) 198. 199.

6 6

C AP

200. 201.

6 6

AP AP

202. *203.

207. 208.

1,4 2,3

AP AP

209. 210.

2,3 3

AP AP

211. 212.

215. 2 216. 2 217. 2,3 218. 2,3 219. 2,3

AP AP AP AP AP

220. 221. 222. 223. 224.

2,3 2,3 2,3 3 3

AP AP AP AP AP

225. 226. 227. 228. 229.

237. 238.

1 1

K K

239. 240.

1 2

K K

247.

1-6

248. 249. 250.

1 3 3

C C C

6 8

AP AP

*204. *205.

8 8

AP AP

*206.

213. 214.

5 6

AP AP

230. 231. 232. *233. *234.

5 5 6 8 8

AP AP AP AP AP

*235. *236.

8 8

AP AP

3 3

K K

245. 246.

4 6

K K

2 2

C C

Brief Exercises 4 5

AP AP

Exercises 4 4,6 4,6 4,6 4,6

K AP AP AP AP

Completion Statements 241. 242.

2 3

K K

243. 244.

Matching Short-Answer Essay Questions 251. 252. 253.

3 4 4

C C C

254. 255. 256.

4 6 6

C C K

257. 258.

* This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item

Type

Item

Type

Learning Objective 1 Item Type Item Type

Item

Type

Item

Type

1. 2.

TF TF

10. 11.

TF TF

56. 57.

MC MC

65. 66.

MC MC

74. 75.

MC MC

207. 237.

BE C

12.

58.

67.

76.

238.

13.

59.

68.

77.

239.

14.

60.

69.

78.

247.

15.

61.

70.

79.

248.

53.

62.

71.

80.

54.

63.

72.

81.

55.

64.

73.

82.

Learning Objective 2 16.

84.

92.

100.

215.

240.

17.

85.

93.

101.

216.

241.

18.

86.

94.

102.

217.

247.

19.

87.

95.

103.

218.

257.

20.

88.

96.

104.

219.

258.

21.

89.

97.

105.

220.

22.

90.

98.

208.

221.

83.

91.

99.

209.

222.

Merchandising Operations

5-3

Learning Objective 3 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

23.

106.

117.

128.

139.

222.

24.

107.

118.

129.

140.

223.

25.

108.

119.

130.

141.

224.

26.

109.

120.

131.

208.

242.

27.

110.

121.

132.

209.

243.

28.

111.

122.

133.

210.

244.

29.

112.

123.

134.

217.

247.

30.

113.

124.

135.

218.

249.

31.

114.

125.

136.

219.

250.

32.

115.

126.

137.

220.

251.

33.

116.

127.

138.

221.

Learning Objective 4 34. 35.

TF TF

43. 142.

TF MC

150. 151.

MC MC

159. 160.

MC MC

207. 211.

BE BE

252. 253.

SA SA

36.

143.

152.

163.

225.

254.

37.

144.

153.

166.

226.

38.

145.

154.

167.

227.

39.

146.

155.

170.

228.

40.

147.

156.

171.

229.

41.

148.

157.

174.

245.

42.

149.

158.

175.

247.

44. 45.

TF TF

178. 179.

MC MC

182. 183.

MC MC

186. 187.

MC MC

230. 231.

Ex Ex

176.

180.

184.

212.

247.

177.

181.

185.

213.

Learning Objective 5

Learning Objective 6 46. 47.

TF TF

168. 169.

MC MC

189. 190.

MC MC

196. 197.

MC MC

214. 226.

BE Ex

247. 255.

Ma SA

48.

172.

191.

198.

227.

256.

161.

173.

192.

199.

228.

162.

178.

193.

200.

229.

164.

179.

194.

201.

232.

165.

188.

195.

202.

246.

235. 236.

Ex Ex

Learning Objective 7 49.

50.

247.

51. 52.

TF TF

203. 204.

MC MC

205. 206.

Learning Objective 8

Note: TF = True-False MC = Multiple Choice Ma = Matching

MC MC

233. 234.

Ex Ex

C = Completion Ex = Exercise SA = Short Answer Essay .

5-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. Identify the differences between a service company and a merchandising company. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system. 2. Explain the recording of purchases under a perpetual inventory system. The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances. 3. Explain the recording of sales revenues under a perpetual inventory system. When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale. 4. Distinguish between a single-step and a multiple-step income statement. In a singlestep income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities. 5. Determine cost of goods sold under a periodic system. The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine cost of goods sold, first calculate cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory. 6. Explain the factors affecting profitability. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control costs, as measured by the profit margin ratio. 7. Identify a quality of earnings Indicator. Earnings have high quality if they provide a full and transparent depiction of how a company performed. An indicator of the quality of earnings is the quality of earnings ratio, which is net cash provided by operating activities divided by net income. Measures above 1 suggest the company is employing conservative accounting practices. Measures significantly below 1 might suggest the company is using aggressive accounting to accelerate the recognition of income. *8. Explain the recording of purchases and sales of inventory under a periodic inventory system. To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

Merchandising Operations

5-5

TRUE-FALSE STATEMENTS 1.

Retailers and wholesalers are both considered merchandising enterprises.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The operating cycle of a merchandising company ordinarily is shorter than that of a service company.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenue minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A periodic inventory system does not require a detailed record of inventory items.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under the periodic inventory system, cost of goods sold is treated as an account.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10.

The periodic inventory system provides an up to date amount of inventory on hand.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

11.

A very small business most likely would have to use the perpetual inventory system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

12.

The computer has increased greatly the use of the periodic inventory system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics

5-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

13.

Cost of Goods Sold is considered an expense of a merchandising firm.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14.

Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15.

Net sales minus cost of goods sold is called gross profit.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18.

The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

19.

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

20.

Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

21.

If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

22.

When an invoice is paid within the discount period, the amount of the discount decreases Inventory.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

23.

Sales revenues are only earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

24.

Cash register tapes provide evidence of credit sales.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Merchandising Operations

25.

5-7

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26.

The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

28.

Sales Discounts is a contra revenue account to Sales Revenue.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

The normal balance of Sales Returns and Allowances is a credit.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31.

Sales Discounts and Sales Returns and Allowances both have normal debit balances.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

33.

The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods

34.

The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35.

In a single-step income only one step is required in determining net income.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36.

Freight-out appears as an operating expense in the income statement.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5-8 37.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Gross profit appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38.

Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39.

Operating expenses include interest expense and income tax expense.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

Income from operations appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41.

A merchandising company’s net income is determined by subtracting operating expenses from gross profit.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43.

The income statement for a merchandising company presents only two amounts not shown on a service company income statement.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44.

Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

45.

With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

46.

If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

47.

The gross profit amount is generally considered to be more informative than the gross profit rate.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Merchandising Operations

49.

5-9

The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50.

A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*51.

Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*52.

Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

Ans: T, LO: 8, 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 1. 2. 3. 4. 5. 6. 7. 8.

T F F T F T T F

9. 10 11. 12. 13. 14. 15. 16.

T F F F T T T T

17. 18. 19. 20. 21. 22. 23. 24.

T T F F T T F F

25. 26. 27. 28. 29. 30. 31. 32.

F T F T F T T T

33. 34. 35. 36. 37. 38. 39. 40.

F T T T F F F F

41. 42. 43. 44. 45. 46. 47. 48.

T T F T T T F F

49. 50. *51. *52.

F T F T

MULTIPLE CHOICE QUESTIONS 53.

Merchandising companies that sell to retailers are known as a. brokers. b. corporations. c. wholesalers. d. service firms.

Ans: C, LO: 1, 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 would not be considered a merchandising operation? a. Retailer b. Wholesaler c. Service firm d. Merchandising company

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

5-10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

55.

Which of the following activities is not a component of the operating cycle? a. Sale of merchandise b. Payment of employees’ salaries c. Collection of cash from merchandise sales d. Purchase of merchandise

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56.

Which of the following companies would be most likely to use a perpetual inventory system? a. Grain company b. Beauty salon c. Clothing store d. Fur dealer

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

57.

Gross profit equals the difference between a. net income and operating expenses. b. sales revenue and cost of goods sold. c. sales revenue and operating expenses. d. sales revenue and cost of goods sold plus operating expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

Each of the following companies is a merchandising company except a a. wholesale parts company. b. candy store. c. moving company. d. furniture store.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

59.

Net income will result if gross profit exceeds a. cost of goods sold. b. operating expenses. c. purchases. d. cost of goods sold plus operating expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

A merchandiser will earn an operating income of exactly $0 when a. net sales equals cost of goods sold. b. cost of goods sold equals gross margin. c. operating expenses equal net sales. d. gross profit equals operating expenses.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Merchandising Operations

61.

5-11

A merchandiser that sells directly to consumers is a a. retailer. b. wholesaler. c. broker. d. service enterprise.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

62.

Two categories of expenses in 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. other expenses and cost of goods sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

The primary source of revenue for a wholesaler is a. investment income. b. service revenue. c. the sale of merchandise. d. the sale of plant assets the company owns.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64.

Generally, the revenue account for a merchandising enterprise is called a. Sales Revenue or Sales. b. Investment Income. c. Gross Profit. d. Net Sales.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

Under a perpetual inventory system a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are returned to vendors.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

66.

The operating cycle of a merchandising company is a. always one year in length. b. ordinarily longer than that of a service company. c. about the same as that of a service company. d. ordinarily shorter than that of a service company.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5-12 67.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Sales revenue less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

Detailed records of goods held for resale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double entry accounting system. d. single entry accounting system.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

71.

A perpetual inventory system would most likely be used by a(n) a. automobile dealership. b. hardware store. c. drugstore. d. convenience store.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

72.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Merchandising Operations

73.

5-13

The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method? a. Sales Revenue b. Cost of Goods Sold c. Purchases d. Accounts Receivable

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

74.

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. each time a sale occurs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

75.

The primary difference between a periodic and perpetual inventory system is that a periodic system a. keeps a record showing the inventory on hand at all time. b. provides better control over inventories. c. records the cost of the sale on the date the sale is made. d. determines the inventory on hand only at the end of the accounting period.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

76.

When using the periodic system the physical inventory count is used to determine a. only the sales value of goods in the ending inventory. b. both the cost of the goods in ending inventory and the sales value of goods sold during the period. c. both the cost of the goods sold and the cost of ending inventory. d. only the cost of merchandise sold during the period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77.

Inventory becomes part of cost of goods sold when a company a. pays for the inventory. b. purchases the inventory. c. sells the inventory. d. receives payment from the customer.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

Which statement is incorrect? a. Periodic inventory systems provide better control over inventories than perpetual inventory systems. b. Computers and electronic scanners allow more companies to use a perpetual inventory system. c. Freight-in is debited to Inventory when a perpetual inventory system is used. d. Regardless of the inventory system that is used, companies should take a physical inventory count.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5-14

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

79.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

80.

The periodic inventory system is used most commonly by companies that sell a. low-priced, high-volume merchandise. b. high-priced, high-volume merchandise. c. high-priced, low-volume merchandise. d. high-priced, low and high-volume merchandise.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

81.

What is a difference between merchandising companies and service enterprises? a. Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements. b. Merchandising companies generally have a longer operating cycle than service enterprises. c. Cost of goods sold is an expense for service enterprises but not for merchandising companies. d. All are differences.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82.

Under the perpetual inventory system, which of the following accounts would not be used? a. Sales Revenue b. Purchases c. Cost of Goods Sold d. Inventory

Ans: B, LO: 2 , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83.

Under a perpetual inventory system, acquisition of merchandise for resale is debited to a. the Inventory account. b. the Purchases account. c. the Supplies account. d. the Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84.

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales Revenue. d. Inventory.

Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Merchandising Operations

85.

5-15

Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? a. A purchase of merchandise. b. A return of merchandise inventory to the supplier c. Payment of freight costs for goods shipped to a customer d. Payment of freight costs for goods received from a supplier

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

86.

A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

87.

If a purchaser using a perpetual inventory system pays the transportation costs, then the a. Inventory account is increased. b. Inventory account is not affected. c. Freight-Out account is increased. d. Delivery Expense account is increased.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

88.

Freight costs incurred by a seller on merchandise sold to customers will cause an increase a. in the selling expenses of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

89.

Conway Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period? a. $9,000 b. $8,820 c. $8,100 d. $8,280

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $9,000  .98 = $8,820

90.

A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for this total event? a. $0 b. $40.00 c. $40.80 d. $80.00

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($6,000  .01) − ($6,000  .06  20/360) = $40

5-16 91.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In the credit terms of 1/10, n/30, the “1” represents the a. number of days in the discount period. b. full amount of the invoice. c. number of days when the entire amount is due. d. percent of the cash discount.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

92.

Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 2% b. 12% c. 18% d. 36%

Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [360  (30 − 10)]  1% = 18%

93.

Davies Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period? a. $9,000 b. $8,856 c. $8,820 d $7,200

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $9,000  .98 = $8,820

94.

A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28. What amount is received as payment in full on May 4? a. $1,764 b. $1,862 c. $1,900 d $1,800

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,900 − $100)  .98 = $1,764

95.

Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 2% b. 12% c. 24% d 36%

Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [360  (30 − 10)]  2% = 36%

Merchandising Operations

96.

5-17

A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24? a. $700 b. $637 c. $650 d $686

97.

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, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

98.

A purchase invoice is a document that a. provides support for goods purchased for cash. b. provides evidence of incurred operating expenses. c. provides evidence of credit purchases. d. serves only as a customer receipt.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

99.

Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct? a. Returns of merchandise by Adams Company to a manufacturer are credited to Inventory. b. Freight paid to get merchandise to Adams Company’s store is debited to Freight Expense. c. A return of merchandise by one of Adams Company’s customers is credited to Inventory. d. Discounts taken by Adams Company’s customers are credited to Inventory.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

100.

As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation? a. All invoices have credit terms of n/30. b. There is not sufficient cash to pay within the discount period. c. Discounts are missed because no one knows how to enter them in the new accounting software. d. The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

5-18 101.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

When using a perpetual inventory system, why are discounts credited to Inventory? a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory. b. The discounts reduce the cost of the inventory. c. The discounts are a reduction of business expenses. d. None of these answers choices are correct.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

102.

Tony’s Market recorded the following events involving a recent purchase of inventory: Received goods for $40,000, terms 2/10, n/30. Returned $800 of the shipment for credit. Paid $200 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $38,416. b. increased by $39,400. c. increased by $38,612. d. increased by $38,616.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($40,000 − $800)  .98] + $200 = $38,616

103.

Stan’s Market recorded the following events involving a recent purchase of inventory: Received goods for $90,000, terms 2/10, n/30. Returned $1,800 of the shipment for credit. Paid $450 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $86,436. b. increased by $88,650. c. increased by $86,877. d. increased by $86,886.

104.

Assets purchased for resale are recorded in which of the following accounts? a. Supplies b. Inventory c. Equipment d. More than one of these answer choices is correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105.

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory d. Freight-Out

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Merchandising Operations

106.

5-19

Which of the following accounts is classified as a contra revenue account? a. Sales Revenue b. Cost of Goods Sold c. Sales Returns and Allowances d. Purchase Discounts

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

Sales revenues are usually considered earned when a. cash is received from credit sales. b. an order is received. c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109.

The journal entry to record a credit sale ignoring cost of goods sold is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Sales Returns and Allowances d. Accounts Receivable Sales Revenue

Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

110.

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111.

When sales of merchandise are made for cash, the transaction may be recorded by the following entry: a. Debit Sales Revenue, credit Cash b. Debit Cash, credit Sales Revenue c. Debit Sales Revenue, credit Cash Discounts d. Debit Sales Revenue, credit Sales Returns and Allowances

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

5-20

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

112.

The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a a. debit to Sales Discounts for $24. b. debit to Sales Revenue for $1,176. c. credit to Accounts Receivable for $1,200. d. credit to Sales Revenue for $1,200.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

113.

A sales invoice is prepared when goods a. are sold for cash. b. are sold on credit. c. sold on credit are returned. d. are sold on credit or for cash.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

114.

The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra asset account. c. expense account. d. contra revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

115.

The entry to record the return of goods from a customer would include a a. debit to Sales Revenue. b. credit to Sales Revenue. c. debit to Sales Returns and Allowances. d. credit to Sales Returns and Allowances.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116.

The entry to record the receipt of payment within the discount period on a sale of $700 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $14. b. debit to Sales Revenue for $686. c. credit to Accounts Receivable for $700. d. credit to Sales Revenue for $700.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

117.

The entry to record a sale of $700 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $14. b. debit to Cash for $686. c. credit to Accounts Receivable for $700. d. credit to Sales Revenue for $700.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Merchandising Operations

118.

5-21

The collection of an $900 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $18. b. debit to Accounts Receivable for $882. c. credit to Cash for $882. d. credit to Accounts Receivable for $882.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $900  .02 = $18

119.

A sales invoice is used as documentation for a journal entry that requires a debit to a. Cash and a credit to Sales Revenue. b. Sales Returns and Allowances and a credit to Accounts Receivable. c. Accounts Receivable and a credit to Sales Revenue. d. Cash and a credit to Sales Returns and Allowances.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

120.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

121.

When goods are returned that relate to a prior cash sale a. the Sales Returns and Allowances account should not be used. b. the Cash account will be credited. c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122.

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 filling customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

123.

A Sales Returns and Allowances account is not debited if a customer a. returns defective merchandise. b. receives a credit for merchandise of inferior quality. c. utilizes a prompt payment incentive. d. returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

5-22 124.

Test Bank for Accounting: Tools for Business Decision Making, Fifth 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

125.

The credit terms offered to a customer by a business firm were 2/10, n/30, which means a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

126.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127.

Anderson Inc. sells $900 of merchandise on account to Baltic Company with credit terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic Company's check? a. $882 b. $900 c. $810 d. $840

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $900  .98 = $882

128.

Aber Company sells merchandise on account for $1,800 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $300 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. $1,464 b. $1,476 c. $1,470 d. $1,350

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,800 − $300)  .98 = $1,470

Merchandising Operations

129.

5-23

Casin Company sells $700 of merchandise on account to Delta Exploration with credit terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount offered, what is the amount of Delta Exploration's check? a. $490 b. $686 c. $630 d. $560

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $700  .98 = $686

130.

Which sales accounts normally have a debit balance? a. Sales Discounts b. Sales Returns and Allowances. c. Both Sales Discounts and Sales Returns and Allowances have debit balances. d. Neither Sales Discounts or Sales Returns and Allowances have debit balances.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131.

Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,000 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. $4,900 b. $4,920 c. $4,000 d. $3,920

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($5,000 − $1,000)  .98 = $3,920

132.

Piper Company sells merchandise on account for $1,500 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check? a. Cash 1,000 Accounts Receivable 1,000 b. Cash Sales Returns and Allowances Accounts Receivable .

980 520

c. Cash Sales Returns and Allowances Sales Discounts Accounts Receivable

980 500 20

1,500

d. Cash 1,470 Sales Discounts 30 Sales Returns and Allowances Accounts Receivable

500 1,000

5-24 133.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The collection of a $600 account beyond the 2 percent discount period will result in a a. debit to Cash for $588. b. debit to Accounts Receivable for $600. c. debit to Cash for $600. d. debit to Sales Discounts for $12.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600 − 0 = $600

134.

The collection of a $700 account beyond the 2 percent discount period will result in a a. debit to Cash for $686. b. credit to Accounts Receivable for $700. c. credit to Cash for $700. d. debit to Sales Discounts for $14.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $700 − 0 = $700

135.

Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales Revenue d. Cost of Goods Sold

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

With respect to the income statement a. contra revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales. c. contra revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138.

When a seller records a return of goods, the account that is credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.

Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Merchandising Operations

139.

5-25

The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

140.

Rains Company is a furniture retailer. On January 14, 2014, Rains purchased merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014 and the accounts receivables were settled on January 30, 2014. Which statement is correct? a. Cash flows were affected on January 14 and January 21. b. Gross profit percentage is 60%. c. On January 30, 2014, customers should remit cash in the amount of $79,200. d. There is not enough information available to answer this question.

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $80,000  .99 = $79,200

141.

Which statement is incorrect? a. The sales revenue account is used to record the sales of goods held for resale to customers. b. Sales discounts are recorded as debits to the sales revenue account. c. The sales revenue account is a revenue account. d. The sales revenue account has a normal credit balance and is closed at the end of the accounting period.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142.

Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement. a. Gross profit b. Operating expenses c. Sales revenue d. Cost of goods sold

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143.

The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step statement. b. revenue statement. c. report-form statement. d. single-step statement.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5-26

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

144.

Gross profit does not appear a. on a multiple-step income statement. b. on a single-step income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on either a multiple-step or single-step income statement.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

145.

Gross profit equals the difference between net sales and a. operating expenses. b. cost of goods sold. c. net income. d. cost of goods sold plus operating expenses.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146.

Positive operating income will result if gross profit exceeds a. costs of goods sold. b. salaries and wages expense. c. cost of goods sold plus operating expenses. d. operating expenses.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

147.

What is the term applied to the excess of net sales over the cost of goods sold? a. Income before income taxes b. Income from operations c. Net income d. Gross profit

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

148.

Operating expenses would include a. interest expense. b. income tax expense. c. freight-out. d. freight-out and interest.

Ans: C, LO: 4, 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 is not a true statement about a multiple-step income statement? a. Operating expenses do not include income tax expense. b. There may be a section for non-operating activities. c. There may be a section for operating assets. d. There is a section for cost of goods sold.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

150.

An advantage of the single-step income statement over the multiple-step form is a. the amount of information it provides. b. its comprehensiveness. c. its simplicity. d. its use in computing ratios.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Merchandising Operations

151.

5-27

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152.

Income from operations is gross profit less 1. operating expenses and other expenses and losses. 2. operating expenses plus other revenues and gains. 3. operating expenses. a. 1 b. 2 c. 3 d. both 1 and 2

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

153.

Multiple-step income statements show a. gross profit but not income from operations. b. neither gross profit nor income from operations. c. both income from operations and gross profit. d. income from operations but not gross profit.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

154.

Interest expense would be classified on a multiple-step income statement under the heading a. Other expenses and losses. b. Other revenues and gains. c. Operating expenses. d. Cost of goods sold.

Ans: A , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

155.

Gross profit for a merchandising company is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

156.

The sales section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Cost of goods sold.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5-28 157.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The operating expenses section of an income statement for a merchandising company would not include a. Freight-out. b. Utilities expense. c. Cost of goods sold. d. Insurance expense.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

158.

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 revenue d. Cost of goods sold

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159.

Gross profit does not appear a. on a merchandising company income statement. b. on a service company income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

160.

Financial information is presented below: Operating expenses $ 36,000 Sales revenue 150,000 Cost of goods sold 105,000 Gross profit would be a. $114,000. b. $ 36,000. c. $ 45,000. d. $ 24,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 − $105,000 = $45,000

161.

Financial information is presented below: Operating expenses $ 36,000 Sales revenue 150,000 Cost of goods sold 105,000 The gross profit rate would be a. .70. b. .24 c. .06. d. .30.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($150,000 − $105,000)  $150,000 = .30

Merchandising Operations

162.

5-29

Financial information is presented below: Operating expenses $ 36,000 Sales revenue 150,000 Cost of goods sold 105,000 The profit margin would be a. .70. b. .06. c. .30. d. .94.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($150,000 − $105,000 − $36,000)  $150,000 = .06

163.

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 91,000 Gross profit would be a. $56,000. b. $49,000. c. $52,000. d. $59,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($150,000 − $7,000 − $3,000) − $91,000 = $49,000

164.

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 91,000 The gross profit rate would be a. .33. b. .35. c. .65. d. .27.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 − $7,000 − $3,000 = $140,000; ($140,000 − $91,000)  $140,000 = .35

5-30 165.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 91,000 The profit margin would be a. .21. b. .14. c. .35. d. .15.

166.

Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 4,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold 90,000 The amount of net sales on the income statement would be a. $154,000. b. $150,000. c. $160,000. d. $156,000.

167.

Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 14,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold 90,000 Gross profit would be a. $90,000. b. $70,000. c. $60,000. d. $66,000.

Merchandising Operations

168.

5-31

Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 4,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold 90,000 The gross profit rate would be a. .40. b. .60. c. .44. d. .45.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $160,000 − $4,000 − $6,000 = $150,000; ($150,000 − $90,000)  $150,000 = .40

169.

Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 4,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold 90,000 The profit margin would be a. .40. b. .09. c. .16. d. .10.

170.

Financial information is presented below: Operating expenses $ 35,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 The amount of net sales on the income statement would be a. $128,000. b. $125,000. c. $140,000. d. $137,000.

5-32 171.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Financial information is presented below: Operating expenses $ 35,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 Gross profit would be a. $40,000. b. $43,000. c. $55,000. d. $52,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($140,000 − $12,000 − $3,000) − $85,000 = 40,000

172.

Financial information is presented below: Operating expenses $ 35,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 The gross profit rate would be a. .68. b. .39. c. .32. d. .34.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $140,000 − $12,000 − $3,000 = $125,000; ($125,000 − $85,000)  $125,000 = .32

173.

Financial information is presented below: Operating expenses $ 35,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 The profit margin would be a. .32. b. .16. c. .03. d. .04.

Merchandising Operations

174.

5-33

What is an advantage of using the multiple-step income statement? a. It highlights the components of net income. b. Gross profit is not a separate item. c. It is easier to prepare than the single-step income statement. d. Net income will be higher than net income computed using the single-step income statement.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

175.

For a jewelry retailer, which is an example of Other Revenues and Gains? a. Repair revenue b. Unearned revenue c. Gain on sale of display cases d. Discount received for paying for merchandise inventory within the discount period

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176.

When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a. The amount of ending inventory is determined on the last day of the accounting period. b. Cost of goods available for sale includes net purchases plus the ending inventory. c. Purchases represent cash paid for purchases during the accounting period. d. Freight-in is ignored.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177.

When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased? a. Add freight-in b. Subtract purchase returns and allowances c. Subtract cost of ending inventory d. All of these are necessary steps

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178.

At the beginning of the year, Uptown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,500,000. If Uptown Athletic reported ending inventory of $500,000 and sales of $2,000,000, their cost of goods sold and gross profit rate would be a. $1,000,000 and 70%. b. $1,400,000 and 30%. c. $1,000,000 and 30%. d. $1,400,000 and 70%.

Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 + $1,500,000 − $500,000 = $1,400,000; ($2,000,000 − $1,400,000)  $2,000,000 = 3090

5-34 179.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At the beginning of the year, Wildcat Athletic had an inventory of $200,000. During the year, the company purchased goods costing $800,000. If Wildcat Athletic reported ending inventory of $300,000 and sales of $1,000,000, their cost of goods sold and gross profit rate would be a. $500,000 and 70% b. $700,000 and 30%. c. $500,000 and 30%. d. $700,000 and 70%.

Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 + $800,000 − $300,000 = $700,000; ($1,000,000 − $700,000)  $1,000,000 = 30%

180.

During the year, Megan’s Pet Shop’s merchandise inventory decreased by $60,000. If the company’s cost of goods sold for the year was $900,000, purchases would have been a. $960,000. b. $840,000. c. $780,000. d. Unable to determine.

181.

During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $600,000, purchases would have been a. $640,000. b. $560,000. c. $520,000. d. Unable to determine.

182.

The amount of cost of good available for sale during the year depends on the amounts of a. beginning merchandise inventory and cost of goods sold. b. beginning merchandise inventory, net cost of purchases, and ending merchandise inventory. c. beginning merchandise inventory, cost of goods sold, and ending merchandise inventory. d. beginning merchandise inventory and net costs of purchases.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

183.

Which of the following is not considered in computing net cost of purchases? a. Purchases returns and allowances b. Purchases c. Freight paid on purchased goods d. Freight paid on goods shipped to customers

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Merchandising Operations

184.

5-35

Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was a. equal to $5,000. b. more than $5,000. c. less than $5,000. d. indeterminate.

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

185.

All of the following statements are true regarding the periodic inventory system except a. Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period. b. Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period. c. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used. d. Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186.

Sampson Company's accounting records show the following for the year ending on December 31, 2014. Purchase Discounts $ 5,600 Freight-In 7,800 Purchases 350,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns and Allowances 6,400 Using the periodic system, the cost of goods purchased is a. $330,210. b. $354,210. c. $358,610. d. $345,810.

5-36 187.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Sampson Company's accounting records show the following at the year ending on December 31, 2014. Purchase Discounts $ 5,600 Freight-In 7,800 Purchases 350,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns and Allowances 6,400 Using the periodic system, the cost of goods sold is a. $351,110. b. $348,910. c. $340,510. d. $359,510.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [$23,500 + ($350,010 − $5,600 − $6,400 + $7,800)] − $28,800 = $340,510

188.

Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount? a. The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio. b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales. c. The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used. d. The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

189.

Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate? a. Bolton must pay higher prices to suppliers without passing these costs on to customers. b. Bolton may have begun selling products with a higher markup. c. Bolton's average margin between selling price and inventory cost is decreasing. d. Bolton may have seen a decline in total gross profit while maintaining net sales.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

190.

Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change? a. Haverty's global sourcing efforts at the beginning of 2014 resulted in a lower cost of merchandise sold. b. Haverty's new profit lines with lower margins in 2014 became a larger component of their sales. c. Haverty increased its product markdowns in 2014. d. Haverty's average margin between the selling price and the inventory cost decreased over this two-year period.

Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Merchandising Operations

191.

5-37

Which of the following statements is true regarding profit margin? a. Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs b. Profit margin does not vary across industries. c. Discount stores with high merchandise turnover generally have higher profit margins. d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

192.

The gross profit rate is computed by dividing gross profit by a. sales revenue. b. cost of goods sold. c. net sales. d. operating expenses.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

193.

A decline in a company’s gross profit could be caused by all of the following except a. selling products with a lower markup. b. clearance of discontinued inventory. c. paying lower prices to its suppliers. d. increasing competition resulting in a lower selling price.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

194.

If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell’s gross profit rate is a. 50%. b. 35%. c. 54%. d. 100%.

195.

If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink’s gross profit rate is a. 75%. b. 33% c. 25%. d. 100%.

5-38 196.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A company shows the following balances: Sales Revenue $1,000,000 Sales Returns and Allowances 175,000 Sales Discounts 25,000 Cost of Goods Sold 560,000 What is the gross profit rate? a. 56% b. 70% c. 44% d. 30%

197.

A company shows the following balances: Sales Revenue $ 800,000 Sales Returns and Allowances 75,000 Sales Discounts 25,000 Cost of Goods Sold 420,000 What is the gross profit rate? a. 53% b. 60% c. 40% d. 47%

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($800,000 − $75,000 − $25,000) − $420,000]  $700,000 = $40%

198.

What is a difference between the profit margin and the gross profit rate? a. None, these are interchangeable terms. b. The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income. c. The gross profit rate will normally be higher than the profit margin ratio. d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods were 7% of the selling price.

Ans: C, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

199.

Andrea’s Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company’s gross profit rate is 40%, Andrea’s will report monthly net sales revenue and cost of goods sold of a. $95,000 and $57,000. b. $93,000 and $37,200. c. $93,000 and $55,800. d. $95,000 and $55,800.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $95,000 − $2,000 − $93,000; $93,000  .60 = $55,800

Merchandising Operations

200.

5-39

Betty’s Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of a. $114,000 and $68,400. b. $111,600 and $44,640. c. $111,600 and $66,960. d. $114,000 and $66,960.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $114,000 − $2,400 = $111,600; $111,600  .60 = $66,960

201.

American Importers reports net income of $50,000 and cost of goods sold of $450,000. If the company’s gross profit rate was 40%, net sales were a. $750,000. b. $1,125,000. c. $1,175,000. d. $825,000.

202.

United Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. US&S’s gross profit rate was 40%, net sales were a. $600,000. b. $900,000. c. $960,000. d. $660,000.

*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as: a. Inventory 500 Accounts Payable 500 b. Accounts Payable 500 Purchases 500 c. Purchases 500 Accounts Payable 500 d. Accounts Payable 500 Inventory 500 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

5-40

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as: a. Inventory 200 Accounts Receivable 200 b. Sales Returns and Allowances 200 Accounts Receivable 200 c. Accounts Payable 200 Sales Returns and Allowances 200 d. Accounts Receivable 200 Sales Returns and Allowances 200 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan Industries. Using the periodic Inventory approach, Turner would record this transaction as: a. Inventory 150 Accounts Payable 150 b. Accounts Payable 150 Inventory 150 c. Purchase Returns and Allowances 150 Accounts Payable 150 d. Accounts Payable 150 Purchase Returns and Allowances 150 Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*206. Ramos Company receives a payment on account from Martinez Industries. Based on the original sale of $8,000 using the periodic inventory approach, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record? a. Cash 7,760 Sales Discounts 240 Inventory 8,000 b. Accounts Receivable 8,000 Cash 7,840 Purchase Discounts 160 c. Cash 7,760 Sales Discounts 240 Accounts Receivable 8,000 d. Cash 7,760 Purchase Discounts 240 Accounts Payable 8,000 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $8,000  .03 = $240 sales discount

Merchandising Operations

5-41

Answers to Multiple Choice Questions 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

c c b d b c b d a c c a a b a b d b a b

73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.

b d d c c a d a b b a d c a a b b b d c

93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.

c a d b b c a a b d d b c c c a d c b d

113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.

b d c c d a c d b b c a c d a c b c d c

133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.

c b a c d d c c b a d b b d d c c c d c

153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172.

c a b d c b b c d b b b d b c a d b a c

173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192.

d a c a c b b b b d d a c d c b b a d c

193. 194. 195. 196. 197. 198. 199. 200. 201. 202. *203. *204. *205. *206.

c b c d c c c c a a c b d c

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-42

BRIEF EXERCISES Be. 207 Presented here are the components in Rowland Company’s income statement. Determine the missing amounts. Sales Revenue_ $75,000 (c)

Cost of Goods Sold (a) $56,000

Gross _Profit $35,000 $59,000

Operating Expenses (b) $48,000

Net Income $17,000 (d)

Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 207 a. b. c. d.

(5 min.)

$ 40,000 $ 18,000 $115,000 $ 11,000

Be. 208 On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company. The selling price of the goods is $900 and the cost of goods is $600. Both companies use the perpetual inventory systems Journalize the transactions on the books of both companies. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Merchandising Operations

Solution 208

5-43

(5 min.)

Roberta’s Knickknacks records Sept. 4

Inventory ............................................................................ Accounts Payable .....................................................

900 900

Dolan Company records Sept. 4

Accounts Receivable ......................................................... Sales Revenue...........................................................

900

Cost of Goods Sold ............................................................ Inventory ...................................................................

600

900

600

Be. 209 Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14, 2014, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10, n/30. The inventory was sold on account for $60,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014, and the accounts receivables were settled on January 30, 2014. Prepare journal entries to record each of these transactions. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 209 (10 min.) Jan. 14

Jan. 21

Jan. 23

Jan. 30

Inventory............................................................................. Accounts Payable ......................................................

45,000

Accounts Receivable .......................................................... Sales Revenue...........................................................

60,000

Cost of Goods Sold ............................................................ Inventory ....................................................................

45,000

Accounts Payable ............................................................... Cash .......................................................................... Inventory ....................................................................

45,000

Cash .................................................................................. Sales Discounts .................................................................. Accounts Receivable..................................................

59,400 600

45,000

60,000

45,000

44,100 900

60,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-44 Be. 210

Prepare the journal entries to record the following transactions on Markowitz Company’s books using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was $70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased on February 6. The cost of the merchandise returned was $7,000. On February 16 Markowitz Company received the balance due from the Lyman Company. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 210 Feb 6

Feb 8

Feb 16

(5 min.)

Accounts Receivable .......................................................... Sales Revenue ...........................................................

105,000

Cost of Goods Sold ............................................................ Inventory ...................................................................

70,000

Sales Returns and Allowances ........................................... Accounts Receivable .................................................

14,000

Inventory ............................................................................ Cost of Goods Sold ...................................................

7,000

Cash ($91,000 x .98) .......................................................... Sales Discounts ................................................................. Accounts Receivable ($105,000 – $14,000) ..............

89,180 1,820

105,000

70,000

14,000

7,000

91,000

Be. 211 Lovett Company provides this information for the month of November, 2014: sales on credit $140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211

(5 min.) LOVETT COMPANY Income Statement(Partial) For the Month Ended November 30, 2014

Sales Revenue ................................................................... Less: Sales Returns and Allowances ............................... Sales Discounts ..................................................... Net Sales

$190,000 $ 8,000 2,000 180,000

10,000

Merchandising Operations

5-45

Be. 212 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 212

(5 min.)

Calculation of Net Purchases and Cost of goods purchased Purchases ........................................................................... Less: Purchases returns and allowances ......................... Purchase discounts ................................................ Net Purchases ................................................................... Add: Freight-in .................................................................... Cost of Goods Purchased ................................................

$570,000 $14,000 9,000

23,000 547,000 15,000 $562,000

Be. 213 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases 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 amounts to be reported for cost of goods sold and gross profit. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 213

(10 min.)

Calculation of cost of goods sold Inventory, beginning ............................................................ Cost of goods sold Purchases ........................................................................... Less: Purchases returns and allowances ......................... Purchase discounts ................................................ Net purchases ..................................................................... Add: Freight-In .................................................................... Cost of goods purchased .................................................... Cost of goods available for sale .......................................... Inventory, ending ................................................................ Cost of goods sold ..............................................................

$45,000 $620,000 $25,000 11,000

36,000 584,000 19,000 603,000 648,000 55,000 $593,000

Calculation of gross profit Net sales ............................................................................. Cost of goods sold .............................................................. Gross profit .........................................................................

$750,000 593,000 $157,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-46 Be. 214

Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following values. 1. Profit margin. 2. Gross profit rate. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214

(5 min.)

1. Profit margin =

Net income Net sales

$ 9,000 $150,000

=6%

2. Gross profit rate =

Gross profit Net sales

($150,000 - $96,000) $150,000

= 36%

EXERCISES Ex. 215 Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account. Instructions (a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best. (b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 215 (a)

(b)

(10 min.)

Yes, Sue should take the discount. Discount of 1% on $9,000 Interest received on $9,000 (for 20 days at 6%) Savings by taking the discount

$90 30 $60

($9,000  6%  20  360)

The equivalent annual interest rate is: 1%  360  20 = 18%.

Ex. 216 This information relates to Sherper Co. 1. On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10. 2. On April 6 paid freight costs of $900 on merchandise purchased from Newport. 3. On April 7 purchased equipment on account for $26,000. .

Merchandising Operations

Ex. 216

5-47

(Cont.)

4. On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000. 5. On April 15 paid the amount due to Newport Company in full. Instructions (a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co. Sherper Co. uses a perpetual inventory system. (b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216 (a)

(1) (2) (3) (4) (5)

(b)

(10 min.)

April 5 April 6 April 7 April 8 April 15

May 4

Inventory ...................................................... Accounts Payable .................................

22,000

Inventory ...................................................... Cash .....................................................

900

Equipment .................................................... Accounts Payable .................................

26,000

Accounts Payable......................................... Inventory ...............................................

2,000

Accounts Payable ($22,000 – $2,000) ................................... Inventory [($22,000 – $2,000)  2%] ................... Cash ($20,000 – $400)............................

Accounts Payable ($22,000 – $2,000) ................. Cash ...........................................................

22,000 900 26,000 2,000 20,000 400 19,600 20,000 20,000

Ex. 217 (a)

Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid $59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal entries that Bazil Company made to record the: (1) purchase of merchandise. (2) return of merchandise. (3) payment on account.

(b)

Weaver Company sold merchandise to Moore Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Moore Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Weaver Company made to record the: (1) sale of merchandise. (2) return of merchandise. (3) collection on account.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-48

Solution 217 (a)

To compute the amount due after returns but before the discount divide $59,400 by .99 (100% - 1%). $59,400  .99 = $60,000. Subtract $60,000 from $62,000 to determine that $2,000 of merchandise was returned. (1)

(2)

(3)

(b)

(15-20 min.)

Inventory ............................................................................ Accounts Payable ......................................................

62,000

Accounts Payable .............................................................. Inventory ...................................................................

2,000

Accounts Payable ($62,000 - $2,000) ................................ Inventory ($60,000 x .01) ........................................... Cash ($60,000 x .99) .................................................

60,000

62,000

2,000

600 59,400

Moore Company returns $4,000 of merchandise and owes $80,000 to Weaver Company. $78,400  $80,000 = .98 100% - 98% = 2% The missing discount percentage is 2%. $80,000  2% = $1,600 sales discount. $80,000 - $1,600 = $78,400 cash received on account. (1)

(2)

(3)

Accounts Receivable .......................................................... Sales Revenue ...........................................................

84,000

Cost of Goods Sold ............................................................. Inventory ....................................................................

63,000

Sales Returns and Allowances ........................................... Accounts Receivable .................................................

4,000

Inventory ............................................................................. Cost of Goods Sold .................................................... * (cost = sales price x .75 as shown in sales entries)

3,000*

Cash .................................................................................. Sales Discounts ................................................................. Accounts Receivable .................................................

84,000

63,000

4,000

3,000

78,400 1,600 80,000

Ex. 218 June 4

Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes Company. The cost of the merchandise was $6,300.

Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of $350 to Hayes.

Black paid the account in full.

Merchandising Operations

Ex. 218

5-49

(Cont.)

Instructions Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’ records. Assume use of the perpetual inventory system for both companies. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218

(15-20 min.)

(a)

Black’s books

June

Inventory Accounts Payable……………………………….

9,000

Accounts Payable………………………………………… Inventory

500

Accounts Payable………………………………………… Cash……………………………………………….

8,500

(b)

Hayes’ books

June

9,000

500

8,500

Accounts Receivable…………………………………….. Sales Revenue……………………………………

9,000

Cost of Goods Sold………………………………………. Inventory

6,300

Sales Returns and Allowance…………………………… Accounts Receivable…………………………….

500

Inventory Cost of Goods Sold

350

9,000

6,300

500

350

Cash……………………………………………………….. Accounts Receivable…………………………….

8,500 8,500

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-50 Ex. 219

On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150 each. During the month of October the following transactions occurred. Assume Kile uses a perpetual inventory system. Oct. 4

Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company, terms 2/10, n/30.

Paid freight of $1,000 on the October 4 purchase.

Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.

Received credit from the Nixon Bicycle Company for the return of 8 defective bicycles.

Issued a credit memo to Team America for the return of a defective bicycle.

Paid Nixon Bicycle Company in full, less discount.

Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 219 Oct. 4

(15-20 min.)

Inventory ............................................................................ Accounts Payable ......................................................

26,100

Inventory ............................................................................ Cash ..........................................................................

1,000

Accounts Receivable .......................................................... Sales Revenue ...........................................................

2,500

Cost of Goods Sold ............................................................ Inventory ...................................................................

1,500

Accounts Payable .............................................................. Inventory ...................................................................

1,160

Sales Returns and Allowances ........................................... Accounts Receivable .................................................

250

Inventory ............................................................................ Cost of Goods Sold ...................................................

150

Accounts Payable ($26,100 - $1,160) ................................ Cash ($24,940  .98).................................................. Inventory ($24,940  .02) ..........................................

24,940

26,100

1,000

2,500

1,500

1,160

250

150

24,441 499

Merchandising Operations

5-51

Ex. 220 On September 1, Pennington Supply had an inventory of 20 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 50 backpacks at $25 each from Sievert, terms 2/10, n/30. 6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that were defective. 9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30. 13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30. 14 Paid Sievert in full, less discount.

Instructions Journalize the September transactions for Pennington Supply. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 220 Sept.

(15-20 min.)

Inventory ......................................................................... Accounts Payable ..................................................

1,250

Accounts Payable ........................................................... Inventory ................................................................

100

Accounts Receivable ...................................................... Sales Revenue ........................................................

1,000

Cost of Goods Sold ......................................................... Inventory ................................................................

625

Accounts Receivable ...................................................... Sales Revenue ........................................................

600

Cost of Goods Sold ......................................................... Inventory ................................................................

375

Accounts Payable ($1,250 - $100) .................................. Cash ($1,150  .98) ................................................ Inventory ($1,150  .02) ...........................................

1,150

1,250

100

1,000

625

600

375

1,127 23

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-52 Ex. 221

Petersen Book Store entered into the transactions listed below. In the journal provided, prepare Petersen’s necessary entries, assuming use of the perpetual inventory system. July

Purchased $1,600 of merchandise on credit, terms n/30.

Returned $100 of the items purchased on July 6.

Paid freight charges of $90 on the items purchased July 6.

Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had an inventory cost of $2,700.

Of the merchandise sold on July 19, $300 of it was returned. The items had cost the store $150.

Received payment in full from the customer of July 19.

Paid for the merchandise purchased on July 6.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 221 July

(15-20 min.) Inventory Accounts Payable………………………………………

1,600

Accounts Payable……………………………………………… Inventory

100

Inventory Cash ……………………………………………………

Accounts Receivable …………………………………………. Sales Revenue…………………………………………

4,400

Cost of Goods Sold……………………………………………. Inventory

2,700

Sales Returns and Allowances……………………………….. Accounts Receivable………………………………….

300

Inventory Cost of Goods Sold……………………………………

150

Cash ($4,100 x .99) …………………………………………… Sales Discounts………………………………………………… Accounts Receivable

4,059 41

Accounts Payable ($1,600 - $100)…………………………… Cash

1,500

1,600

100

4,400

2,700

300

150

4,100

1,500

Merchandising Operations

5-53

Ex. 222 Presented here are selected transactions for the Leiss Company during April. Leiss uses the perpetual inventory system. April

Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.

Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.

Purchased merchandise from Ryan Company for $1,000, n/30.

Received payment from Mann Company for purchase of April 1 less appropriate discount.

Paid Wild Corporation for April 2 purchase.

Instructions Journalize the April transactions for Leiss Company. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 222 April

(12-16 min.) Accounts Receivable Sales Revenue…………………………………………

4,000

Cost of Goods Sold Inventory

2,500

Inventory Accounts Payable……………………………………..

8,000

Inventory Accounts Payable……………………………………..

1,000

Cash ($4,000 x .98) Sales Discounts ($4,000 x .02) Accounts Receivable…………………………………

3,920 80

Accounts Payable……………………………………………… Inventory ($8,000 x .01) Cash ($8,000 x .99)

8,000

4,000

2,500

8,000

1,000

4,000

80 7,920

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-54 Ex. 223

Norman Company completed the following transactions in October: Norman uses a perpetual inventory system. Credit Sales Date Amount Oct. 3 $ 800 Oct. 11 1,500 Oct. 17 5,000 Oct. 21 1,700 Oct. 23 6,000

Sales Returns Date Amount

Terms 2/10, n/30 3/10, n/30 1/10, n/30 2/10, n/60 2/10, n/30

Oct. 14 Oct. 20 Oct. 23 Oct. 27

Date of Collection Oct. 8 Oct. 16 Oct. 29 Oct. 27 Oct. 28

$ 300 1,200 400 500

Instructions (a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the (1) Oct. 17 sale. The merchandise sold had a cost of $3,000. (2) Oct. 23 sales return. The merchandise returned had a cost of $200. (3) Oct. 28 collection. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223

$784

[Sales $800 - Sales discount $16 ($800  .02)]

$1,164

[Sales $1,500 - Sales return $300 = $1,200; $1,200 - Sales discount $36 ($1,200  .03)]

$3,800

[Sales $5,000 - Sales return $1,200 = $3,800; (discount lapsed)]

$1,274

[Sales $1,700 - Sales return $400 = $1,300; $1,300 - Sales discount $26 ($1,300  .02)]

$5,390

[Sales $6,000 - Sales return $500 = $5,500; $5,500 - Sales discount $110 ($5,500  .02)]

(a) Oct. 8

(b) (1)

(2)

(3)

(20 min.)

Oct. 17

Oct. 23

Oct. 28

Accounts Receivable ........................................ Sales Revenue..........................................

5,000

Cost of Goods Sold............................................ Inventory ...................................................

3,000

Sales Returns and Allowances ......................... Accounts Receivable ................................

400

Inventory............................................................ Cost of Goods Sold ...................................

200

Cash ................................................................. Sales Discounts ................................................ Accounts Receivable ................................

5,390 110

5,000 3,000 400 200

5,500

Merchandising Operations

5-55

Ex. 224 The following transactions are for Kale Company. (1) (2) (3)

On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms 1/10, n/10. The cost of the merchandise sold was $320,000. On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise purchased on December 3. On December 13 Kale Company received the balance due from Thomson Co.

Instructions (a) Prepare the journal entries to record these transactions on the books of Kale Company. Kale uses a perpetual inventory system. (b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 224

(10 min.)

(a) (1) Dec 3 Accounts Receivable ........................................ Sales Revenue ..........................................

500,000

Cost of Goods Sold .......................................... Inventory ...................................................

320,000

(2) Dec 8 Sales Returns and Allowances ......................... Accounts Receivable .................................

20,000

(3) Dec. 13 Cash ($480,000 – $4,800) ................................ Sales Discounts [($500,000 – $20,000)  1%]...................... Accounts Receivable ($500,000 – $20,000)...................

475,200

(b)

Jan 2

Cash................................................................. Accounts Receivable ($500,000 – $20,000) ...............................

500,000 320,000 20,000

4,800 480,000 480,000 480,000

Ex. 225 Instructions State the missing items identified by ?. 1. Gross profit - Operating expenses = ? 2. Cost of goods sold + Gross profit = ? 3. Sales revenue - (? + ?) = Net sales 4. Income from operations + ? - ? = Net income 5. Net sales - Cost of goods sold = ? Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-56

Solution 225 (5 min.) 1. 2. 3. 4. 5.

Income from operations (or Net income) Net sales Sales discounts, Sales returns and allowances Other revenues and gains, Other expenses and losses Gross profit

Ex. 226 Financial information is presented here for two companies. King Company $56,000 ? 50,000 33,000 ? 12,000 ?

Sales revenue Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Net income

Queen Company ? 5,000 80,000 ? 32,000 ? 14,000

Instructions (a) Compute the missing amounts. (b) Calculate the profit margin and the gross profit rate for each company. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 226 (a)

(10 min.)

King Company

Sales returns = $6,000 ($56,000 – $50,000 = $6,000) Gross profit = $17,000 ($50,000 – $33,000 = $17,000) Net income = $5,000 ($17,000 – $12,000) Queen Company Sales revenue = $85,000 ($80,000 + $5,000) Cost of goods sold = $48,000 ($80,000 – $32,000) Operating expenses = $18,000 ($32,000 – $14,000) (b)

Profit margin Gross profit rate

King $5,000 = .10 $50,000

Queen $14,000 = .175 $80,000

$17,000 $50,000

$32,000 $80,000

= .34

= .40

Merchandising Operations

5-57

Ex. 227 The following information is available for Quayle Company: Sales revenue Sales returns and allowances Cost of goods sold Operating expenses Interest expense Interest revenue

$618,000 20,000 398,000 114,000 19,000 20,000

Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014. 2. Compute the profit margin. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 227 1.

(20 min.) QUAYLE COMPANY Income Statement For the Year Ended December 31, 2014

Sales Sales revenue ..................................................................... Less: Sales returns and allowances ................................. Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit .............................................................. Operating expenses . Income from operations ...................................................... Other revenues and gains Interest revenue ...................................................... Other expenses and losses Interest expense ...................................................... Net income.......................................................................... 2. Profit margin: $87,000 ÷ $598,000 = 14.5%

$618,000 20,000 $598,000 398,000 200,000 114,000 86,000 20,000 19,000 $ 87,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

5-58 Ex. 228

The adjusted trial balance of McCoy Company included the following selected accounts: Debit Credit Sales Revenue $645,000 Sales Returns and Allowances $ 50,000 Sales Discounts 9,500 Cost of Goods Sold 396,000 Freight-Out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Salaries and Wages Expense 84,000 Utilities Expense 23,000 Depreciation Expense 3,500 Interest Revenue 25,000 Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014. 2. Calculate the profit margin and gross profit rate. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 228 1.

(20 min.) MCCOY COMPANY Income Statement For the Year Ended December 31, 2014

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. Profit margin = $68,000 ÷ $585,500 = 11.6% Gross profit rate = $189,500 ÷ $585,500 = 32.4% .

$645,000 $ 50,000 9,500

59,500 585,500 396,000 189,500

$ 84,000 23,000 15,000 3,500 2,000 127,500 62,000 25,000 19,000 $ 68,000

Merchandising Operations

5-59

Ex. 229 Presented below is information for Zales Company for the month of January 2014. Cost of goods sold $280,000 Freight-out 7,000 Insurance expense 12,000 Salaries and wages expense 42,000

Rent expense Sales discounts Sales returns and allowances Sales revenue

$35,000 8,000 13,000 421,000

Instructions (a) Prepare a multiple-step income statement. (b) Calculate the profit margin and the gross profit rate. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 229

(20 min.)

(a)

ZALES COMPANY Income Statement For the Month Ended January 31, 2014 _____________________________________________________________________________ Sales Sales revenue ...................................................... $421,000 Less: Sales returns and allowances ........................................... $13,000 Sales discounts.......................................... 8,000 21,000 Net sales.............................................................. 400,000 Cost of goods sold ......................................................... 280,000 Gross profit .................................................................... 120,000 Operating expenses Salaries and wages expense ................................ 42,000 Rent expense........................................................ 35,000 Insurance expense................................................ 12,000 Freight-out ............................................................ 7,000 Total operating expense ............................... 96,000 Net income ................................................................... $ 24,000 (b) Profit margin =

Gross profit rate =

$24,000 $400,000

= .06

$120,000 $400,000

= .30

Ex. 230 The trial balance of Rachel Company at the end of its fiscal year, August 31, 2014, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000. Instructions Prepare a cost of goods sold section for the year ending August 31. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Solution 230

(10 min.)

Inventory, September 1, 2013 ................................................. Purchases ............................................................................... Less: Purchase returns and allowances ................................. Net purchases ......................................................................... Add: Freight-in ........................................................................ Cost of goods purchased......................................................... Cost of goods available for sale............................................... Inventory, August 31, 2014...................................................... Cost of goods sold ............................................................

$ 29,200 $144,000 5,000 139,000 8,000 147,000 176,200 25,000 $151,200

Ex. 231 Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc. Mikey $ 250 1,700 40 (a) 130 (b) 2,240 310 (c)

Beginning inventory Purchases Purchase returns and allowances Net purchases Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

Nancie $ 120 1,080 (d) 1,020 (e) 1,230 1,350 (f) 1,130

Oscar $ (g) 43,590 (h) 41,590 2,740 (i) 49,530 6,230 43,300

Instructions Fill in the lettered blanks to complete the cost of goods sold sections. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 231

(10 min.)

(a) (b) (c)

$1,660 ($1,700 – $40) $1,790 ($1,660 + $130) $1,930 ($2,240 – $310)

(d) (e) (f)

$60 $210 $220

(g) (h) (i)

$5,200 ($49,530 – $44,330 from (i)) $2,000 ($43,590 – $41,590) $44,330 ($41,590 + $2,740)

($1,080 – $1,020) ($1,230 – $1,020) ($1,350 – $1,130)

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Ex. 232 The following information is available from the annual reports of Flynn Company and Tolan Inc. (Amounts in millions) Flynn Tolan $32,622 $40,457 20,739 24,431 7,428 9,188 4,455 6,838 2,594 4,072

Sales revenue Cost of goods sold Operating expenses Income before taxes Net income Instructions

1. Calculate the profit margin and gross profit rate for each company. 2. What conclusion concerning the relative profitability of the two companies can be drawn from these data? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 232

(15 min.)

1. Profit margin:

Gross profit rate:

Flynn $2,594 ———— = 8.0% $32,622

Tolan $4,072 ———— = 10.1% $40,457

$32,622 - $20,739 ———————— $32,622

$40,457 - $24,431 ———————— $40,457

$11,883 ———— = 36.4% $32,622

$16,026 ———— = 39.6% $40,457

2. Because all of Tolan’s profitability ratios are higher than Flynn’s, it can be concluded that Tolan is the more profitable of the two companies. *Ex. 233 June 4

Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert Company. The cost of the merchandise was $2,500.

Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of $400 to Johnson.

Deere paid the account in full.

Instructions Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s records. Assume use of the periodic inventory system for both companies. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

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*Solution 233

(15-20 min.)

(a)

Deere’s books

June

Purchases ……………………………………………….. Accounts Payable……………………………….

3,500

Accounts Payable………………………………………… Purchase Returns and Allowances…………….

600

Accounts Payable………………………………………… Cash……………………………………………….

2,900

(b)

Gilbert’s books

June

3,500

600

2,900

Accounts Receivable…………………………………….. Sales Revenue……………………………………

3,500

Sales Returns and Allowance…………………………… Accounts Receivable…………………………….

600

Cash……………………………………………………….. Accounts Receivable…………………………….

2,900

3,500

600

2,900

*Ex. 234 On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each. The company uses a periodic inventory system. During September, the following transactions and events occurred. Sept.

4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective. 9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30. 13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30. 14 Paid Neufeld in full, less discount.

Instructions Journalize the September transactions for Hendricks Supply. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Merchandising Operations

*Solution 234 Sept.

5-63

(15-20 min.)

Purchases .... ................................................................... Accounts Payable ..................................................

1,000

Accounts Payable ........................................................... Purchase Returns and Allowances .........................

100

Accounts Receivable ...................................................... Sales Revenue ........................................................

900

Accounts Receivable ...................................................... Sales Revenue ........................................................

300

Accounts Payable ($1,000 - $100) .................................. Cash ($900  .98) ................................................... Purchase Discounts ($900  .02) ...........................

900

1,000

100

900

300

882 8

*Ex. 235 Presented here are selected transactions for the Foyle Company during April. Foyle uses the periodic inventory system. April

Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.

Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.

Purchased merchandise from Ryan Company for $2,000, n/30.

Received payment from Land Company for purchase of April 1 less appropriate discount.

Paid Webb Corporation for April 2 purchase.

Instructions Journalize the April transactions for Foyle Company. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 235 April

(12-16 min.) Accounts Receivable…………………………………………… Sales Revenue…………………………………………

4,000

Purchases……………………………………………………… Accounts Payable……………………………………..

6,000

Purchases ……… ……………………………………………… Accounts Payable……………………………………..

2,000

4,000

6,000

2,000

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*Solution 235 (Cont.) 10 Cash ($4,000 x .98) … ……………………………………….. Sales Discounts ($4,000 x .02)……………………………….. Accounts Receivable……………………………………

3,920 80 4,000

Accounts Payable………………………………………………… Purchase Discounts ($6,000 x .01)….. Cash ($6,000 x .99)…………………………………….

6,000 60 5,940

*Ex. 236 This information relates to Tandi Co. 1. 2. 3. 4. 5.

On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30. On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company. On April 7 purchased equipment on account for $26,000. On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000. On April 15 paid the amount due to Buehler Company in full.

Instructions (a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a periodic inventory system. (b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 236

(10 min.)

(a)

(1) (2) (3) (4)

(5)

(b)

April April April April

6 7 8

April 15

May 4

Purchases ................................................. Accounts Payable ...............................

33,000

Freight-In ................................................... Cash ...................................................

900

Equipment ................................................. Accounts Payable ...............................

26,000

Accounts Payable ...................................... Purchase Returns and Allowances ...... ($33,000 – $3,000)

3,000

Accounts Payable ...................................... Purchase Discounts............................ [($33,000 – $3,000)  2%] Cash ($30,000 – $600) .......................

30,000

Accounts Payable ...................................... ($33,000 – $3,000) Cash ...................................................

30,000

33,000 900 26,000 3,000

600 29,400

30,000

Merchandising Operations

5-65

COMPLETION STATEMENTS 237. A _________________ buys and sells inventory rather than performing services as their primary source of revenue. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

238. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

239. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

240. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

241. The freight costs incurred by a seller on outgoing inventory are an ________________ to the seller. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

242. When a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer requires a debit to the ___________________ account and a credit to the ________________ account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

243. Every credit sales transaction should be supported by a _________________ that provides written evidence of the sale. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

244. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have normal _______________ balances. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

245. Gross profit is obtained by subtracting ________________ from ________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

246. A useful measure of profitability is the ratio of net income to _____________. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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5-66

Answers to Completion Statements 237. merchandiser 238. gross profit 239. perpetual 240. Inventory 241. operating expense 242. Sales Returns and Allowances, Accounts Receivable

243. 244. 245. 246.

Sales invoice contra revenue, debit cost of goods sold, net sales net sales

MATCHING 247. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Net sales Sales discount Credit terms Periodic inventory system Gross profit rate

F. G. H. I. J.

Contra revenue Freight-out Gross profit Sales invoice Purchase discount

____

1. A reduction given by the seller for prompt payment of a credit sale.

____

2. Provides support for a credit sale.

____

3. Gross profit divided by net sales.

____

4. Sales less sales returns and allowances and sales discounts.

____

5. Specifies the amount of cash discount and time period during which it is offered.

____

6. Net sales less cost of goods sold.

____

7. Freight cost to deliver goods to customers reported as an operating expense.

____

8. Requires a physical count of goods on hand to compute cost of goods sold.

____

9. A cash discount claimed by a buyer for prompt payment of a balance due.

____ 10. An account that is offset against a revenue account on the income statement. Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

B I E A C

6. 7. 8. 9. 10.

H G D J F

Merchandising Operations

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SHORT-ANSWER ESSAY QUESTIONS S-A-E 248 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 248 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 249 A merchandising company frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 249 The contra accounts related to the sale of goods that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from the sale of goods, rather than a cost used to help earn revenue. S-A E 250 Alice Gray believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 250 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.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 251 To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 251 In most industries returns are not significant, and they are therefore accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period's sales, so that revenues will not be overstated during the period. S-A E 252 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 252 The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed selling and administrative expenses, income from operations, other revenues and gains, and other expenses and losses. For companies using the periodic inventory method the computation of cost of goods sold using beginning and ending inventories, purchases (gross and net) are also broken out. S-A-E 253 Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 253 Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted directly from net sales on the income statement. Operating expenses, on the other hand, include selling and general administrative expenses; they appear directly below the gross profit on the income statement. S-A E 254 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Merchandising Operations

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Solution 254 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 255 What factors affect a company's gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 255 Factors affecting a company's gross profit rate include selling products with a higher (or lower) "markup," increased competition that results in lower selling prices, and price increases or decrease from suppliers. S-A E 256 The following are the gross profit percentages for Naylor Company: Year 2012 2013 2014 2015

Gross Profit Percentage 33% 34% 36% 13%

List four possible explanations for the low gross profit percentage in 2015. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 256 Possible explanations for 2015’s low gross profit percentage: 1. 2. 3. 4. 5. 6.

Errors have occurred. Cost of buying merchandise inventory increased, but the selling price was not increased. Merchandise inventory has been stolen. Some sales were not recorded. The economy is weak and commissioned sales personnel lowered selling prices without authorization. Inferior goods are being sold and customers are subsequently given sales allowances which reduce net sales.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 257

(Ethics)

Hiller 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, Hiller 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. Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Donna to check the shipping terms. She did so, and found the notation "FOB (free on board) shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Hiller should consider it received when it reached Hiller's dock. She did not record the sale until after month end. Required: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 257 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. Donna does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Hiller 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 Donna compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known how to interpret the shipping documents. S-A E 258

(Communication)

Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On May 30, 2014, each made a large sale. Both orders were shipped on May 31, 2014, the last day of the month, and both were received by the customers on June 5, 2014. Sandy's sale was FOB shipping point (ownership passes to buyer at time of shipping), and Mandy's was FOB destination (ownership passes to buyer at time of receipt). The printed policy of the company states that sales "count" for purposes of calculating bonuses on the date that ownership passes to the purchaser. Sandy's sale was therefore counted in her May monthly total of sales while Mandy's sale was not. Mandy is quite upset. She has asked you to just include it, or to take Sandy's off as well. She also has told you that you are being unethical for allowing Sandy to get a bonus just for choosing a particular shipping method.

Merchandising Operations

S-A E 258

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(Cont.)

As the accounting manager write a memo to Mandy on June 15, 2014, and explain your position. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 258 MEMO TO:

Mandy Starr

FROM:

Accounting Manager

RE:

Sales Bonuses

DATE:

June 15, 2014

As you know, sales bonuses are based upon the revenue generated by each salesperson in accordance with the printed policy of the company. This policy states that you will receive bonus credit based on the date of title transfer for goods sold. Your disputed sale of May 30, 2014, was shipped on May 31, 2014, with terms “FOB Destination”. Our records indicate that this shipment was received by the customer on June 5, 2014. This puts title transfer into your June 2014 bonus payment. I can appreciate your being upset that this large sale was not counted in your May 2014 bonus but it will appear in your June 2014 bonus payment in accordance with the policy which is consistency applied. It would be unethical and unprofessional for me to change the written policy and it would violate the consistency of that policy’s application. I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help. (signature)

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

IFRS QUESTIONS 1.

The Income statement is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The basic accounting entries for merchandising are a. the same under GAAP and under IFRS. b. required under GAAP but not under IFRS. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Companies cannot use the a. periodic inventory system under GAAP. b. periodic inventory system under IFRS. c. perpetual system under IFRS. d. None of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. All of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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Under GAAP, companies generally classify income statement items by a. function. b. nature. c. nature or function d. date incurred.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies must classify income statement items by a. function. b. nature. c. nature or function d. date incurred.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, income statement items are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10.

Under IFRS, income statement items classified by nature are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

11.

For the income statement, IFRS requires a. single-step approach. b. multiple-step approach. c. single-step approach or multiple-step approach. d. no specific income statement approach.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12.

Under IFRS, companies can apply revaluation to a. land, buildings, and intangible assets. b. land, buildings, but not intangible assets. c. intangible assets, but not land. d. no assets.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

13.

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. net income and other comprehensive income. d. neither net income nor other comprehensive income.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

5-74 14.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15.

The number of years of income statement information to be presented is a. 2 years under both GAAP and IFRS. b. 3 years under both GAAP and IFRS. c. 2 years under GAAP and 3 years under IFRS. d. 3 years under GAAP and 2 years under IFRS.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

CHAPTER 6 REPORTING AND ANALYZING INVENTORY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

3 3 3 3 3 4 4 4 4

K K K K K K K K K

37. 38. 39. 40. *41. *42. *43. *44.

5 5 6 6 7 7 8 8

K C K K K K K K

135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164.

3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5

C K C AP AP AP K C C C K K K K AP AN AN C AN AN AN AN C K K K C AP AP AP

165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. *188. *189. *190. *191.

5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 8 8 8 8 8

AP C AP AP AP AP K K K AP C C AN AN AN C K AP AP AP AP AP AN AN AN C C

198.

True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.

1 1 1 1 1 1 1 1 1

K K K K K K K K K

10. 11. 12. 13. 14. 15. 16. 17. 18.

1 2 2 2 2 2 2 3 3

K K K K K K K K K

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. 73. 74.

1 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 2

K K K K K K K K K K K K K K K AP AP K C K K AP AP AP C AP AP AP AP AP

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. 103. 104.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

AP AP AP AP AP AP AP AP AP K K K C AP AP AP AP K K K K K K K K K AP AP AP AP

19. 20. 21. 22. 23. 24. 25. 26. 27.

3 3 3 3 3 3 3 3 3

K C C C K K K K K

28. 29. 30. 31. 32. 33. 34. 35. 36.

Multiple Choice Questions 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. 133. 134.

2 2 2 3 3 3 3 3 3 3 3 2 3 2 3 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3

AP K C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C C C C C C C K K

Brief Exercises 192. 193.

1 2

K AP

194. 195.

2 2

AP AP

196. 197.

2 4

C AP

6-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

199. 200. 201. 202. 203.

1 1 1 2 2

AN AN AN AP AP

204. 205. 206. 207. 208.

2 2 2 2 2

224. 225. 226.

1 1 1

K K K

227. 228. 229.

2 3 3

235.

1-6

Exercises AP 209. 2 AP 214. AP 210. 2 AP 215. AP 211. 4 AP *216. AP 212. 5 AN *217. AP 213. 6 AN *218. Completion Statements K 230. 2 K 233. K 231. 2 K 234. K 232. 4 K Matching

Short Answer Essay 236. 1 K 238. 3 C 240. 3 C 242. 237. 2 K 239. 3 K 241. 3 C 243. *This topic is dealt with in an Appendix to the chapter.

6 6 7 7 7

AP AP AP AP AP

5 6

K K

4 6

C C

*219. *220. *221. *222. *223.

8 8 8 8 8

AN AN AN AN AN

244. 245.

1 1

E AN

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item 1. 2. 3. 4. 5. 6. 7.

Type TF TF TF TF TF TF TF

Item 8. 9. 10. 45. 46. 47. 48.

Type TF TF TF MC MC MC MC

Item 49. 50. 51. 52. 53. 54. 55.

Type MC MC MC MC MC MC MC

Item 56. 57. 58. 59. 60. 61. 62.

Type MC MC MC MC MC MC MC

Item 63. 192. 199. 200. 201. 224. 225.

Type MC BE Ex Ex Ex CS CS

Item 226. 235. 236. 244. 245.

Type CS Ma SA SA CS

11. 12. 13. 14. 15. 16. 64. 65. 66. 67. 68. 69. 70. 71.

TF TF TF TF TF TF MC MC MC MC MC MC MC MC

72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC

Learning Objective 2 86. MC 100. MC 87. MC 101. MC 88. MC 102. MC 89. MC 103. MC 90. MC 104. MC 91. MC 105. MC 92. MC 106. MC 93. MC 116. MC 94. MC 118. MC 95. MC 120. MC 96. MC 121. MC 97. MC 122. MC 98. MC 123. MC 99. MC 193. BE

194. 195. 196. 202. 203. 204. 205. 206. 207. 208. 209. 210. 227. 230.

BE BE BE Ex Ex Ex Ex Ex Ex Ex Ex Ex CS CS

231. 235. 237.

CS Ma SA

Reporting and Analyzing Inventory ` Learning Objective 3 Item 17. 18. 19. 20. 21. 22. 23. 24. 25.

Type TF TF TF TF TF TF TF TF TF

Item 26. 27. 28. 29. 30. 31. 32. 108. 109.

Type TF TF TF TF TF TF TF MC MC

Item 110. 111. 112. 113. 114. 115. 117. 119. 124.

Type MC MC MC MC MC MC MC MC MC

Item 134. 135. 136. 137. 138. 139. 140. 141. 142.

Type MC MC MC MC MC MC MC MC MC

Item 143. 144. 228. 229. 235. 238. 239. 240. 241.

Type MC MC CS CS Ma SA SA SA SA

33. 34. 35.

TF TF TF

36. 145. 146.

TF MC MC

Learning Objective 4 147. MC 150. MC 148. MC 151. MC 149. MC 197. BE

211. 232. 235.

Ex CS Ma

242.

37. 38. 152. 153. 154.

TF TF MC MC MC

155. 156. 157. 158. 159.

MC MC MC MC MC

Learning Objective 5 160. MC 165. MC 161. MC 166. MC 162. MC 167. MC 163. MC 168. MC 164. MC 169. MC

170. 198. 212. 233. 235.

MC BE Ex CS Ma

39. 40. 171.

TF TF MC

172. 173. 174.

MC MC MC

Learning Objective 6 175. MC 178. MC 176. MC 179. MC 177. MC 180. MC

213. 214. 215.

Ex Ex Ex

234. 235. 243.

CS Ma SA

41. 42.

TF TF

181. 182.

MC MC

Learning Objective 7 183. MC 185. MC 184. MC 186. MC

216. 217.

Ex Ex

218.

MC MC

Learning Objective 8 189. MC 191. MC 190. MC 219. Ex

220. 221.

Ex Ex

222. 223.

Ex Ex

43. 44.

TF TF

187. 188.

Note: TF = True-False MC = Multiple Choice Ma = Matching

Type MC MC MC MC MC MC MC MC MC

Item 125. 126. 127. 128. 129. 130. 131. 132. 133.

C = Completion Ex = Exercise SA = Short Answer Essay

6-3

6-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. Determine how to classify Inventory and inventory quantities. Merchandisers need only one inventory classification. merchandise inventory to describe the different items that make up total inventory. Manufacturers, on the other hand, usually classify inventory into three categories: finished goods work in process and raw materials. To determine inventory quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit on an consignment. 2. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost. 3. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current value. LIFO results in the lowest income taxes (because of lower taxable income). 4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies 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. Compute and interpret the inventory turnover. The inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level. 6. Describe the LIFO reserve and explain its importance for comparing results of different companies. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover. *7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new average cost is computed after each purchase.

Reporting and Analyzing Inventory

6-5

* 8. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g. overstatement of inventory results in understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g. overstatement of inventory results in overstatement of net income). If ending inventory errors are not corrected in the following period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities.

6-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

TRUE-FALSE STATEMENTS 1.

Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A manufacturer’s inventory consists of raw materials, work in process, and finished goods.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under the periodic inventory system, both the sales amount and the cost of goods sold amount are recorded when each item of merchandise is sold.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

Goods held on consignment should be included in the consignor’s ending inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

In accounting for inventory, the assumed flow of costs must match the physical flow of goods.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

12.

6-7

Inventory methods such as FIFO and LIFO deal more with flow of costs than with flow of goods.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

13.

The average cost inventory method relies on a simple average calculation.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

14.

If prices never changed there would be no need for alternative inventory methods.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15.

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

16.

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

17.

The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19.

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20.

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-8 23.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A company may use more than one inventory cost flow method at the same time.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26.

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

27.

In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

28.

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31.

The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

32.

Computers has made the periodic inventory system more popular and easier to apply.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

33.

When the market value of inventory is lower than its cost, the inventory is written down to its market value.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

34.

The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

35.

6-9

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36.

Under the LCM basis, market is defined as selling price, not current replacement cost.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37.

The inventory turnover is calculated as cost of goods sold divided by ending inventory.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

38.

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

39.

The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

The FIFO reserve is a required disclosure for companies that use FIFO.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*41.

When the average cost method is applied in a perpetual inventory system, the sale of goods will change the unit cost that remains in inventory.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*42.

When the average cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*43.

An error in the ending inventory of the current period will have a similar effect on net income of the next accounting period.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*44.

An error that overstates the ending inventory will also cause net income for the period to be overstated.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

6-10

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.

F T F T T F F T

9. 10. 11. 12. 13. 14. 15. 16.

T T F T F T T F

17. 18. 19. 20. 21. 22. 23. 24.

T F F T T T T F

25. 26. 27. 28. 29. 30. 31. 32.

F T F T T F T F

33. 34. 35. 36. 37. 38. 39. 40.

T T F F F T T F

*41. *42. *43. *44.

F T F T

MULTIPLE CHOICE QUESTIONS 45.

Manufactured inventory that has begun the production process but is not yet completed is a. work in process. b. raw materials. c. merchandise inventory. d. finished goods.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

46.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for sake of verification. b. the items counted are compared to the inventory account balance. c. a second employee counts the inventory and compares the result to the count made by the first employee. d. all prenumbered inventory tags are accounted for.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

49.

6-11

An employee assigned to counting computer monitors in boxes should a. estimate the number if there is a large quantity to be counted. b. read each box and rely on the box description for the contents. c. determine that the box contains a monitor. d. rely on the warehouse records of the number of computer monitors.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

50.

After the physical inventory is completed, a. quantities are listed on inventory summary sheets. b. quantities are entered into various general ledger inventory accounts. c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets. d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

51.

When is a physical inventory usually taken? a. When goods are not being sold or received. b. When the company has its greatest amount of inventory. c. At the end of the company’s fiscal year. d. When the company has its greatest amount of inventory and at the end of the company's fiscal year.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

52.

Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. d. All of these answer choices should be included.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

Tidwell Company's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases made (3) FOB destination (4) FOB shipping point. Which items should be included in Tidwell's inventory at December 31? a. Sales made FOB shipping point and purchase made FOB destination b. (1) and (4) c. (1) and (3) d. (2) and (4)

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-12 54.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55.

Goods held on consignment are a. never owned by the consignee. b. included in the consignee’s ending inventory. c. kept for sale on the premises of the consignor. d. included as part of no one’s ending inventory.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56.

Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method? a. It limits the risk of having obsolete items in inventory. b. Companies may not have quantities to meet customer demand. c. It lowers inventory levels and costs. d. Companies can respond to individual customer requests.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

57.

When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? a. To check the accuracy of the perpetual inventory records b. To determine cost of goods sold for the accounting period c. To compute inventory ratios d. All are a purpose of taking a physical inventory when a perpetual inventory system is used.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

Which statement is false? a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period. c. An inventory count is generally more accurate when goods are not being sold or received during the counting. d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

59.

6-13

Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Reeves, FOB destination b. Goods that Reeves is holding on consignment for Parker Company c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

At December 31, 2014 Mohling Company’s inventory records indicated a balance of $602,000. Upon further investigation it was determined that this amount included the following: • $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd • $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $6,000 of goods received on consignment from Dollywood Company What is Mohling’s correct ending inventory balance at December 31, 2014? a. $490,000 b. $596,000 c. $410,000 d. $484,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $602,000 − $112,000 − $6,000 = $484,000

61.

At December 31, 2014 Howell Company’s inventory records indicated a balance of $858,000. Upon further investigation it was determined that this amount included the following: • $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd • $111,000 in goods sold by Howell with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $9,000 of goods received on consignment from Westwood Company What is Howell’s correct ending inventory balance at December 31, 2014? a. $690,000 b. $849,000 c. $570,000 d. $681,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $858,000 − $168,000 − $9,000 = $681,000

62.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-14 63.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to: a. check the accuracy of the records. b. determine the amount of wasted raw materials. c. determine losses due to employee theft. d. determine ownership of the goods.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64.

Inventory costing methods place primary reliance on assumptions about the flow of a. goods. b. costs. c. resale prices. d. values.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66.

Alpha First Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,092 b. $1,131 c. $1,386 d. $1,368

Reporting and Analyzing Inventory

67.

6-15

Baker Bakery Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,092 b. $1,131 c. $1,368 d. $1,386

68.

Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is a. $1,229. b. $1,368. c. $1,323. d. $1,260.

69.

Echo Sound Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the average cost method. d. not determinable.

Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

6-16 70.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Atom Company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,105. b. $1,100. c. $1,170. d. $1,180.

71.

Quark Inc. just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,105. b. $1,100. c. $1,170. d. $1,180.

72.

A company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $1,134. b. $1,180. c. $1,100. d. $1,120.

Reporting and Analyzing Inventory

73.

6-17

A company purchased inventory as follows: 200 units at $5.00 300 units at $5.50 The average unit cost for inventory is a. $5.00. b. $5.25. c. $5.30. d. $5.50.

74.

Noise Makers Inc has the following inventory data: July 1 Beginning inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $22

$ 380 1,400 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is a. $620. b. $640. c. $651. d. $660. Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($2,000  100)  32] = $640

75.

Olympus Climbers Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $620. b. $660. c. $1,340. d. $1,380.

6-18 76.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Pop-up Party Favors Inc has the following inventory data: July 1 Beginning inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $22

$ 380 1,400 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $620. b. $660. c. $640. d. $704. Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $220 + [(32 − 10)  $20] = $660

77.

Quiet Phones Company has the following inventory data: July 1 Beginning inventory 20 units at $19 7 Purchases 70 units at $20 22 Purchases 10 units at $22

$ 380 1,400 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $620. b. $660. c. $1,340. d. $1,380. Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $220 + [(100 − 32 − 10)  $20] = $1,380

78.

Radical Radials Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $620 b. $608 c. $640 d. $704.

Reporting and Analyzing Inventory

79.

6-19

Orange-Aide Company has the following inventory data: July 1 Beginning inventory 20 units at $20 7 Purchases 70 units at $21 22 Purchases 10 units at $22

$ 400 1,470 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the average cost method, the value of ending inventory is a. $535 b. $523 c $525 d $550 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($2,090  100)  $25] = $523

80.

Peach Pink Inc. has the following inventory data: July 1 Beginning inventory 20 units at $20 7 Purchases 70 units at $21 22 Purchases 10 units at $22

$ 400 1,470 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,555 b. $1,585 c. $1,505. d. $1,540. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400 + [(100 − 25 − 20)  $21] = $1,555

81.

Grape Gratuities Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $585. b. $505. c. $535. d. $550.

6-20 82.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Apple-A-Day Company has the following inventory data: July 1 Beginning inventory 20 units at $20 7 Purchases 70 units at $21 22 Purchases 10 units at $22

$ 400 1,470 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,585 b. $1,540 c. $1,555. d. $1,540. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $220 + [(100 − 25 − 10)  $21] = $1,585

83.

Bonkers Bananas has the following inventory data: July 1 Beginning inventory 20 units at $20 7 Purchases 70 units at $21 22 Purchases 10 units at $22

$ 400 1,470 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $550 b. $505 c. $535 d. $500. Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400 + [(25 − 20)  $21] = $505

84.

Which of the following is an inventory costing method? a. Periodic b. Specific identification c. Perpetual d. Lower of cost or market

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

85.

Inventory costing methods place primary reliance on assumptions about the flow of a. good. b. costs. c. resale prices. d. values.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

86.

6-21

Which of the following terms best describes the assumption made in applying the four inventory methods? a. Goods flow b. Cost flow c. Asset flow d. Physical flow

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

87.

An assumption about cost flow is necessary a. because it is required by the income tax regulation. b. even when there is no change in the purchase price on inventory. c. only when the flow of goods cannot be determined. d. because prices usually change, and tracking which units have been sold is difficult.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

88.

Piper Pipes has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis. a. $10,992 b. $11,022 c. $23,088. d. $23,118

89.

Trumpeting Trumpets has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis. a. $10,992 b. $11,022 c. $23,088. d. $23,118

6-22 90.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Sassy Saxophones has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis. a. $10,992 b. $11,022 c. $23,088. d. $23,118

91.

Clear Clarinets has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis. a. $10,932 b. $11,022 c. $23,088. d. $23,118

92.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

93.

Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

94.

6-23

A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower of cost or market basis cannot be applied.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

95.

The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

96.

Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

97.

The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no such accounting requirement. d. called the physical flow assumption.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

98.

Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

99.

Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

6-24 100.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Given equal circumstances, which inventory method would probably be the most time consuming? a. FIFO b. LIFO c. Average cost d. Specific identification.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

101.

Serene Stereos has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is a. $438 b. $846 c. $421 d. $863

102.

Automobile Audio has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is a. $438 b. $846 c. $421 d. $863

103.

Carryable CDs has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO is a. $438 b. $846 c. $421 d. $863

Reporting and Analyzing Inventory

104.

6-25

Delightful Discs has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is a. $438 b. $421 c. $846 d. $863

105.

Laser Listening has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, cost of goods sold is a. $427. b. $857. c. $854. d. $836.

106.

Which inventory costing method should a gasoline retailer use? a. Average cost b. LIFO c. FIFO d. Either LIFO or FIFO.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

In periods of rising prices, which is an advantage of using the LIFO inventory costing method? a. Ending inventory will include latest (most recent) costs and thus be more realistic. b. Cost of goods sold will include latest (most recent) costs and thus will be more realistic. c. Net income will be the highest and thus reflect the prosperity of the company. d. Phantom profits are reported.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-26 108.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $4,882 b. $4,730 c. $1,696 d. $1,544

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (44  $49) + [(102 − $44)  $47] = $4,882; [(102  $63) − $4,882] = $1,544

109.

Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $600, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $944 b. $1,096 c. $767 d. $661

110.

Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $4,882 b. $4,730 c. $1,696 d. $1,544

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (36  $45) + (62  $47) + [(102 − 98)  $49] = $4,730; [(102  $63) − $4,730] = $1,696

Reporting and Analyzing Inventory

111.

6-27

Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $600, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $944 b. $1,096 c. $767 d. $661

112.

Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $19,528 b. $18,920 c. $6,784 d. $6,176

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (88  $98) + [(204 − 88)  $94] = $19,528; [(204  $126) − $19,528] = $6,176

113.

Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,000, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $4,176 b. $4,323 c. $3,349 d. $2,923

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (88  $98) + [(204 − 88)  $94] = $19,528; [(204  $126) − $19,528] = $6,176; ($6,176 − $2,000)  .70 = $2,923

6-28

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

114.

Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $19,528 b. $18,920 c. $6,784 d. $6,176

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (72  $90) + (124  $94) + [(204 − 196)  $98] = $18,920; [(204  $126) − $18,920] = $6,784

115

Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,000, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $4,176 b. $4,784 c. $3,349 d. $2,923

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (72  $90) + (124  $94) + [(204 − 196)  $98] = $18,920; [(204  $126) − $18,920] = $6,784; ($6,784 − $2,000)  .70 = $3,349

116.

Hoover Company had beginning inventory of $15,000 at March 1, 2014. During the month, the company made purchases of $55,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March? a. $52,700 b. $55,000 c. $70,000 d. $72,300

Reporting and Analyzing Inventory

117.

6-29

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 $290 and used FIFO costing, the gross profit for the period would be a. $115. b. $125. c. $110. d. $100.

118.

At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The average cost per unit for May is a. $7.00. b. $7.50. c. $7.60. d. $8.00.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [(200 + $7) + (400  $7) + (600  $8)]  1,200 = $7.50

119.

At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. Heineken's gross profit for the month of May is a. $4,500 b. $7,500 c. $9,000 d. $12,000

120.

At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The value of Heineken's inventory at May 31, 2014 is a. $1,400 b. $1,500 c. $1,600 d. $9,000

6-30 121.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 200 $5.00 $1,000 Purchase, 1/15/2014 100 5.30 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. How many units did the company sell during January 2014? a. 60 b. 160 c. 200 d. 240

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [(200 + 100 + 100) − 160] = 240

122.

Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 200 $5.00 $1,000 Purchase, 1/15/2014 100 5.30 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $880 b. $800 c. $868 d. $1,212

123.

Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 200 $5.00 $1,000 Purchase, 1/15/2014 100 5.30 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $843 b. $800 c. $868 d. $1,280

Reporting and Analyzing Inventory

124.

6-31

Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Balance, 1/1/2014 Purchase, 1/15/2014 Purchase, 1/28/2014

Units 200 100 100

Per unit price $5.00 5.30 5.50

Total $1,000 530 550

An end of the month (1/31/2014) inventory showed that 160 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. $1,188 b. $1,212 c. $2,400 d. $1,600 Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (200  $5.00) + [(400 − 160 − 200)  $5.30] = $1,212; [(400 − 160)  $10] − $1,212 = $1.188

125.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

126.

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127.

In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

128.

Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost? a. LIFO b. FIFO c. Average cost method d. Whichever method that produces the highest ending inventory figure

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

6-32 129.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of goods sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130.

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 purchased during the year will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131.

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average cost method d. Income tax expense for the period will be the same under all assumptions.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132.

Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most? a. FIFO b. LIFO c. Average cost d. Income tax expense for the period will be the same under all assumptions.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

133.

The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low cost homogeneous items. c. company sells large quantities of relatively low cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

134.

The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

135.

6-33

The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138.

The accountant at Landry 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 $8,740. The LIFO method will result in income before taxes of $8,100. What is the difference in tax that would be paid between the two methods? a. $640 b. $448 c. $192 d. Cannot be determined from the information provided.

139.

The accountant at Patton Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $600 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $11,600 b. $13,000 c. $9,000 d. $10,400

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($600  30) + $11,000] = $13,000

6-34 140.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $35,700 for FIFO and $29,400 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. $9,000 b. $12,600 c. $1,800 d. $6,300

141.

The consistent application of an inventory costing method enhances a. conservatism. b. accuracy. c. comparability. d. efficiency.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142.

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using? a. LIFO b. Average c. FIFO d. No inventory costing method directly affects the current ratio.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

143.

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because cost of goods sold represents the latest costs. d. FIFO because cost of goods sold represents the earliest costs.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

144.

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because ending inventory represents the earliest costs. d. FIFO because ending inventory represents the latest costs.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

145.

6-35

The lower of cost or market basis of valuing inventories is an example of a. comparability. b. the historical cost principle. c. conservatism. d. consistency.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

146.

When applying the lower of cost or market rule to inventory valuation, market generally means a. current replacement cost. b. original cost. c. resale value. d. original cost, less physical deterioration.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

147.

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by a. a decline in the value of the inventory. b. an increase in selling price. c. an increase in the value of the inventory. d. a desire for more profit.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

148.

Which statement concerning lower of cost or market (LCM) is incorrect? a. LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income. b. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost. c. The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item. d. LCM is applied after one of the cost flow assumptions has been applied.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

149.

Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product A B C

Cost $57,000 40,000 80,000

Market $60,000 38,000 81,000

If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $177,000. b. $179,000. c. $175,000. d. $181,000. Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $57,000 + $38,000 + $80,000] = $175,000

6-36 150.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Nelson Corporation sells three different products. The following information is available on December 31: Inventory Item X Y Z

Units 150 300 750

Cost per unit $4.00 $2.00 $3.00

Market value per unit $3.50 $1.50 $4.00

When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be? a. b. c. d.

$3,450 $3,225 $3,975 $3,300

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (150  $3.50) + (300  $1.50] + (750  $3.00) = $3,325

151.

Whitman Corporation sells six different products. The following information is available on December 31: Inventory Item Tin Titanium Stainless Steel Aluminum Iron Fiberglass

Units 30 10 40 40 20 20

Cost per unit $ 500 5,000 2,000 350 400 300

Market value per unit $ 505 4,950 1,910 285 410 295

Estimated Selling Price $ 515 5,100 1,985 290 425 310

When applying the lower of cost or market rule to each item, what will Whitman's total ending inventory balance be? a. b. c. d.

$173,000 $166,200 $166,550 $166,400

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (30  $500) + (10  $4,950] + (40  $1,910) + (40 + $285) + (20  $400) + (20  295) = $166,200

152.

Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson County: a. is minimizing funds tied up in inventory. b. is increasing the amount of inventory on hand relative to sales. c. may be losing sales due to inventory shortages. d. has a cost of goods sold that is increasing relative to its average inventory.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

153.

6-37

Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company's "days in inventory" for 2014 (to the closest decimal place)?”

Black Company

Red Company

a. b. c. d.

Year 2012 2013 2014 2012 2013 2014

Inventory Turnover 10.7 10.4

Ending Inventory $26,340 $29,890 $30,100

9.0 9.5

$25,860 $24,750 $22,530

35.1 days 34.1 days 82.5 days 29.5 days

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365  10.4 = 35.1

154.

Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Red Company's "days in inventory" for 2013 (to the closest decimal place)?”

Black Company

Red Company

a. b. c. d.

Year 2012 2013 2014 2012 2013 2014

Inventory Turnover 10.7 10.4

Ending Inventory $26,340 $29,890 $30,100

9.0 9.5

$25,860 $24,750 $22,530

67.8 days 38.4 days 28.1 days 40.6 days

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365  9 = 40.6

6-38 155.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Black Company's "cost of goods sold" for 2013 (to the closest dollar)?”

Black Company

Red Company

a. b. c. d.

Year 2012 2013 2014 2012 2013 2014

Inventory Turnover 10.7 10.4

Ending Inventory $26,340 $29,890 $30,100

8.8 9.5

$25,860 $24,750 $22,530

$300,830 $281,838 $319,823 $320,946

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 10.7  $29,890 = $319,823

156.

Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company's "cost of goods sold" for 2014 (to the closest dollar)?”

Black Company

Red Company

a. b. c. d.

Year 2012 2013 2014 2012 2013 2014

Inventory Turnover Ratio 10.7 10.2

Ending Inventory $26,340 $29,890 $30,100

9.0 9.5

$25,860 $24,750 $22,530

$222,684 $235,125 $224,580 $214,035

157.

Which of the following companies would most likely have the highest inventory turnover? a. An art gallery. b. An automobile manufacturer. c. A piano manufacturer. d. A bakery.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Inventory

158.

6-39

An aircraft company would most likely have a a. high inventory turnover. b. low profit margin. c. high volume. d. low inventory turnover.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

159.

The inventory turnover is calculated by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

160.

Days in inventory is calculated by dividing 365 days by a. average inventory. b. beginning inventory. c. ending inventory. d. the inventory turnover.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

161.

Which of these would cause the inventory turnover ratio to increase the most? a. Increasing the amount of inventory on hand. b. Keeping the amount of inventory on hand constant but increasing sales. c. Keeping the amount of inventory on hand constant but decreasing sales. d. Decreasing the amount of inventory on hand and increasing sales.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

162.

The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s inventory turnover in 2014 was a. 8.0 times. b. 6.7 times. c. 5.6 times. d. 4.7 times.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $560,000  [($80,000 + $120,000) 2] = 5.6

163.

The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s days in inventory in 2014 was a. 45.6 days. b. 54.5 days. c. 65.2 days. d. 77.7 days.

6-40 164.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s inventory turnover in 2014 was a. 15.0 times. b. 11.0 times. c. 12.6 times. d. 9.8 times.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $880,000  [($90,000 + $70,000) 2] = 11

165.

The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s days in inventory in 2014 was a. 24.3 days. b. 33.2 days. c. 29 days. d. 37.2 days.

166.

A low number of days in inventory may indicate all of the following except a. Sales opportunities may be lost because of inventory shortages. b. There is less chance of having obsolete inventory items. c. The company has fewer funds tied up in inventory. d. Management has achieved the best balance between too much and too little inventory levels.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

167.

Redeker Company had the following records: Ending inventory Cost of goods sold

2014 $34,580 182,000

2013 $32,650 178,000

2012 $30,490 174,200

What is Redeker’s inventory turnover for 2013? (rounded) a. 5.6 times b. 5.5 times c. 0.2 times d. 5.3 times Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $178,000  [($32,650 + $30,490) 2] = 5.6

Reporting and Analyzing Inventory

168.

6-41

Redeker Company had the following records: Ending inventory Cost of goods sold

2014 $34,580 182,000

2013 $32,650 163,500

2012 $30,490 174,200

What is Redeker’s average days in inventory for 2014? (rounded) a. 67.6 days b. 66.4 days c. 68.9 days d. 68.25 days Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $365  5.5 = 67.6

169.

Barnett Company had the following records: Ending inventory Cost of goods sold

2014 $34,580 273,000

2013 $32,650 255,250

2012 $30,490 261,300

What is Barnett’s inventory turnover for 2013? (rounded) a. 7.6 times b. 8.1 times c. 0.1 times d. 7.8 times Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $255,250  [($32,650 + $30,490) 2] = 8.1

170.

Barnett Company had the following records: Ending inventory Cost of goods sold

2014 $34,580 273,000

2013 $37,650 255,250

2012 $30,490 261,300

What is Barnett’s average days in inventory for 2013? (rounded) a. 45.1 days b. 48.0 days c. 46.8 days d. 365 days Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365  8.1 = 45.1

171.

The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the a. FIFO reserve. b. inventory reserve. c. LIFO reserve. d. periodic reserve.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-42 172.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The LIFO reserve is a. the difference between the value of the inventory under LIFO and the value under FIFO. b. an amount used to adjust inventory to the lower of cost or market. c. the difference between the value of the inventory under LIFO and the value under average cost. d. the amount used to adjust inventory to history cost.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173.

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? a. FIFO reserve b. Inventory turnover c. LIFO reserve d. Current replacement cost

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174.

Butler Company reported ending inventory at December 31, 2014 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2014, and $300,000 at December 31, 2014. Cost of goods sold for 2014 was $4,600,000. If Butler Company had used FIFO during 2014, its cost of goods sold for 2014 would have been a. $4,900,000. b. $4,690,000. c. $4,510,000. d. $4,300,000.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [$4,600,000 − ($300,000 − $210,000)] = 4,510,000

175.

To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold a. the ending LIFO reserve is added to LIFO cost of goods sold. b. the ending LIFO reserve is subtracted from LIFO cost of goods sold. c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold. d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176.

All of the following statements are true regarding the LIFO reserve except: a. Companies using LIFO are required to report the LIFO reserve. b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO. c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO. d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

177.

6-43

Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “What is Danforth's LIFO reserve for 2013?” (amounts in $ millions) Inventory Method for 2013 & 2014 2013 Ending inventory assuming LIFO 2013 Ending inventory assuming FIFO 2014 Ending inventory assuming LIFO 2014 Ending inventory assuming FIFO 2013 Current assets (reported on balance sheet) 2013 Current liabilities 2014 Current assets (reported on balance sheet) 2014 Current liabilities 2014 Cost of goods sold a. b. c. d.

Boxter LIFO $324 $427 $436 $578

Clifford FIFO N/A $535 N/A $612

Danforth LIFO $225 $310 $167 $209

Evans FIFO N/A $663 N/A $542

$1,677 $987

$2,031 $1,209

$1,308 $545

$2,748 $1,200

$2,225 $1,306 $4,678

$2,605 $1,410 $5,042

$1,100 $465 $3,000

$2,390 $1,000 $7,000

$535 $85 $42 $58

Ans: B, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $310 − $225 = $85

178.

Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO reserve adjustment, which company would has the strongest liquidity position for 2014 as expressed by the current ratio?” (amounts in $ millions) Inventory Method for 2013 & 2014 2013 Ending inventory assuming LIFO 2013 Ending inventory assuming FIFO 2014 Ending inventory assuming LIFO 2014 Ending inventory assuming FIFO 2013 Current assets (reported on balance sheet) 2013 Current liabilities 2014 Current assets (reported on balance sheet) 2014 Current liabilities 2014 Cost of goods sold a. b. c. d.

Boxter LIFO $324 $427 $436 $578

Clifford FIFO N/A $535 N/A $612

Danforth LIFO $225 $310 $167 $209

Evans FIFO N/A $663 N/A $542

$1,677 $987

$2,031 $1,209

$1,308 $545

$2,748 $1,200

$2,225 $1,306 $4,678

$2,605 $1,410 $5,042

$1,100 $465 $3,000

$2,390 $1,000 $7,000

Boxter Clifford Danforth Evans

Ans: C, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

6-44 179.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, what is Boxter's inventory turnover ratio for 2014 (to the closest decimal place)?” (amounts in $ millions) Inventory Method for 2013 & 2014 2013 Ending inventory assuming LIFO 2013 Ending inventory assuming FIFO 2014 Ending inventory assuming LIFO 2014 Ending inventory assuming FIFO 2013 Current assets (reported on balance sheet) 2013 Current liabilities 2014 Current assets (reported on balance sheet) 2014 Current liabilities 2014 Cost of goods sold a. b. c. d.

Boxter LIFO $324 $427 $436 $578

Clifford FIFO N/A $535 N/A $612

Danforth LIFO $225 $310 $167 $209

Evans FIFO N/A $663 N/A $542

$1,677 $987

$2,031 $1,209

$1,308 $545

$2,748 $1,200

$2,225 $1,306 $4,678

$2,605 $1,410 $5,042

$1,100 $465 $3,000

$2,390 $1,000 $7,000

12.3 times 9.3 times 7.5 times 6.4 times

Ans: A, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,678  [($324 + $436)  2] = $380

180.

Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, which company shows the greatest improvement in its current ratio from 2013 to 2014?” (amounts in $ millions) Inventory Method for 2013 & 2014 2013 Ending inventory assuming LIFO 2013 Ending inventory assuming FIFO 2014 Ending inventory assuming LIFO 2014 Ending inventory assuming FIFO 2013 Current assets (reported on balance sheet) 2013 Current liabilities 2014 Current assets (reported on balance sheet) 2014 Current liabilities 2014 Cost of goods sold a. b. c. d.

Boxter LIFO $324 $427 $436 $578

Clifford FIFO N/A $535 N/A $612

Danforth LIFO $225 $310 $167 $209

Evans FIFO N/A $663 N/A $542

$1,677 $987

$2,031 $1,209

$1,308 $545

$2,748 $1,200

$2,225 $1,306 $4,678

$2,605 $1,410 $5,042

$1,100 $465 $3,000

$2,390 $1,000 $7,000

Boxter Clifford Danforth Evans

Ans: B, LO: 6, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Inventory

6-45

*181. In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system. b. average costs are based entirely on unit cost simple averages. c. a new average is computed under the average cost method after each sale. d. FIFO cost of goods sold will be the same as in a periodic inventory system. Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*182. Classic Floors has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale

15 units at $6.00 60 units at $6.60 40 units 30 units at $7.20 28 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $465.60 b. $236.40 c. $702.00 d. $348.00 Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (40  $6.60) + (28  $7.20) = $465.60

*183. Classic Floors has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale

15 units at $6.00 60 units at $6.60 40 units 30 units at $7.20 28 units

Assuming that a perpetual inventory system is used, what is the value of ending inventory on a LIFO basis for July? a. $465.60 b. $702.00 c. $354.00 d. $236.40 Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (15  $6.00) + (20  $6.60) + (2  $7.20)= $236.40

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*184. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $5,802 b. $5,772 c. $5,796. d. $5,916 Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (60  $56) + (42  $58) = $5,796

*185. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July? a. $2,748 b. $2,754 c. $2,772. d. $5,796 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (15  $60) + (30  $56) + (3  $58) = $2,754

*186. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for July? a. $2,750 b. $2,784 c. $2,406. d. $2,772 Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(15  $60) + (90  $56)]  105 = $56.571; [(45  $56.571) + (45  $58)]  90 = $57.286; 48  $57.286 = $2,750

Reporting and Analyzing Inventory

6-47

*187. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*188. If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*189. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are Asset Stockholders’ Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct Ans: B, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*190. An overstatement of the beginning inventory results in a. no effect on the period’s net income. b. an overstatement of net income. c. an understatement of net income. d. a need to adjust purchases. Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*191. An overstatement of ending inventory in one period results in a. no effect on net income of the next period. b. an overstatement of net income of the next period. c. an understatement of net income of the next period. d. an overstatement of the ending inventory of the next period. Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Answers to Multiple Choice Questions 45. a 46. b 47. a 48. c 49. c 50. a 51. c 52. a 53. b 54. a 55. a 56. b 57. a 58. d 59. d 60. d 61. d 62. c 63. d 64. b 65. c

66. 67. 68. 69. 70. 71. 72. 73 74. 75. 76. 77. 78. 79. 80. 81 82. 83. 84.

b c d a a c a c b c b d a b a c a b b 85. b 86. b

87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

105. 106. 107.

d d c a b d d b d b c a c d b a d b b d b

108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.

124. 125. 126. 127. 128.

d d c c d d c c a a b a b d c b a a c b b

129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.

143. 144. 145. 146. 147. 148. 149.

c b b a d d a b a c b c c c c d c a a b c

150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.

b b b a d a d d d c d d c c b b a a a

169.

170. a

171. 172. 173. 174. 175. 176. 177. 178. 179. 180. *181. *182. *183 *184. *185. *186. *187. 188. *189. *190. *191.

c a c c d b b c a b d a d c b a c c b c c

Reporting and Analyzing Inventory

6-49

BRIEF EXERCISES Be. 192 Shellan Kamp 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 Shellan Kamp to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 192 (5 min.) 1. Included 2. Excluded 3. Excluded 4. Excluded Be. 193 In the first month of operations, Dieker Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Dieker uses a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 193 (5 min.) 1. FIFO 250 x $8 = $2,000 2.

LIFO 200 x $6 = $1,200 50 x $7 = 350 $1,550

Be. 194 Hess Company's inventory records show the following data for the month of September: Units 100 450 300

Inventory, September 1 Purchases: September 8 September 18

Unit Cost $3.00 3.50 3.70

A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 194 (5 min.) Ending inventory of 150 units: 150 × $3.70 = $555 Cost of goods sold: Units available for sale (100 + 450 + 300) = 850 Units sold 850 – 150 = 700 100 × $3 = 450 × $3.50 = 150 × $3.70 = Cost of goods sold

300 1,575 555 $ 2,430

Be. 195 Hess Company's inventory records show the following data for the month of September: Units 100 450 300

Inventory, September 1 Purchases: September 8 September 18

Unit Cost $3.00 3.50 3.70

A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (3 min.) Ending inventory: (100 units × $3.00) + (50 units × $3.50) = $475 Cost of goods sold: (300 units × $3.70) + (400 units × $3.50) = $2,510 Be. 196 The management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: 1. result in the lowest income tax expense? 2. provide the highest net income? 3. provide the highest ending inventory? 4. result in the most stable earnings over a number of years? Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 196 (5 min.) 1. In times of rising costs, the LIFO method will result in the lowest income tax expense. 2. In times of rising costs, the FIFO method will result in the highest net income. 3. In times of rising costs, the FIFO method will result in the highest ending inventory. 4. In times of rising costs, the average cost method will result in the most stable earnings over a number of years.

Reporting and Analyzing Inventory

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Be. 197 The Entertainment Center accumulates the following cost and market data at December 31. Inventory Categories Camera Camcorders DVDs

Cost Data _ $11,000 8,000 14,000

Market _ Data_ $10,200 8,500 12,600

What is the lower-of-cost-or-market value of the inventory? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197

(5 min.) Inventory Categories Camera Camcorders DVDs

Cost Data _ $11,000 8,000 14,000

Market _ Data_ $10,200 8,500 12,600

Lower of Cost or Market $10,200 8,000 12,600 $30,800

Be. 198 At December 31, 2014, the following information (in thousands) was available for Kitselman Inc.: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 198

(5 min.)

Inventory Turnover =

$198,000 ($22,600 + $21,400)/2

= 9.0 times

Days in Inventory =

365 9.0

= 40.6 days

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

EXERCISES Ex. 199 The Cain Company has just completed a physical inventory count at year end, December 31, 2014. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information: (a) There were goods in transit on December 31, 2014, from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count. (b) On December 27, 2014, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2014. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2015. Cain Company had paid $500 for the goods and, because they were in storage, Cain included them in the physical inventory count. (c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2014; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2014, it was excluded from the physical inventory. (d) On December 31, 2014, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had been shipped, they were excluded from the physical inventory count. (e) On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2014. Because the goods were not on hand, they were not included in the physical inventory count. (f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2014, they were included in the physical inventory count. Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Inventory

Solution 199 Start with Item (a)

(20 min.) $80,000 –

Item (b)

– 500

Item (c)

+ 4,000

Item (d)

–

Item (e)

+ 2,500

Item (f)

– 3,000

Corrected inventory

$83,000

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(Because the goods were shipped FOB destination title will pass to Cain upon arrival. Properly excluded.) (Goods should be excluded. The customer accepted title when the goods left Cain FOB shipping point.) (Goods belong to Cain. Title passed when supplier delivered the goods to the transportation company.) (Because the goods were shipped FOB shipping point Cain no longer has title to these goods. Properly excluded.) (Goods were shipped FOB destination. Cain retains title until the customer receives them.) (These goods are owned by the consignor, not the consignee, and should not be included in Cain's inventory.)

Ex. 200 Dalton Company was undergoing an end of year audit of its financial records. The auditors were in the process of reviewing Dalton’s inventory for year end, December 31, 2014. They completed an end of year inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant revealed the following: (a)

Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December 28. The goods are not expected to reach Summey until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

(b)

The physical count of the inventory did not include goods costing $95,000 that were shipped to Dalton FOB destination on December 27 and were still in transit at year-end.

(c)

Dalton received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Strong Company. The goods were not included in the physical count.

(d)

Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30. The goods were received by Hampton Company on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.

(e)

Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was suppose to arrive December 31. This purchase was included in the ending inventory of $192,000.

(f)

Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 200

(20 min.)

Start with

$185,000

Item (a)

–

(Because the goods were shipped FOB shipping point title passed to Button upon shipping. Properly excluded.)

Item (b)

–

(Goods should be excluded. Title does not pass to Dalton until goods are received).

Item (c)

+25,000

(Goods belong to Dalton. Title passed when supplier delivered the goods to the transportation company.)

Item (d)

+40,000

Item (e)

–42,000

Item (f)

– 3,000

(Because the goods were shipped FOB destination point Dalton has title to these goods.) (Goods were shipped FOB destination. Dalton does not take title until they receive them no matter when expected.) (These goods are owned by the consignor, not the consignee, and should not be included in Dalton's inventory.)

Corrected inventory $205,000 Ex. 201 Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount. 1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation. 2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse until January 3. 3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year. 4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock. 5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could. 6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all."

Reporting and Analyzing Inventory

Ex. 201

6-55

(Cont.)

Instructions Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 201

(20 min.)

Ending inventory-as reported 1. 2. 3. 4. 5.

$640,000

Subtract from inventory: The goods belong to Agler Corporation. Dobson is merely holding them as a consignee. (200,000) Add to inventory: The goods belong to Dobson as soon as they are shipped (December 28). 40,000 Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. (22,000) Add to inventory: The goods belong to Dobson until they are shipped (Jan. 1). 30,000 Add to inventory: Central Sales ordered goods with a cost of $7,000. Dobson should record the corresponding sales revenue of $10,000. Dobson's decision to ship extra "unordered" goods does not constitute a sale. The manager's statement that Central could ship the goods back indicates that Dobson knows this overshipment is not a legitimate sale. The manager acted unethically in an attempt to improve Dobson's reported income by over-shipping. 62,000* Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use. (50,000)

Correct inventory

$500,000

*($70,000–$8,000) Ex. 202 Grother 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 500 $5 2,500 7/25 Purchase 100 $7 700 10/20 Purchase 300 $8 2,400 1,000 $6,000 A physical count of inventory on December 31 revealed that there were 350 units on hand.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 202

(Cont.)

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 $__________. 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, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 202 (20 min.) 1. FIFO: Ending inventory $2,750 300 units @$8 = $2,400 50 units @$7 = 350 350 units $2,750 2. Average Cost: Ending inventory $2,100 $6,000  1,000 = $6.00 per unit  350 units = $2,100 3. LIFO: Ending Inventory $1,650 100 units @$4 = $ 400 250 units @$5 = 1,250 350 units $1,650 4. FIFO: Cost of goods sold $3,250 100 units @$4 = $ 400 500 units @$5 = 2,500 50 units @$7 = 350 650 units $3,250 LIFO: Cost of goods sold $4,475 300 units @$8 $2,400 100 units @$7 700 250 units @$5 1,250 650 units $4,350 Income would have been $1,100; ($4,350 vs. $3,250) greater if the company used FIFO instead of LIFO.

Reporting and Analyzing Inventory

6-57

Ex. 203 Hansen Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $3 $ 300 1/20 Purchase 500 $4 2,000 7/25 Purchase 100 $5 500 10/20 Purchase 300 $6 1,800 1,000 $4,600 A physical count of inventory on December 31 revealed that there were 380 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The 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 $__________. 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, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 203 (20 min.) 1. FIFO: Ending inventory $2,200 300 units @$6 = $1,800 80 units @$5 = 400 380 units $2,200 2. Average Cost: Ending inventory $1,748 $4,600  1,000 = $4.60 per unit  380 units = $1,748 3. LIFO: Ending Inventory $1,420 100 units @$3 = $ 300 280 units @$4 = 1,120 380 units $1,420 4. FIFO: Cost of goods sold $2,400 100 units @$3 = $ 300 500 units @$4 = 2,000 20 units @$5 = 100 620 units $2,400 LIFO: Cost of goods sold $3,180 300 units @$6 $1,800 100 units @$5 500 220 units @$4 880 620 units $3,180 .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 203

(Cont.)

Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of LIFO. Ex. 204 Faster Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 15 $8.00 $ 120 1/20 Purchase 60 $8.80 528 7/25 Purchase 30 $8.40 252 10/20 Purchase 45 $9.60 432 150 $1,332 A physical count of inventory on December 31 revealed that there were 55 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 $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Assume that the company uses the FIFO method. The value of the cost of goods sold at December 31 is $__________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 204 (20 min.) 1. FIFO: Ending inventory $516 45 units @$9.60 = 10 units @$8.40 = 55 units

432 84 $516

2. Average Cost: Ending inventory $488 $1,332  150 = $8.88 per unit  55 units = $488 3. LIFO: Ending Inventory $472 15 units @$8.00 = 40 units @$8.80 = 55 units

$ 120 352 $472

4. FIFO: Cost of goods sold $816 15 units @$8.00 = 60 units @$8.80 = 20 units @$8.40 = 95 units

$ 120 528 168 $ 816 .

Reporting and Analyzing Inventory

6-59

Ex. 205 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January May

1 1

December

Beginning Inventory Purchases Total Available Total Sales Ending Inventory

150 items @ $4 = $ 600 450 items @ $6 = 2,700 600 items $3,300 430 items 170

Cost assigned on an average cost basis

$__________

Cost assigned on a FIFO basis

$__________

Costs assigned on a LIFO basis

$__________

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 205 (5 min.) $935 [($3,300/600) x 170] $1,020 (170 x $6) $ 720 [(150 x $4)+(20 x $6)] Ex. 206 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January May

1 1

December

Beginning Inventory Purchases Total Available Total Sales Ending Inventory

100 items @ $7 = $ 700 400 items @ $8 = 3,200 500 items $3,900 360 items 140

Cost assigned on an average cost basis

$__________

Cost assigned on a FIFO basis

$__________

Costs assigned on a LIFO basis

$__________

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 206 (5 min.) $1,092 [($3,900/500) x 140)] $1,120 (140 x $8) $1,020 [(100 x $7)+(40 x $8)]

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 207 Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Wooderson 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 60 $80 3/10 Purchase 200 $55 3/16 Sales 70 $90 3/19 Sales 90 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the 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, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 207

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

Purchases Units Unit Cost 100 $40 60 $50 200

Units

Sales Selling Price/Unit

$80

70 90 60

$90 $90 $90

$55

40 400

$60 280

(a)

Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = the cost of goods sold

(b)

Calculate the weighted average unit cost: $20,400  400 = $51 $51  units in ending inventory (400 available less 280 sold = 120) $51  120 = $6,120

Reporting and Analyzing Inventory

Solution 207 (c)

6-61

(Cont.)

There are 120 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 3/3 20 @ $50 = 1,000 120 units $5,000 = Ending inventory

Ex. 208 Torrey Company uses the periodic inventory system to account for inventories. Information related to Torrey 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 @ $10.00 = units @ $10.40 = units @ $10.80 = units @ $11.60 = units

$ 4,000 8,320 6,480 2,320 $21,120

Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 500 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31. Ans: N/A, LO: 2, 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.) 1. 500 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.60 = $2,320 10/16 300 units @ $10.80 = 3,240 500 units $5,560 2. 500 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $21,120  2,000 units = $10.56 500 units  $10.56 = $5,280 3. 500 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $10.00 = $4,000 10/8 100 units @ $10.40 = 1,040 $5,040

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 209 Hanlin Company uses the periodic inventory system to account for inventories. Information related to Hanlin Company's inventory at January 31 is given below: January

1 8 16 24

Beginning inventory Purchase Purchase Purchase Total units and cost

400 800 600 200 2,000

units @ $12.00 = units @ $12.40 = units @ $12.80 = units @ $13.20 = units

$ 4,800 9,920 7,680 2,640 $25,040

Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 600 units remain on hand at January 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 209 (20 min.) 1. 600 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 1/24 200 units @ $13.20 = $2,640 1/16 400 units @ $12.80 = 5,120 600 units $7,760 2. 600 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $25,040  2,000 units = $12.52 600 units  $12.52 = $7,512 3. 600 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 1/1 400 units @ 12.00 = $4,800 1/8 200 units @ 12.40 = 2,480 600 units $7,280

Reporting and Analyzing Inventory

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Ex. 210 Johnson Company reports the following for the month of June. Date June 1 12 23 30

Explanation Inventory Purchase Purchase Inventory

Units 225 525 750 280

Unit Cost $5 6 7

Total Cost $1,125 3,150 5,250

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average cost. (b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why? (c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 210 (a)

(20 min.) (1) FIFO

Beginning inventory (225  $5) .......................................... Purchases June 12 (525  $6) ....................................................... June 23 (750  $7) ....................................................... Cost of goods available for sale ......................................... Less: Ending inventory (280  $7) ...................................... Cost of goods sold .............................................................

$1,125 $3,150 5,250

8,400 9,525 1,960 $7,565

(2) LIFO Cost of goods available for sale ......................................... Less: Ending inventory (225  $5) + (55  $6)..................... Cost of goods sold .............................................................

$9,525 1,455 $8,070

(3) AVERAGE COST Cost of Goods Total Units Available for Sale ÷ Available for Sale $9,525 1,500

Weighted Average Unit Cost $6.35

Ending inventory (280  $6.35) $1,778 Cost of goods sold (1,220  $6.35) $7,747 or $9,525 – $1,778 = $7,747 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Plato Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 210

(Cont.)

(c) The average cost ending inventory ($1,778) is higher than LIFO ($1,455) but lower than FIFO ($1,960). For cost of goods sold, average cost ($7,747) is higher than FIFO ($7,565) but lower than LIFO ($8,070). Ex. 211 Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following data are available at December 31. Units

Cost/Unit

Market Value/Unit

5 7

$175 148

$168 152

15 10

125 120

119 135

Cameras Minolta Canon Light Meters Vivitar Kodak Instructions

What amount should be reported on Wolf Camera Shop's financial statements, assuming the lower-of-cost-or-market rule is applied? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211

Cameras: Minolta Canon Light Meters: Vivitar Kodak Total

(10 min.)

Cost/Unit

Market Value/Unit

Lower-of-Costor-Market

Units

Inventory at Lower-of-Costor-Market

$175 148

$168 152

$168 148

5 7

$ 840 1,036

125 120

119 135

119 120

15 10

1,785 1,200 $4,861

Ex. 212 This information is available for Groneman, Inc. for 2013 and 2014. (in millions) Beginning inventory Ending inventory Cost of goods sold Sales Instructions

2013 $ 2,290 2,522 24,351 43,251

2014 $ 2,522 2,618 23,099 43,232

Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for 2013 and 2014. Comment on any trends. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Reporting and Analyzing Inventory

Solution 212

(15 min.) 2013 $24,351 ($2,290 + $2,522)  2

2014 $23,099 ($2,522 + $2,618)  2

$24,351 = 10.1 times $2,406

$23,099 = 9.0 times $2,570

Days in inventory

365 = 36.1 days 10.1

365 = 40.6 days 9.0

Gross profit rate

$43,251–$24,351 = .44 $43,251

$43,232–$23,099 = .47 $43,232

Inventory turnover ratio

6-65

The inventory turnover decreased by approximately 11% from 2013 to 2014 while the days in inventory increased by a similar amount (12%) over the same period. Both of these changes would be considered unfavorable since it's better to have a higher inventory turnover ratio with a corresponding lower days in inventory. Groneman., Inc.'s gross profit rate increased by 6.8% from 2013 to 2014. Ex. 213 Burnham Company reported the following summarized annual data at the end of 2014: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes

$1,600,000 900,000 700,000 400,000 $ 300,000

*Based on an ending FIFO inventory of $250,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000. Instructions (a) Restate the summary information on a LIFO basis. (b) What effect, if any, would the proposed change have on Burnham’s income tax expense, net income, and cash flows? (c) If you were an owner of this business, what would your reaction be to this proposed change? Ans: N/A, LO: 6, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 213 (25 min.) (a) Restate to a LIFO basis: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes

$1,600,000 945,000 655,000 400,000 $ 255,000

*Ending inventory would be $45,000 less ($250,000 – $205,000 = $45,000) under LIFO, thereby increasing cost of goods by $45,000. .

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

6-66

Solution 213 (b)

(Cont.)

The taxes on the FIFO basis would be: $300,000  .30 = $90,000 Leaving net income of $210,000; ($300,000 – $90,000 = $210,000). The taxes on the LIFO basis would be: $255,000  .30 = $76,500 Leaving Net Income of $178,500; ($255,000 – $76,500= $178,500). Switching to the LIFO basis will result in $13,500 less income tax expense and less net income of $31,500. The cash effect is $13,500; ($90,000 – $76,500 = $13,500) saved in taxes if LIFO were used.

(c)

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.

Ex. 214 The following information is available from the annual reports of Young and Olde: (Amounts in millions) Young Olde $ 6,031 $ 4,816 6,162 5,044 25,937 31,983 29,656 36,704 227 — 225 —

2014 ending Inventory 2013 ending inventory Cost of goods sold Sales revenue 2014 LIFO reserve 2013 LIFO reserve Instructions (a)

Calculate the inventory turnover and days in inventory for both companies.

(b)

Calculate Young’s inventory turnover after adjusting for the LIFO reserve. Young uses the LIFO inventory method.

(c)

What conclusion concerning the management of inventory can be drawn from these data?

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214 (a)

(15 min.)

Inventory turnover

Days in inventory

Young $25,937

Olde $31,983

($6,031 + $6,162) ÷ 2

($4,816 + $5,044) ÷ 2

$25,937 ———— = 4.25 times $6,096.5

$31,983 ——— = 6.49 times $4,930

365 ÷ 4.25 = 85.9 days

365 ÷ 6.49 = 56.2 days

Reporting and Analyzing Inventory

Solution 214

6-67

(Cont.)

(b)

2014 $6,031 227 $6,258

LIFO inventory LIFO reserve FIFO inventory LIFO cost of goods sold Less: increase in LIFO reserve ($227 – $225) FIFO cost of goods sold Inventory turnover

2013 $6,162 225 $6,387 $25,937 (2) $25,935

= $25,935 ÷ [($6,258 + $6,387) ÷ 2] = $25,935 ÷ $6,322.5 = 4.10

(c) Olde’s inventory turnover ratio is approximately 53% [(6.49 – 4.25) ÷ 4.25)] higher than Young’s ratio. In addition, Olde’s days in inventory is 35% [85.9 – 56.2) ÷ 85.9] lower than Young’s. Generally, a firm prefers to maintain as high an inventory turnover as possible. It can be concluded that Olde is more effective in managing inventory than Young. Ex. 215 The following information is available for Wallace Company for 2014. Wallace uses the LIFO inventory method. Beginning inventory Ending inventory Beginning LIFO reserve Ending LIFO reserve Cost of goods sold Sales

$ 600,000 700,000 200,000 300,000 5,980,000 8,000,000

Instructions (a)

Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO.

(b)

Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 215 (15 min.) (a) Inventory turnover = $5,980,000 ÷ [($600,000 + $700,000) ÷ 2] = $5,980,000 ÷ $650,000 = 9.2 times Days in inventory = 365 days ÷ 9.2 = 39.7 days

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 215

(Cont.)

(b)

Beginning $600,000 200,000 $800,000

LIFO inventory LIFO reserve FIFO inventory

Ending $ 700,000 300,000 $1,000,000

LIFO cost of goods sold Less: increase in LIFO reserve ($300,000 – $200,000) FIFO cost of goods sold Inventory turnover

$5,980,000 (100,000) $5,880,000

= $5,880,000 ÷ [($800,000 + $1,000,000) ÷ 2] = $5,880,000 ÷ $900,000 = 6.5 times

Days in inventory = 365 days ÷ 6.5 = 56.2 days *Ex. 216 Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses the perpetual inventory system.

3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60 200

Purchases Unit Cost $40 $50

Units

Sales Selling Price/Unit

$80

90 70 60

$90 $90 $90

$55

$60

Instructions (a) (b)

Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 216

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

Purchases Units Unit Cost 100 $40 60 $50 200

40 400

Units

Sales Selling Price/Unit

$80

90 70 60

$90 $90 $90

$55

$60

FOR INSTRUCTOR USE ONLY

280

Reporting and Analyzing Inventory

*Solution 216

6-69

(Cont.)

(a)

Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = The cost of goods sold

(b)

There are 120 units in ending inventory. The beginning inventory layer was reduced by 20 units and the first two purchases were consumed. The last purchase was made after all sales occurred. 3/1 3/30

80 @ $40 40 @ $60 120 units

= =

$3,200 2,400 $5,600 = Ending inventory

*Ex. 217 Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the perpetual inventory system.

3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60

Purchases Unit Cost $55 $60

200

Units

Sales Selling Price/Unit

$120

90 70 50

$130 $130 $130

$65

$75

Instructions (a)

Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

(b)

Using the FIFO assumption, calculate the value of ending inventory for March.

(c)

Using the moving average cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

(d)

Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

(e)

Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 217

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

Purchases Unit Cost $55 $60

200

Units

Sales Selling Price/Unit

$120

90 70 50

$130 $130 $130

$65

40 400

$75 270

(a)

Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $55 = $ 5,500 3/3 60 @ 60 = 3,600 3/10 110 @ 65 = 7,150 270 units $16,250 = The cost of goods sold

(b)

Using FIFO – the latest purchased units were left in inventory. 3/30 40 @ $ 75 = $ 3,000 3/10 90 @ $ 65 = 5,850 130 $8,850

(c)

Calculate the value of ending inventory using the weighted average cost: Date 3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

Purchases Cost of Goods Sold Beginning Inventory (60 @ 60) $ 3,600 (60 @ 56.875) (200 @ 65) $13,000 (90 @ 62.292) (70 @ 62.292) (50 @ 62.292) (40 @ 75) $ 3,000

(100 @ 55) (160 @ 56.875) (100 @ 56.875) (300 @ 62.292) (210 @ 62.292) (140 @ 62.292) (90 @ 62.292) (130 @ 66.202)

Balance $ 5,500.00 9,100.00 5,687.50 18,687.50 13,081.32 8,720.88 5,606.28 8,606.28

(d)

There are 130 units in ending inventory. They are comprised of the first units purchased prior to each sale when LIFO is assumed. 3/1 90 @ $55 = $4,950 3/3 40 @ $75 = 3,000 120 units $7,950 = Ending inventory

(e)

Using LIFO – the latest purchased units purchased prior to the sale were the first sold. 3/3 60 @ $60 = $ 3,600 3/10 90 @ $65 = 5,850 3/10 80 @ $65 = 5,200 3/10 30 @ $65 = 1,950 3/1 10 @ $55 = 1,550 270 units $17,150

Reporting and Analyzing Inventory

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*Ex. 218 Plato Company reports the following for the month of June. Date June 1 12 23 30

Explanation Inventory Purchase Purchase Inventory

Units 225 525 750 330

Unit Cost $5 6 7

Total Cost $1,125 3,150 5,250

Instructions (a)

Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the average-cost method, round unit cost to three decimal places.)

(b)

Why is the average unit cost not $6 [($5 + $6 + $7)  3 = $6]?

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 218 (a)

(20 min.)

Date June 1

Purchases

June 12

(525 @ $6) $3,150

June 15 June 23

FIFO Cost of goods sold

(225 @ $5) (345 @ $6)

$1,125 $2,070

(750 @ $7) $5,250

June 27

(180 @ $6) (420 @ $7)

$1,080 $2,940 $7,215

Balance (225 @ $5) $1,125 (225 @ $5) (525 @ $6)

$4,275

(180 @ $6)

$1,080

(180 @ $6) (750 @ $7)

$6,330

(330 @ $7)

$2,310

Ending inventory: $2,310. Cost of goods sold: $7,215 Date June 1

Purchases

June 12

(525 @ $6) $3,150

June 15 June 23

June 27

LIFO Cost of goods sold

(525 @ $6) (45 @ $5)

$3,150 $ 225

(750 @ $7) $5,250

(600 @ $7)

Ending inventory: $1,950. Cost of goods sold: $7,575 .

$4,200 $7,575

Balance (225 @ $5) $1,125 (225 @ $5) (525 @ $6)

$4,275

(180 @ $5)

$ 900

(180 @ $5) (750 @ $7)

$6,150

(180 @ $5) (150 @ $7)

$1,950

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

6-72

*Solution 218

(Cont.)

Moving Average Date

Purchases

Cost of goods sold

June 1 June 12

(525 @ $6) $3,150

June 15 June 23

(570 @ $5.70)

$3,249

(750 @ $7) $5,250

June 27

(600 @ $6.748)

$4,049*

Balance (225 @ $5)

$1,125

(750 @ $5.70)

$4,275

(180 @ $5.70)

$1,026

(930 @ $6.748*)

$6,276

(330 @ $6.748)

$2,227

$7,298 *rounded Ending inventory: $2,227. Cost of goods sold: $7,298. (b) The simple average would be [($5 + $6 + $7) ÷ 3] or $6. However, the average cost method uses a weighted average unit cost that changes each time a purchase is made rather than a simple average. *Ex. 219 Carter Company reported these income statement data for a 2-year period. 2014 $250,000 40,000 202,000 242,000 50,000 192,000 $ 58,000

Sales Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Gross profit

2013 $210,000 30,000 173,000 203,000 40,000 163,000 $ 47,000

Carter Company uses a periodic inventory system. The inventories at January 1, 2013, and December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is overstated by $4,000. Instructions (a) (b)

Prepare correct income statement data for the 2 years. What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Inventory

Solution 219 (a)

6-73

(15 min.)

Sales ...................................................................... Cost of goods sold Beginning inventory ............................................ Cost of goods purchased .................................... Cost of goods available for sale .......................... Ending inventory ($40,000 – $4,000) .......................................... Cost of goods sold ...................................... Gross profit .............................................................

2013 $210,000

2014 $250,000

30,000 173,000 203,000

36,000 202,000 238,000

36,000 167,000 $ 43,000

50,000 188,000 $ 62,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference

$47,000 + $58,000 = $105,000 $43,000 + $62,000 = 105,000 $ 0

*Ex. 220 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 Items Stockholders’ Cost of Net Events Assets Equity Goods Sold Income 1. The ending inventory in the previous period was overstated. _________________________________________________________________________________________________________________________

2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. _________________________________________________________________________________________________________________________

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. _________________________________________________________________________________________________________________________

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

6-74 *Ex. 220

(Cont.)

5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 220

(20 min.) Items Stockholders’ Cost of Assets Equity Goods Sold NA NA O O O U U U O NA U O O O U

Events 1. 2. 3. 4. 5.

Net Income U O U U O

*Ex. 221 Condensed income statements for Swift Corporation are shown below for two years.

Sales Cost of Goods Sold Gross Profit Operating Expense Net Income

2013

2014

$75,000 45,000 $30,000 15,000 $15,000

$90,000 54,000 $36,000 15,000 $21,000

Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly understated by $7,000. 2013

$ __________

2014 $__________

Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 221 2013 = $22,000 2014 = $14,000

(5 min.)

Reporting and Analyzing Inventory

6-75

*Ex. 222 Condensed income statements for Werly Corporation are shown below for two years.

Sales Cost of Goods Sold Gross Profit Operating Expense Net Income

2013

2014

$75,000 45,000 $30,000 15,000 $15,000

$90,000 54,000 $36,000 15,000 $21,000

Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly overstated by $5,000. 2013

$ __________

2014 $__________

Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 222 2013 = $10,000 2014 = $26,000

(5 min.)

*Ex. 223 Arnold 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

2013 $ 54,000 847,000 901,000 64,000 $837,000

Arnold made two errors: (1) 2013 ending inventory was overstated by $6,000. (2) 2014 ending inventory was understated by $11,000.

2014 $ 64,000 891,000 955,000 55,000 $900,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*Ex. 223

(Cont.)

Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2013 2014 Overstated/ Overstated/ Amount Understated Amount Understated Total assets

$_________

_______

$_________

_______

Stockholders’ equity

$_________

_______

$_________

_______

Cost of goods sold

$_________

_______

$_________

_______

Net income

$_________

_______

$_________

_______

Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 223

(20 min.) 2013 Overstated/ Amount Understated

2014 Overstated/ Amount Understated

Total assets

$6,000

$11,000

Stockholders’ equity

$6,000

$11,000

Cost of goods sold

$6,000

$17,000

Net income

$6,000

$17,000

Correct cost of goods sold: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

2013 $ 54,000 847,000 901,000 58,000 $843,000

FOR INSTRUCTOR USE ONLY

2014 $ 58,000 891,000 949,000 66,000 $883,000

Reporting and Analyzing Inventory

6-77

COMPLETION STATEMENTS 224. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

225. In a manufacturing company, there are three categories of inventory: they are _____________________, _________________, and _________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

226. When the terms of sale are FOB ______________, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

227. The two inventory costing systems used are the ______________ and ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

228. When a business holds goods of other parties without taking ownership, and tries to sell them for a fee, the goods are called ____________ goods. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

229. Cost of goods available for sale must be allocated between cost of goods ___________ and ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

230. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

231. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

232. Under the LCM basis, market is defined as current ______________ cost. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

233. The ______________ is calculated as cost of goods sold divided by average inventory. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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234. The _____________ is a required disclosure for companies that use LIFO. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 224. finished goods, merchandise inventory 225. raw materials, work in process and finished goods. 226. shipping point 227. periodic, perpetual. 228. consigned

229. 230. 231. 232. 233. 234.

sold, ending inventory specific identification, income first-in, last-in replacement inventory turnover LIFO reserve

MATCHING 235. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory B. Work in process C. FOB shipping point D. FOB destination E. Specific identification method

F. G. H. I. J.

First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average cost method LIFO reserve Inventory turnover ratio

____

1. The difference between inventory reported using LIFO and inventory using FIFO.

____

2. Tracks the actual physical flow for each inventory item available for sale.

____

3. Goods that are only partially completed in a manufacturing company.

____

4. Cost of goods sold consists of the most recent inventory purchases.

____

5. Goods ready for sale to customers by retailers and wholesalers.

____

6. Title to the goods transfers when the public carrier accepts the goods from the seller.

____

7. Ending inventory valuation consists of the most recent inventory purchases.

____

8. The same unit cost is used to value ending inventory and cost of goods sold.

____

9. Title to goods transfers when the goods are delivered to the buyer.

____ 10. Measures the number of times the inventory sold during the period. Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

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

I E B G A

6. 7. 8. 9. 10.

C F H D J

SHORT-ANSWER ESSAY QUESTIONS S-A E 236 The periodic and the perpetual inventory systems are two methods that companies use to account for inventories. Briefly describe the major features of each system and explain why a physical inventory is necessary under both systems. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 236 When a periodic inventory system is used, the Inventory account remains the same throughout the period. Separate accounts are used to record the transactions. Cost of goods sold is determined by the following formula: Beginning inventory + Net purchases - Ending inventory The determination of ending inventory is made by a physical count. When a perpetual inventory system is used, the purchase and sale of goods is recorded directly in the Inventory account, which eliminates the need for separate purchases accounts. Cost of goods sold is recognized for each sale by debiting the account and crediting Inventory. At the end of the period, the ending account balance in inventory represents the amount of inventory that should be on hand. However, a company should conduct a physical inventory count, at least once a year, because differences could result from spoilage, theft, or errors. S-A E 237 What is the primary basis of accounting for inventories? What is the major objective in accounting for inventories? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 237 The primary basis of accounting for inventories is cost in accordance with the historical cost principle. The major objective of accounting for inventories is the proper determination of net income in accordance with the expense recognition principle. S-A E 238 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. Requirement .

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Provide brief, yet concise responses to the following questions. a. Why are LIFO and FIFO so popular? b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 238 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. Companies must choose an inventory method and follow it each year (consistency) until a proper accounting change is made. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be used for financial reporting purposes. This rule keeps companies from using LIFO for tax purposes to show the lower net income and FIFO for external reporting to show the higher net income. 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. 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.

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S-A E 239 Your office is on the 68th floor of your building. The CEO’s office is on the 77th floor. The two of you are waiting for an elevator one morning. The CEO states “Our prices are rising and I want the lowest net income for tax purposes and the highest ending inventory for external reporting purposes. Which inventory method should we use? Requirement You have three minutes to respond to the CEO. What is your response? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 239 You have asked a very good question and I am glad to respond to it. In periods of rising prices, LIFO results in the lowest net income, thus resulting in the lowest income tax. FIFO results in the highest net income, thus resulting in the most favorable external reporting information. Unfortunately companies cannot use LIFO for tax purposes and FIFO for financial reporting purposes. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be used for financial reporting purposes. This LIFO conformity rule causes company decision makers to weigh all of the pros and cons of each inventory method. While LIFO does produce the lowest net income when prices are rising, there is a danger in using it. Since LIFO ending inventory represents the oldest costs of the company, it becomes necessary to try to maintain a constant level of units of ending inventory. If the level of inventory units falls at the end of the accounting period, phantom, or paper, profits end up in net income. This creates a larger income tax liability. To avoid this problem, and to report the highest net income for external financial purposes, I suggest that the company use FIFO. S-A E 240 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 240 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.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 240

(Cont.)

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 Tax Method Effect Average Falls between FIFO and LIFO FIFO Highest net income, thus highest taxes

LIFO

Lowest net income, thus lowest taxes (works best if constant levels of inventory units are maintained)

Income Statement Effect Falls between FIFO and LIFO Highest net income. Thus more attractive for external financial reporting Lowest net income (If you use LIFO for tax purposes, you must also use it for external financial reporting.)

Balance Sheet Effect Falls between FIFO and LIFO Most realistic ending inventory because the latest costs are matched to ending inventory Most unrealistic ending inventory because the earliest costs are matched to ending inventory

S-A E 241 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 241 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 242 Glenda Carson is studying for the next accounting midterm examination. What should Glenda 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

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Solution 242 Glenda should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is no longer as great as 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 243 What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 243 The LIFO reserve is a required disclosure for companies that employ LIFO. It is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. Ignoring a large LIFO reserve when analyzing a company can distort any comparisons that an analyst might try to make with a company's competitors that used FIFO. S-A E 244 (Ethics) Angie and Neal Fry are department managers in the housewares and shoe departments, respectively, for Calhouns, a large department store. Neal has observed Angie taking inventory from her own department home, apparently without paying for it. He hesitates confronting Angie because he is due to be promoted, and needs Angie's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Angie tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Calhouns 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, Neal relaxes. "The system will catch Angie now," he says to himself. Required: 1. Is Neal's attitude justified? Why or why not? 2. What, if any, action should Neal take now? Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Internal Controls

Solution 244 1. Neal's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Neal should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Neal's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Neal's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Calhouns if someone else reports Angie's actions. The resulting investigation may implicate Neal because of his failure to notify the proper authorities in a timely manner. .

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S-A E 245 (Communication) Al Bodkin, a new employee of Crafter's Paradise, 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 Al reasoned that the goods should be included in inventory sooner because Crafter's paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Crafter’s inventory at all. Al told Sid Goza, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Al'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. Sid Goza has reported the problem to the accounting department. Required: You are Al's supervisor. Write a memo to Al explaining why the error should have been corrected. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 245 MEMO

TO:

Al Bodkin, Accounting Department

FROM:

Martha King, Supervisor

DATE:

March 12, 200x

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)

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IFRS QUESTIONS 1.

The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Under GAAP, companies can choose which inventory system? a. b. c. d.

LIFO

FIFO

Yes Yes No Yes

No Yes Yes No

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Under IFRS, companies can choose which inventory system? a. b. c. d.

LIFO

FIFO

Yes Yes No Yes

No Yes Yes No

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Specific Identification can be used for inventory valuation under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

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

a. b. c. d.

essentially similar essentially different essentially similar essentially different

Costs to include in inventory

essentially similar essentially different essentially different essentially similar

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

10.

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

11.

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Reporting and Analyzing Inventory

12.

6-87

The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

13.

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

14.

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

15. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

16.

The option to value inventory at fair value exists under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

17.

Certain agricultural and mineral products can be reported at net realizable value under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8.

1 1 2 2 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 2 2

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. 67. 68. 69. 70. 71. 72.

1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

C K K K K K K K K K K K K K K K K K C C K K K K K K K K K C K K K

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. 103. 104. 105.

2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

Item

True-False Statements K 17. 2 K 25. K 18. 2 K 26. K 19. 2 K 27. K 20. 2 K 28. K 21. 3 K 29. K 22. 3 K 30. K 23. 3 K 31. K 24. 4 K 32. Multiple Choice Questions K 106. 4 K 139. K 107. 5 K 140. K 108. 5 K 141. K 109. 5 K 142. K 110. 5 K 143. C 111. 5 K 144. C 112. 5 K 145. K 113. 5 K 146. K 114. 5 K 147. K 115. 5 K 148. K 116. 5 K 149. K 117. 5 K 150. K 118. 5 AP 151. K 119. 5 AP 152. K 120. 5 AP 153. K 121. 5 AP 154. K 122. 5 AP 155. K 123. 5 AP 156. K 124. 5 K 157. K 125. 5 K 158. K 126. 5 K 159. K 127. 5 AP 160. K 128. 5 AP 161. K 129. 5 AP 162. K 130. 5 AP 163. K 131. 5 AP 164. K 132. 5 AP 165. C 133. 5 K 166. K 134. 5 AP 167. K 135. 5 AP 168. K 136. 5 AP 169. K 137. 5 K 170. C 138. 5 AP 171.

Item

4 4 5 5 5 5 6 6

K K K K K K K K

33. 34. 35. 36. 37. *38. *39.

6 6 7 8 8 9 9

K K K K K K K

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 7 7 7 7 7 8 8 8 8 8 8 8

AP C C C C AP AP AP AP AP AP AP AP AP AP C K K K K K K K K K K K AP AP AP K AP AP

172. 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.

8 8 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9

AP K K AP AP C AP AP AP AP AP K AP AP K K C K AP K AP AP AP AP AP AP AP K K

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

201. 202. 203.

2 2 3

K K K

204. 205. 206.

4 5 5

212. 213. 214. 215. 216. 217.

2 2 5 5 5 5

C AN AP AP AP AP

218. 219. 220. 221. 222. 223.

5 5 5 5 5 5

239. 240. 241. 242.

1 1 1 1

K K K K

243. 244. 245. 246.

2 2 2 4

256.

1-7

Brief Exercises 207. 5 AP 210. 208. 5 AP 211. 209. 5 AP Exercises AP 224. 5 AN 230. AP 225. 5 AN 231. AP 226. 5 C 232. K 227. 5 AP 233. AP 228. 5 AP 234. AP 229. 5 AP *235. Completion Statements K 247. 4 K 251. K 248. 5 K 252. K 249. 5 K 253. K 250. 5 K *254. Matching K K K

Short Answer Essay 257. 1 K 259. 2 C 261. 2 C 263. 258. 2 C 260. 2 E 262. 4 K 264. *This topic is dealt with in an Appendix to the chapter.

5 6

AP AP

5 5 8 8 8 9

AP AP AP AP AP AP

*236. *237. *238.

9 9 9

AP AP AP

5 7 8 9

K K K K

*255.

5 7

C C

265. 266.

2 2

E C

SUMMARY OF LEARNIG OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

40.

41.

256.

257.

MC MC MC MC MC MC MC MC MC MC MC MC MC

76. 77. 78. 79. 201. 202. 212. 213. 239. 240. 241. 242. 243.

MC MC MC MC Be Be Ex Ex C C C C C

244. 245. 256. 258. 259. 260. 261. 265. 266.

C C Ma SA SA SA SA SA SA

Learning Objective 2

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

TF TF TF TF TF TF TF TF TF TF TF TF TF

16. 17. 18. 19. 20. 42. 43. 44. 45. 46. 47. 48. 49.

TF TF TF TF TF MC MC MC MC MC MC MC MC

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.

MC MC MC MC MC MC MC MC MC MC MC MC MC

63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

Fraud, Internal Control, and Cash

Learning Objective 3 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

21. 22.

TF TF

23. 80.

TF MC

81. 82.

MC MC

83. 84.

MC MC

85. 86.

MC MC

87. 256.

MC Ma

105. 106. 225. 256. 262.

MC MC C Ma SA

210. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226.

Be Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex

227. 228. 229. 230. 248. 249. 250. 251. 256. 263.

Ex Ex Ex Ex C C C C Ma SA

158. 159.

MC MC

211. 256.

Be Ma

264.

183. 184. 185. 231. 232.

MC MC MC Ex Ex

233. 234. 253.

Ex Ex C

Learning Objective 4

24. 25. 26. 88. 89.

TF TF TF MC MC

90. 91. 92. 93. 94.

MC MC MC MC MC

95. 96. 97. 98. 99.

27. 28. 29. 30. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.

TF TF TF TF MC MC MC MC MC MC MC MC MC MC

117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC

131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144.

MC MC MC MC MC

100. 101. 102. 103. 104.

MC MC MC MC MC

Learning Objective 5

MC MC MC MC MC MC MC MC MC MC MC MC MC MC

145. 146. 147. 148. 149. 150. 151. 152. 153. 205. 206. 207. 208. 209.

MC MC MC MC MC MC MC MC MC Be Be Be Be Be

Learning Objective 6

31. 32.

TF TF

33. 34.

TF TF

154. 155.

MC MC

156. 157.

MC MC

Learning Objective 7

35. 160.

TF MC

161. 162.

MC MC

163. 164.

MC MC

231. 256.

C Ma

Learning Objective 8

36. 37. 165. 166. 167.

TF TF MC MC MC

168. 169. 170. 171. 172.

MC MC MC MC MC

173. 174. 175. 176. 177.

MC MC MC MC MC

178. 179. 180. 181. 182.

MC MC MC MC MC

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Learning Objective 9 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

34. 38. 39. 186.

TF TF TF MC

187. 188. 189. 190.

MC MC MC MC

191. 192. 193. 194.

MC MC MC MC

195. 196. 197. 198.

MC MC MC MC

199. 200. 235. 236.

MC MC Ex Ex

237. 238. 254. 255.

Ex Ex C C

Note: TF = True-False MC = Multiple Choice Ma = Matching

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LEARNING 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 activities. The principles of internal control are establishment of responsibility; segregation of duties; documentation procedures; physical controls; independent internal verification; and human resource controls. 3. Explain the applications of internal control principles to cash receipts. Internal controls over cash receipts include: (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals; (c) obtaining remittance advices for mail receipts, cash register tapes or computer records for over-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-the-counter receipts; (e) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (f) bonding personnel who handle cash, as well as requiring them to take vacations. 4. Explain the applications of internal control principles to cash disbursements. Internal controls over cash disbursements include: (a) having only specified individuals such as the treasurer authorized to sign checks; (b) assigning the duties of approving items for payment, paying the items, and recording the payment to different individuals; (c) using prenumbered checks and accounting for all checks, with each check supported by an approved invoice; after payment, stamping each approved invoice “paid”; (d) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a machine with indelible ink to imprint amounts on checks; (e) comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks.

Fraud, Internal Control, and Cash

7-5

5. Prepare a bank reconciliation. In reconciling the bank account, it is customary to reconcile the balance per books and the balance per bank to their adjusted balance. The steps reconciling the Cash account are to determine deposits in transit, outstanding checks, errors by the depositor or the bank, and unrecorded bank memoranda. 6. Explain the reporting of cash. Cash is listed first in the current assets section of the balance sheet. Companies often report cash together with cash equivalents. Cash restricted for a special purpose is reported separately as a current asset or as a noncurrent asset, depending on when the company expects to use the cash. 7. Discuss the basic principles of cash management. The basic principles of cash management include: (a) increase the speed of receivables collection, (b) keep inventory levels low, (c) monitor the timing of payment of liabilities, (d) plan timing of major expenditures, and (e) invest idle cash. 8. Identify the primary elements of a cash budget. The three main elements of a cash budget are the cash receipts section, cash disbursements section, and financing section. *9. Explain the operation of a petty cash fund. In operating a petty cash fund, a company establishes the fund by appointing a custodian and determining the size of the fund. The custodian makes payments from the fund for documented expenditures. The company replenishes the fund as needed, and at the end of each accounting period. Accounting entries to record payments are made each time the fund is replenished.

TRUE-FALSE STATEMENTS 1.

The most important element of the fraud triangle is rationalization.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

Employees sometimes commit fraud because of personal financial problems caused by too much debt.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

The safeguarding of assets is an objective of a company's system of internal control.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

Internal control is most effective when several people are responsible for a given task.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

An effective system of internal control centralizes functions in a single capable individual.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

7-6 7.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

10.

Bonding means insuring a company against theft by employees.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

11.

It is unlikely that a company would want to bond its employees who handle cash or inventory.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

12.

An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

13.

A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

14.

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

15.

Only large companies need to be concerned with a system of internal control.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

16.

Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

17.

The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

18.

7-7

The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

19.

In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

20.

Segregation of duties among employees eliminates the possibility of collusion.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

21.

For efficiency of operations and better control over cash, a company should maintain only one bank account.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

22.

Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

23.

The treasurer should prepare and sign a check only after authorization to issue a check has been provided.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

24.

Control over cash disbursements is improved if major expenditures are paid by check.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

25.

An example of segregation of duties is having a check signer recording cash disbursements.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

26.

Electronic funds transfer (EFT) is a disbursement system that uses a telephone or a computer to transfer cash from one location to another.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: None

27.

One example of a periodic independent verification is the bank reconciliation.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

28.

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

29.

All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the cash account.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

7-8 30.

A bank reconciliation is generally prepared by the bank and sent to the depositor along with canceled checks.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

31.

Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

Cash equivalents include money market accounts, commercial paper, and U.S. treasury bills held for ninety days or less.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33.

Cash restricted in use should be separately reported on the balance sheet.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34.

Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

35.

A basic principle of cash management is to increase the speed of paying liabilities.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

36.

If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

37.

A cash budget contributes to more effective cash management.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*38.

A petty cash fund is used to pay relatively large amounts.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*39.

The petty cash fund eliminates the need for a bank checking account.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.

F T T F F F T

8. 9. 10. 11. 12. 13. 14.

F T T F F T F

15. 16. 17. 18. 19. 20. 21.

F F T T F F F

22. 23. 24. 25. 26. 27. 28.

F T T F T T F

29. 30. 31. 32. 33. 34. 35.

T F T T T F F

36. 37. 38. 39.

F T F F

Fraud, Internal Control, and Cash

7-9

MULTIPLE CHOICE QUESTIONS 40.

Which of the following is not one of the main factors that contribute to fraudulent activity? a. Opportunity. b. Incompatible duties. c. Financial pressure. d. Rationalization.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

41.

All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act except a. independent outside auditors must attest to the level of internal control. b. companies must develop sound internal controls over financial reporting. c. companies must continually assess the functionality of internal controls. d. independent outside auditors must eliminate redundant internal controls.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

42.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

43.

Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets. b. Enhance the accuracy and reliability of accounting records. c. Fairness of the financial statements. d. Reduce the risks of errors.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

44.

All of the following are examples of internal control procedures except a. using prenumbered documents. b. reconciling the bank statement. c. customer satisfaction surveys. d. insistence that employees take vacations.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

45.

Each of the following is a feature of internal control except a. an extensive marketing plan. b. bonding of employees. c. separation of duties. d. recording of all transactions.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-10 46.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Each of the following is a feature of internal control except a. limited access to assets. b. independent internal verifications. c. authorization of transactions. d. generic design of documents.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

47.

Which of the following is not a limitation of internal control? a. Cost of establishing control procedures should not exceed their benefit. b. The human element. c. Collusion. d. The size of the company.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

48.

Internal controls are concerned with a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets. d. preparing income tax returns.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

49.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

50.

Under the concept of establishment of responsibility, how many people should have the ultimate responsibility? a. Everyone in the organization. b. An individual and his/her supervisor. c. Only one individual. d. The CEO.

Ans: C, LO: 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.

Internal controls are not designed to safeguard assets from a. natural disasters. b. employee theft. c. robbery. d. unauthorized use.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

52.

7-11

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control. d. is a good example of safeguarding the company's assets.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

53.

The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

54.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

55.

When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

56.

From an internal control standpoint, the asset most susceptible to improper diversion and use is a. prepaid insurance. b. cash. c. buildings. d. land.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

57.

A traditional definition of internal control specifically includes all of the following features except a. adherence to prescribed managerial policies. b. promotion of operational efficiency. c. reliability of accounting data. d. insistence that employees not take earned vacations.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-12 58.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A consequence of separation of duties is that a. theft by employees becomes impossible. b. operations become extremely inefficient because of constant training of employees. c. more employees will need to be bonded. d. theft is still possible when several employees are involved.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

59.

A very small company would have the most difficulty in implementing which of the following internal control activities? a. Separation of duties. b. Limited access to assets. c. Periodic independent verification. d. Sound personnel procedures.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

60.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

61.

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. separation of duties. d. rotation of duties.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

62.

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 separation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

63.

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. separation of duties is violated.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

64.

7-13

Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

65.

Related purchasing activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

66.

Joe is a 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

67.

Physical controls to safeguard assets do not include a. cashier department supervisors. b. vaults. c. safety deposit boxes. d. locked warehouses.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

68.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

69.

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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-14 70.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

71.

In a small business, the lack of certain separations of duties can best be overcome by a. bonding the employees. b. getting the owner actively involved. c. hiring only honest employees. d. holding one person responsible for a given set of transactions.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

72.

Mrs. Smith has worked for Bosco Inc. for 20 years without taking a vacation. An internal control feature that would address this situation would be a. human resource controls. b. establishment of responsibility. c. physical controls. d. documentation procedures.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

73.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

74.

Which of the following statements is correct? a. Due to its liquid nature, cash is the easiest asset to steal. b. A good system of internal control will ensure that employees will not be able to steal cash. c. It takes two or more employees working together to be able to steal cash. d. All of these answer choices are correct.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

75.

Internal control measures a. only apply to publicly traded companies. b. are in place to safeguard assets. c. can eliminate all irregularities in the accounting process. d. All of these answer choices are correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

76.

7-15

Sam’s Grocery Store has the following policy. ‘Only one cashier can have access to a cash drawer.’ Which internal control principle supports this policy? a. Documentation procedures. b. Segregation of duties. c. Physical controls. d. Establishment of responsibilities.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

77.

Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated? a. None, Ron has proven to be trustworthy and has enough experience to do a good job. b. Documentation procedures. c. Establishment of responsibilities. d. Segregation of duties.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

78.

What is the rationale for the internal control principle, segregation of duties? a. History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties. b. The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee. c. Control is most effective when only one person is responsible for a give task. d. Segregation of duties causes companies to hire more employees and thus it supports the economy.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

79.

Bonding involves all of the following except a. The company obtains insurance protection against misappropriation of assets by a dishonest employee. b. The insurance company screens employees before they are added to the policy. c. The company informs employees that the insurance company will vigorously prosecute all offenders. d. Employees do not commit inappropriate acts because of the threat of prosecution and their loyalty to the employer.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

80.

Which of the following would not be included in the definition of cash? a. Money on deposit in a bank. b. Coins. c. NSF checks. d. Petty cash.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

7-16 81.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At Emerson Company, one bookkeeper prepares the cash deposits while the other bookkeeper enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts? a. Physical controls. b. Documentation procedures. c. Segregation of duties. d. Mechanical controls.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

82.

Which one of the following items would not be considered cash? a. Coins. b. Money orders. c. Currency. d. Postdated checks.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83.

The reconciliation of the cash register tape with the cash in the register is an example of a. other controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

84.

Which of the following is not an internal control procedure for cash? a. Payments should be made with cash. b. There should be limited access to cash. c. The amount of cash on hand should be kept to a minimum. d. Cash should be deposited daily.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

85.

Which of the following is not an internal control activity for cash? a. The number of persons who have access to cash should be limited. b. The functions of record keeping and maintaining custody of cash should be combined. c. Surprise audits of cash on hand should be made occasionally. d. All cash receipts should be recorded promptly.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

86.

Supervisors counting cash receipts daily is an example of a. human resource controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

87.

7-17

Which of the following is not an internal control procedure for cash? a. Only designated personnel are authorized to handle cash. b. The same individual receives the cash and pays the bills. c. Surprise audits of cash on hand should be made occasionally. d. Access to cash is limited.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

88.

Which of the following is not an internal control activity for cash? a. All payments should be made with currency, not checks. b. Banking facilities should be used as much as possible. c. The amount of cash on hand should be kept to a minimum. d. Employees who have access to cash should be bonded.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

89.

Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

90.

Which of the following is not a suggested procedure to establish internal control over cash disbursements? a. Anyone can sign the checks. b. Different individuals approve and make the payments. c. Blank checks are stored with limited access. d. The bank statement is reconciled monthly.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

91.

The use of prenumbered checks is an example of a. documentation procedures. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

92.

Before a check authorization is issued, the following documents must be in agreement, except for the a. invoice. b. remittance advice. c. receiving report. d. purchase order.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-18 93.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following is an appropriate internal control activity for cash? a. Record keeping and custodianship over cash should be performed by the same person. b. Banking facilities should be used as little as possible. c. All payments should be made with currency, not checks. d. The amount of cash on hand should be kept to a minimum.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

94.

An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

95.

Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. separation of duties. c. other controls. d. establishment of responsibility.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

96.

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 pre-numbered.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

97.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

98.

Electronic funds transfer (EFT) is a disbursement system that transfers cash from one location to another using a. a telephone. b. a telegraph. c. a computer. d. a telephone, telegraph, or computer.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Applications

Fraud, Internal Control, and Cash

99.

7-19

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 activities that increased or decreased the depositor's account balance.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

100.

Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge. b. Collection of a note receivable. c. Wiring of funds to other locations. d. Checks marked NSF.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

101.

A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account that is a. a contra asset account. b. a liability account. c. also an asset account. d. a stockholders' equity account.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102.

A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

103.

All of the following are items that would most likely be paid from a petty cash fund except a. postage due. b. taxi fares. c. administrative wages. d. freight-out.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

104.

All of the following are true regarding bank statements except a. the bank statement will show a credit for deposits received from a company. b. the bank statement balance will always agree with the company recorded balance. c. the bank statement is a copy of the bank's records sent to the customer for periodic review. d. the bank statement will show a debit if a check is paid for a company issuing the check.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7-20 105.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following controls would best help detect the removal of a blank check by an employee from the back of a company's checkbook for subsequent misappropriation of funds? a. An accounting policies manual. b. Tracing any debit memorandums from the bank to the company's records. c. The use of prenumbered checks. d. A review of the cash budget.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

106.

On a bank statement, paid checks are shown as a. credits. b. debits c. assets. d. liabilities.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

A NSF check should appear in which section of the bank reconciliation? a. Addition to the balance per books. b. Deduction from the balance per bank. c. Addition to the balance per bank. d. Deduction from the balance per books.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

Which of the following would be deducted from the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

109.

Which of the following would be added to the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. NSF check.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

110.

Which of the following would not be subtracted from the balance per books on a bank reconciliation? a. Outstanding checks. b. NSF checks. c. Check printing charge. d. Service charges.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Fraud, Internal Control, and Cash

111.

7-21

Which of the following would be deducted from the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

112.

Which of the following would be added to the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

113.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

114.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

115.

A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud. c. to explain any difference between the depositor's balance per books with the balance per bank. d. by the person who is authorized to sign checks.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

116.

Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are customers’ checks that have not yet been received by the company.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

7-22 117.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

118.

If a check correctly written and paid by the bank for $628 is incorrectly recorded on the company's books for $682, the appropriate treatment on the bank reconciliation would be to a. add $54 to the book's balance. b. subtract $54 from the book's balance. c. deduct $54 from the bank's balance. d. deduct $628 from the book's balance.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119.

A check written by the company for $167 is incorrectly recorded by a company as $176. On the bank reconciliation, the $9 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

120.

For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation? a. Check for $63 recorded as $36. b. Deposit of $600 recorded by bank as $60. c. A returned $300 check recorded by bank as $30. d. Check for $75 recorded as $57.

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

121.

For which of the following errors should the appropriate amount be subtracted from the balance per bank on a bank reconciliation? a. Check for $63 recorded as $36. b. Deposit of $600 recorded by bank as $60. c. A returned $300 check recorded by bank as $30. d. Check for $75 recorded as $57.

Ans: C, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122.

For which of the following errors should the appropriate amount be added to the balance per books on a bank reconciliation? a. Check written for $63, but recorded as $36. b. Deposit of $600 recorded by bank as $60. c. A returned $300 check recorded by bank as $30. d. Check written for $57, but recorded as $75.

Ans: D, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Fraud, Internal Control, and Cash

123.

7-23

For which of the following errors should the appropriate amount be subtracted from the balance per books on a bank reconciliation? a. Check written for $63, but recorded as $36. b. Deposit of $600 recorded by bank as $60. c. A returned $300 check recorded by bank as $30. d. Check written for $57, but recorded as $75.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

124.

Which of the following bank reconciliation items would not result in an adjusting entry? a. Service charge. b. Deposits in transit. c. NSF check of customer. d. Collection of a note by the bank.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

125.

Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books? a. An error by the bank. b. Outstanding checks. c. A bank service charge. d. A deposit in transit.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

126.

All of the following bank reconciliation items would result in an adjusting entry on the company’s books except a. interest earned. b. deposits in transit. c. fee for collection of note by bank. d. NSF check of customer.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

127.

Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

7-24 128.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

James Company had checks outstanding totaling $21,600 on its June bank reconciliation. In July, James Company issued checks totaling $155,600. The July bank statement shows that $105,200 in checks cleared the bank in July. A check from one of James Company's customers in the amount of $1,200 was also returned marked "NSF." The amount of outstanding checks on James Company's July bank reconciliation should be a. $50,400. b. $72,000. c. $70,800. d. $28,800.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $21,600 + $155,600 − $105,200 = $72,000

129.

Dekin Company had checks outstanding totaling $17,000 on its May bank reconciliation. In June, Dekin Company issued checks totaling $106,400. The July bank statement shows that $79,200 in checks cleared the bank in July. A check from one of Dekin Company's customers in the amount of $800 was also returned marked "NSF." The amount of outstanding checks on Dekin Company's July bank reconciliation should be a. $43,400. b. $27,200. c. $44,200. d. $10,200.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $17,000 + $106,400 − $79,200 = $44,200

130.

Nilson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 $21,000 Deposits in transit 900 Notes receivable and interest collected by bank 5,100 Bank charge for check printing 120 Outstanding checks 12,000 NSF check 1,020 The adjusted cash balance per books on August 31 is a. $24,960. b. $24,060. c. $13,800. d. $14,760.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $21,000 + $5,100 − $120 − $1,020 = $24,960

Fraud, Internal Control, and Cash

131.

7-25

Karlin Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $13,200 Deposits in transit 1,800 Notes receivable and interest collected by bank 4,440 Bank charge for check printing 150 Outstanding checks 9,000 NSF check 840 The adjusted cash balance per books on April 30 is a. $18,450. b. $17,640. c. $16,650. d. $18,330.

132.

Clark Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 $30,800 Note receivable collected by bank 16,800 Outstanding checks 25,200 Deposits in transit 12,600 Bank service charge 210 NSF check 3,360 Using the above information, determine the cash balance per books (before adjustments) for the Clark Company. a. $27,370. b. $43,400. c. $4,970. d. $42,000.

133.

Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books.

Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

7-26 134.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Higgins Company gathered the following reconciling information in preparing its October bank reconciliation: Cash balance per books, 10/31 $12,600 Deposits in transit 450 Notes receivable and interest collected by bank 2,550 Bank charge for check printing 60 Outstanding checks 6,000 NSF check 510 The adjusted cash balance per books on October 31 is a. $14,130. b. $12,030. c. $8,580. d. $14,580.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $12,600 + $2,550 − $60 − $510 = $14,580

135.

Dobler Company gathered the following reconciling information in preparing its June bank reconciliation: Cash balance per books, 6/30 $8,400 Deposits in transit 600 Notes receivable and interest collected by bank 1,480 Bank charge for check printing 50 Outstanding checks 3,000 NSF check 280 The adjusted cash balance per books on June 30 is a. $10,150. b. $9,880. c. $9,550. d. $10,110.

136.

Adler Company developed the following reconciling information in preparing its December bank reconciliation: Cash balance per bank, 12/31 $20,000 Note receivable collected by bank 10,000 Outstanding checks 15,000 Deposits in transit 7,500 Bank service charge 125 NSF check 2,000 Using the above information, determine the cash balance per books (before adjustments) for the Adler Company. a. $4,625. b. $27,500. c. $14,625. d. $20,000.

Fraud, Internal Control, and Cash

137.

7-27

An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

138.

In the month of November Gavin Company Inc. wrote checks in the amount of $37,000. In December, checks in the amount of $50,632 were written. In November, $33,872 of these checks were presented to the bank for payment, and $43,532 in December. What is the amount of outstanding checks at the end of December? a. $7,100. b. $10,228. c. $3,128. d. $14,200.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($37,000 + $50,632) − ($33,872 + $43,532) = $10,228

139.

In the month of November Gavin Company Inc. wrote checks in the amount of $27,750. In December, checks in the amount of $37,974 were written. In November, $25,404 of these checks were presented to the bank for payment, and $32,649 in December. What is the amount of outstanding checks at the end of December? a. $5,325. b. $2,346. c. $7,671. d. $10,650.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($27,750 + $37,974) − ($25,404 + $32,649) = $7,671

140.

What causes the balance on the bank statement to differ from the cash balance in the general ledger? a. Time lags. b. Errors by the bank. c. Errors by the company. d. All of these answer choices are correct.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141.

Of the following employees, who should prepare the bank reconciliation? a. Anne, the bookkeeper, because she is aware of all transactions that affected cash. b. Michael, the treasurer, because he has control of the checkbook and has taken more accounting courses than any other employee. c. Mary, the cashier, because she does not pay bills. d. Frank, the purchasing agent, because he does not work in the accounting department.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-28 142.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

While preparing the bank reconciliation, you notice that a check, written by the company for $750, has been outstanding for 5 months. What is the best action for you to take? a. Void the check. If it has not been cashed in 5 months, it will never be cashed. b. Issue a replacement check because you assume the original check has been lost. c. Wait 3 more months to give the bank more time to clear the check. d. Investigate to determine why the check has not cleared.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

143.

Which of the following is an example of a bank reconciliation item that requires an adjusting entry? a. NSF check. b. Deposit in transit. c. Bank error. d. None of these items requires an adjusting entry.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

144.

At April 30, Kessler Company has the following bank information: Cash balance per bank $11,500 Outstanding checks $700 Deposits in transit $1,375 Credit memo for interest $25 Bank service charge $50 What is Kessler’s adjusted cash balance on April 30? a. $12,150. b. $12,200. c. $10,825. d. $12,175.

145.

At April 30, Mendoza Company has the following bank information: Cash balance per bank $7,200 Outstanding checks $560 Deposits in transit $1,100 Credit memo for interest $20 Bank service charge $40 What is Mendoza’s adjusted cash balance on April 30? a. $7,720. b. $7,760. c. $6,660. d. $7,740.

Fraud, Internal Control, and Cash

146.

7-29

Lackey Company wrote checks totaling $25,620 during October and $27,976 during November. $24,360 of these checks cleared the bank in October, and $27,330 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $1,906. b. $346. c. $916. d. $2,970.

147.

Bishop Company wrote checks totaling $34,160 during October and $37,300 during November. $32,480 of these checks cleared the bank in October, and $36,440 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $2,540. b. $460. c. $1,220. d. $3,960.

148.

Russel Company assembled the following information in completing its March 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, Russel will a. reduce its cash account by $1,425. b. reduce its cash account by $75. c. increase its cash account by $165. d. reduce its cash account by $315.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $240 + $75 = $315

7-30 149.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Schwinn Company assembled the following information in completing its March bank reconciliation: Balance per bank $15,280 Outstanding checks $3,100 Deposits in transit $5,000 NSF check $320 Bank service charge $100 Cash balance per books $17,600 As a result of this reconciliation, Schwinn will a. reduce its cash account by $1,900. b. reduce its cash account by $100. c. increase its cash account by $220. d. reduce its cash account by $420.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $320 + $100 = $420

150.

If a check correctly written and paid by the bank for $491 is incorrectly recorded on the company’s books for $419, the appropriate treatment on the bank reconciliation would be to a. add $72 to the book’s balance. b. subtract $72 from the book’s balance. c. deduct $72 from the bank’s balance. d. deduct $491 from the book’s balance.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

151.

A check written by the company for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

152.

In the month of May, Lopat Company Inc. wrote checks in the amount of $55,500. In June, checks in the amount of $75,948 were written. In May, $50,808 of these checks were presented to the bank for payment, and $65,298 in June. What is the amount of outstanding checks at the end of May? a. $10,650. b. $4,692. c. $15,342. d. $21,300.

Fraud, Internal Control, and Cash

153.

7-31

In the month of May, Lopat Company Inc. wrote checks in the amount of $46,250. In June, checks in the amount of $63,290 were written. In May, $42,340 of these checks were presented to the bank for payment, and $54,415 in June. What is the amount of outstanding checks at the end of June? a. $8,875. b. $3,910. c. $12,785. d. $17,750.

154.

Which statement regarding negative cash balances is true? a. The amount is offset against other current assets because users need to know net current assets. b. The amount is shown as a current liability because a company cannot have a cash balance below zero. c. The company must obtain a loan to bring the cash balance to zero before financial statements are prepared. d. The negative cash balance is included as a current asset and discussed in a footnote to the financial statements.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

155.

Which item is a current asset? a. Cash – regardless of whether it has a positive or negative balance. b. Cash equivalents. c. Cash that will be used to close a plant in eighteen months. d. Restricted cash that will not be used within the upcoming year.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

156.

Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund. b. Commercial paper. c. Treasury bill. d. Restricted cash.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157.

Cash equivalents do not include a. money market accounts. b. commercial paper. c. U.S. Treasury bills. d. long-term investment.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7-32 158.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Restricted cash should be reported a. always as a noncurrent asset. b. separately on the income statement. c. separately on the balance sheet. d. always as a current asset.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159.

All of the following are true regarding the management and monitoring of cash except a. companies may have plenty of sales, but insufficient cash to support operations. b. the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company. c. manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers. d. companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

160.

Collier Company has implemented a just-in-time system, which relies on suppliers to deliver goods for resale as needed. This implementation is most consistent with which of the following basic principles of cash management? a. Increasing the speed of receivables collection. b. Planning the timing of major expenditures. c. Keeping inventory levels low. d. Delaying the payment of liabilities.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Economics

161.

Management of cash is the responsibility of the company a. accountant. b. president. c. treasurer. d. vice-president.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

162.

Which of the following is not a basic principle of cash management? a. Increase the speed of collection on receivables. b. Maintain idle cash. c. Keep inventory levels low. d. Delay payment of liabilities.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

163.

Which of the following is not a basic principle of cash management? a. Increase collection of receivables. b. Keep inventory levels high. c. Delay payment of liabilities. d. Invest idle cash.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Fraud, Internal Control, and Cash

164.

7-33

Which of the following is not a basic principle of cash management? a. Increase collection of receivables. b. Keep inventory levels low. c. Pay all liabilities early. d. Invest idle cash.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

165.

Which of the following does not appear as a separate section on the cash budget? a. Cash receipts. b. Cash disbursements. c. Cash sales. d. Financing.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

166.

The following information was taken from Mitchell Company cash budget for the month of July: Beginning cash balance $100,000 Cash receipts 96,000 Cash disbursements 136,000 If the company has a policy of maintaining end of the month cash balance of $100,000, the amount the company would have to borrow is a. $40,000. b. $20,000. c. $60,000. d. $24,000.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $100,000 − ($100,000 + $96,000 − $136,000) = $40,000

167.

The following information was taken from Hurlbert Company cash budget for the month June Beginning cash balance $46,000 Cash receipts 62,000 Cash disbursements 78,000 If the company has a policy of maintaining end of the month cash balance of $40,000, the amount the company would have to borrow is a. $24,000. b. $10,000. c. $16,000. d. $0.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40,000 − ($46,000 + $62,000 − $78,000) = $10,000

7-34 168.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information was taken from Niland Company cash budget for the month of April Beginning cash balance $90,000 Cash receipts 81,000 Cash disbursements 102,000 If the company has a policy of maintaining end of the month cash balance of $75,000, the amount the company would have to borrow is a. $87,000. b. $21,000. c. $6,000. d. $0.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $75,000 − ($90,000 + $81,000 − $102,000) = $6,000

169.

Which one of the following sections would not appear on a cash budget? a. Cash receipts. b. Financing needed. c. Investing. d. Cash disbursements.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

170.

The following information was taken from Hobson Company cash budget for the month of June Beginning cash balance $150,000 Cash receipts 145,000 Cash disbursements 170,000 If the company has a policy of maintaining end-of-the-month cash balance of $125,000, the amount the company would have to borrow is a. $50,000. b. $25,000. c. $0 d. $75,000.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

171.

The following information was taken from Molina Company cash budget for the month of November: Beginning cash balance $96,000 Cash receipts 116,000 Cash disbursements 160,000 If the company has a policy of maintaining an end-of-the-month cash balance of $80,000, the amount the company would have to borrow is a. $44,000. b. $0. c. $28,000. d. $80,000.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $80,000 − ($96,000 + $116,000 − $160,000) = $28,000

Fraud, Internal Control, and Cash

172.

7-35

The following credit sales are budgeted by Garcia Company: January $255,000 February 375,000 March 525,000 April 450,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of March is a. $462,900. b. $420,000. c. $450,000. d. $441,000.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($255,000  .08) + ($375,000  .20) + ($525,000  .70) = $462,900

173.

The cash receipts section of a cash budget includes all of the following except a. cash sales. b. collections from customers. c. receipts of interest and dividends. d. expected borrowings.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

174.

Which of the following is not included in the cash disbursements section of a cash budget? a. Payments for materials. b. Payments for income taxes. c. Repayments of borrowed funds. d. All of these answer choices are included.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

175.

The following credit sales are budgeted by Gonzalez Company: February 150,000 March 210,000 April 180,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of April is a. $144,000. b. $168,000. c. $180,000. d. $186,000.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($210,000  .20) + ($180,000  .80) = $186,000

7-36 176.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following credit sales are budgeted by Gonzalez Company: January $102,000 February 150,000 March 210,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of March is a. $198,000. b. $168,000. c. $210,000. d. $204,000.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($150,000  .20) + ($210,000  .80) = $198,000

177.

If the cash budget showed a projected cash shortage, the company would most likely a. make fewer purchases of inventory so they could control costs. b. lay off workers for that period. c. arrange to borrow the necessary cash for that period. d. cut salaries for that period.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

178.

Ferguson Company is preparing a cash budget for September. The company’s cash balance on September 1 is $23,200. The company anticipates cash receipts of $111,800 and cash disbursements of $117,320. If Ferguson desires a cash balance of $24,000, it must a. acquire financing of $800. b. acquire financing of $6,320. c. acquire financing of $4,720. d. acquire financing of $18,480.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $24,000 − ($23,200 + $111,800 − $117,000) = $6,320

179.

Petersen Company is preparing a cash budget for September. The company’s cash balance on September 1 is $17,400. The company anticipates cash receipts of $83,850 and cash disbursements of $87,990. If Petersen desires a cash balance of $18,000, it must a. acquire financing of $600. b. acquire financing of $4,740. c. acquire financing of $3,540. d. acquire financing of $13,860.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $18,000 − ($17,400 + $83,850 − $87,990) = $4,740

Fraud, Internal Control, and Cash

180.

7-37

The following credit sales are budgeted by Milford Company: May $357,000 June 525,000 July 735,000 August 630,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of August is a. $648,060. b. $588,000. c. $630,000. d. $617,400.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($525,000  .08) + ($735,000  .20) + ($630,000  .70) = $630,000

181.

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: April $ 200,000 May 120,000 June 300,000 The cash inflow in the month of June is expected to be a. $226,000. b. $171,000. c. $180,000. d. $216,000.

182.

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: July $240,000 August 144,000 September 360,000 The cash inflow in the month of September is expected to be a. $271,200. b. $205,200. c. $216,000. d. $259,200.

7-38

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

183.

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

184.

Expected direct materials purchases in Rees Company are $140,000 in the first quarter and $180,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a. $192,000. b. $180,000. c. $156,000. d. $144,000.

185.

Expected direct materials purchases in Wade Company are $525,000 in the first quarter and $675,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a. $720,000. b. $675,000. c. $585,000. d. $540,000.

*186. A credit balance in Cash Over and Short account is shown as a. an asset. b. a liability. c. a revenue. d. an expense. Ans: C, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*187. All of the following activities occur at the time of a cash disbursement from petty cash except a. the petty cash custodian signs the voucher. b. available supporting documents are attached to the voucher. c. a journal entry is made for each cash distribution. d. the individual receiving payment signs the voucher. Ans: C, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

7-39

*188. All of the following actions would strengthen internal control over a petty cash fund except a. surprise counts by a supervisor. b. cancellation of paid vouchers. c. submission of supporting documents. d. multiple petty cash custodians. Ans: D, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

*189. Which of the following is not a necessary internal control procedure for the replenishment of the petty cash fund? a. Segregation of duties. b. Documentation procedures. c. Independent internal verification. d. Employee background check. Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

*190. The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-In. d. Postage Expense. Ans: B, LO: 9, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*191. A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue. Ans: C, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*192. A $100 petty cash fund has cash of $10 and receipts of $80. The journal entry to replenish the account would include a credit to a. Cash for $90. b. Petty Cash for $90. c. Cash Over and Short for $10. d. Cash for $80. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100 − $10 = $90

*193. A $200 petty cash fund has cash of $37 and receipts of $160. The journal entry to replenish the account would include a a. debit to Cash for $160. b. credit to Petty Cash for $163. c. debit to Cash Over and Short for $3. d. credit to Cash for $160. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $200 − $37 − $160 = $3

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*194. A $100 petty cash fund has cash of $16 and receipts of $86. The journal entry to replenish the account would include a a. debit to Cash for $84. b. credit to Petty Cash for $84. c. credit to Cash Over and Short for $2. d. credit to Cash for $86. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $86 − ($100 − $16) = $2

*195. A $200 petty cash fund has cash of $26 and receipts of $170. The journal entry to replenish the account would include a. debit to Cash for $170. b. credit to Petty Cash for $170. c. debit to Petty Cash for $174. d. credit to Cash for $174. Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $200 − $26 = $174

*196. A $100 petty cash fund has cash of $14 and receipts of $84. The journal entry to replenish the account would include a a. debit to Cash for $84. b. credit to Petty Cash for $84. c. credit to Cash Over and Short for $2. d. credit to Cash for $86. Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100 − $14 = $86

*197. A $200 petty cash fund has cash of $32 and receipts of $171. The journal entry to replenish the account would include a. debit to Cash for $171. b. credit to Petty Cash for $171. c. credit to Cash over and Short for $3. d. credit to Cash for $171. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $171 − ($200 − $32

*198. A petty cash fund of $200 is replenished when the fund contains $12 in cash and receipts for $184. The entry to replenish the fund would a. credit Cash Over and Short for $4. b. credit Miscellaneous Revenue for $4. c. debit Cash Over and Short for $4. d. debit Miscellaneous Expense for $4. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Fraud, Internal Control, and Cash

7-41

*199. A petty cash fund should be replenished a. every day. b. at the end of every accounting period. c. once a year. d. as soon as an expense is paid from the fund. Ans: B, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*200. Entries are made to the Petty Cash account when a. establishing the fund. b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund. Ans: A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to Multiple Choice Questions 40. b 41. d 42. b 43. c 44. c 45. a 46. d 47. c 48. c 49. b 50. c 51. a 52. a 53. c 54. c 55. b 56. b 57. d 58. d 59. a 60. c 61. c 62. a

63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

d a a c a c c c b a b a b d d b d c c d b a b

86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.

b b a c a a b d c d a c d d b b b c b c b d d

109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131.

c a a b d d c a d a a b c d a b c b a b c a c

132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154.

c c d c a a b c d d d a d d a a d d b b b c b

155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177.

b d d c b c c b b c c a b c c c c a d c d a c

178. 179. 180. 181. 182. 183. 184. 185. *186. *187. *188. *189. *190. *191. *192. *193. *194. *195. *196. *197. *198. *199. *200.

b b c a a c c c c c d d b c a c c d d c c b a

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BRIEF EXERCISES Be. 201 Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described. Internal Control Principles A. Establishment of responsibility B. Segregation of duties C. Physical control devices D. Documentation procedures E. Independent internal verification F. Human resource controls ____

1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.

____

2. Three people handle cash sales from the same cash register drawer.

____

3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

____

4. The person who is authorized to sign checks approves purchase orders for payment.

____

5. Some cash payments are not recorded because checks are not prenumbered.

____

6. Cash shortages are not discovered because there are no daily cash counts by supervisors.

____

7. The treasurer of the company has not taken a vacation for over 20 years.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Fraud, Internal Control, and Cash

Solution 201 1. B 2. A 3. C

(5 min.) 4. B 5. D 6. E

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Be. 202 Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of internal control. ____

Cashiers are not bonded.

____

All payments are made with checks.

____

Discouraging employees from taking paid vacations.

____

Two people handle cash sales from the same cash register drawer.

____

Using prenumbered sales tickets.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 202 a. W

(5 min.) b. S

Be. 203 Identify the internal control procedures applicable to cash receipts for Colorado Company in each of the following situations. 1. All cashiers are bonded. 2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts. 5. Deposit slips are completed for each deposit. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 203 1. Human resource controls. 2. Independent internal verification. 3. Segregation of duties. 4. Establishment of responsibility. 5. Documentation procedures. Be. 204 Identify the internal control procedures applicable to cash disbursements followed by Tolan Company in each of the following cases. 1. Company checks are pre-numbered. 2. Only the treasurer is authorized to sign checks. 3. Bonding of employees that handle cash. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

7-44

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 204 1. Documentation procedures 2. Establishment of responsibility 3. Human resource controls 4. Physical controls 5. Segregation of duties Be. 205 Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation. 1. EFT transfer to a supplier. 2. Bank service charge. 3. Check printing charge. 4. Error recording check # 214 which was written for $230 but recorded for $320. 5. Collection of note and interest by bank on company’s behalf. Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 205 1. b 2. b 3. b 4. a 5. a Be. 206 Identify which of the following reconciling items would require an adjusting entry to be made by Costello Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $350 by Grover Company was returned NSF. 3. The bank charged the company $46 for printing checks. 4. Outstanding checks totaled $1,667. 5. A debit memorandum reported an EFT of $178 to Paco Utilities. Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 206 Adjusting entries would be required for: 2, 3, and 5 because they are reconciling items for the books. Be. 207 Foyle Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case. 1. A check for $59 written to the company by J. Hammond was returned NSF. 2. The monthly service charge by the bank was $34. 3. The bank collected a $1,000 note plus interest of $60 on the company’s behalf. The company had not accrued the interest. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Fraud, Internal Control, and Cash

Solution 207 1. Debit: Accounts Receivable 2. Debit: Miscellaneous Expense 3. Debit: Cash

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Credit: Cash Credit: Cash Credit: Notes Receivable, Interest Revenue

Be. 208 The following reconciling items are applicable to the bank reconciliation for the Gunselman Company. Indicate how each item should be shown on a bank reconciliation. a. b. c. d.

Outstanding checks. Bank credit memorandum for collecting a note for the depositor. Bank debit memorandum for service charge. Deposit in transit.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 208 (5 min.) a. Outstanding checks should be deducted from the balance per bank. b. Bank credit memorandum should be added to the balance per books. c. Bank debit memorandum should be deducted from the balance per books. d. Deposits in transit should be added to the balance per bank. Be. 209 At August 31 Kiner Company has this bank information: cash balance per bank $9,450; outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2014. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 209

(5 min.) Kiner Company Partial Bank Reconciliation August 31, 2014 Cash balance per bank Add: Deposit in transit

$ 9,450 1,700 11,150 762 $ 10,388

Less: Outstanding checks Adjusted cash balance per bank

Be. 210 Given the following information, determine the adjusted cash balance per books; Balance per books as of June 30 $8,800 Outstanding checks $600 NSF check returned with bank statement $130 Deposit mailed the afternoon of June 30 $300 Check printing charges $30 Interest earned on checking account $40 Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

7-46

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 210 (5 min.) $8,680: (8,800 - 130 - 30 + 40) Be. 211 The following information is available for Nichols Company for the month of February: expected cash receipts $40,000; expected cash disbursements $44,000; cash balance February 1, $11,000. Management wishes to maintain a minimum cash balance of $10,000. Prepare a basic cash budget for the month of February. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211

(5 min.) Nichols Company Cash Budget February Beginning cash balance $11,000 Add: Cash receipts 40,000 Total available cash 51,000 Less: Cash disbursements 44,000 Excess of available cash over cash disbursements 7,000 Financing needed 3,000 Ending cash balance $10,000

Exercises Ex. 212 Jim Gant has worked for Dr. Ken Flood for several years. Jim demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Jim's primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Jim doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office Jim offers to help Lisa post the payments to the patients' accounts receivable. She is always happy to receive his help, because he is a very conscientious worker. Instructions Identify any principles of internal control that may be violated in this medical office situation. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Fraud, Internal Control, and Cash

7-47

Solution 212 (10 min.) Violations: 1. It is Lisa's responsibility to post payments to patient accounts. In allowing Jim to assist her, the establishment of responsibility principle is violated. 2. Although it appears to be a small office, it is not appropriate that Jim 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 Jim being bonded. Also, personnel should be required to take vacations. Ex. 213 Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply. Possible Errors or Problems 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise. 2. A small fire destroys 3 days of cash receipts. 3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection. 4. A 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.

a. b. c. d. e. f.

Internal Control Principles Establishment of responsibility Segregation of duties Physical control devices Documentation procedures Independent internal verification Human resource controls

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

7-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 213 1. b 2. c 3. c 4. c

(10 min.) 5. a and e 6. b, d, and e 7. f

Ex. 214 Using the following information, prepare a bank reconciliation for Hintz Company for July 31, 2014. a. b. c. d. e. f.

The bank statement balance is $3,506. The cash account balance is $3,930 Outstanding checks totaled $1,285. Deposits in transit are $1,670. The bank service charge is $30. A check for $98 for supplies was recorded as $89 in the ledger.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214

(10 min.) Hintz Company Bank Reconciliation July 31, 2014 Cash balance per bank Add: (d) Deposit in transit

$ 3,506 1,670 5,176 1,285 $ 3,891

Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Less: (f) Check for supplies error (e) Bank service charge Adjusted cash balance per books

$ 3,930 $ 9 30

39 $ 3,891

Ex. 215 Using the following information, prepare a bank reconciliation for Munoz Company for May 31, 2014. a. b. c. d. e. f.

The bank statement balance is $8,300. The cash account balance is $6,562 Outstanding checks totaled $1,950. Deposits in transit are $600. The bank service charge is $12. Collection of note by bank, $400.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 215

7-49

(10 min.) Munoz Company Bank Reconciliation May 31, 2014 Cash balance per bank Add: (d) Deposit in transit

$ 8,300 600 8,900 1,950 $ 6,950

Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (f) Collection of a note

$ 6,562 400 6,962 12 $ 6,950

Less: (e) Bank service charge Adjusted cash balance per books

Ex. 216 Using the following information, prepare a bank reconciliation for Hammond Company for June 30, 2014. a. The bank statement balance is $7,650. b. The cash account balance is $6,422 c. Outstanding checks totaled $1,650. d. Deposits in transit are $900. e. The bank service charge is $22. f. Collection of note by bank, $500. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 216

(10 min.) Hammond Company Bank Reconciliation June 30, 2014 Cash balance per bank Add: (d) Deposit in transit

$ 7,650 900 8,550 1,650 $ 6,900

Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (f) Collection of a note

$ 6,422 500 6,922 22 $ 6,900

Less: (e) Bank service charge Adjusted cash balance per books

7-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 217 The Hartman Boat Company's bank statement for the month of November showed a balance per bank of $7,000. The company's Cash account in the general ledger had a balance of $5,659 at November 30. Other information is as follows: (1) Cash receipts for November 30 recorded on the company's books were $6,000 but this amount does not appear on the bank statement. (2) The bank statement shows a debit memorandum for $40 for check printing charges. (3) Check No. 119 payable to Maris Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Maris Company and that the payment to them should have been for $284. (4) The total amount of checks still outstanding at November 30 amounted to $5,800. (5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490. (6) The bank returned an NSF check from a customer for $560. (7) The bank included a credit memorandum for $2,060 which represents collection of a customer's note by the bank for the company; principal amount of the note was $2,000 and interest was $60. Interest has not been accrued. Instructions (a) Prepare a bank reconciliation for the Hartman Boat Company at November 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 217 (a)

(25 min.) HARTMAN BOAT COMPANY Bank Reconciliation November 30 Cash balance per bank Add: (1) Deposit in transit

$ 7,000 6,000 13,000 5,800 $ 7,200

Less: (4) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (5) Accounts payable error (7) Collect $2,000 note and interest $60 Less: (2) Check printing (6) NSF check Adjusted cash balance per books

$ 5,659 $ 81 2,060 40 560

Note: Item (3) is not a reconciling item.

2,141 7,800 600 $ 7,200

Fraud, Internal Control, and Cash

Solution 217 (b)

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(Cont.)

Nov. 30 Cash

Accounts Payable (To correct error in recording Check No. 138) 30 Cash

2,060

Notes Receivable Interest Revenue (To record collection of note receivable and interest by the bank)

2,000 60

30 Miscellaneous Expense Cash (To record check printing charges)

30 Accounts Receivable Cash (To record NSF check)

560

Ex. 218 The bank statement for Cates Company indicates a balance of $1,730 on June 30. The cash balance per books had a balance of $799 on this date. The following information pertains to the bank transactions for the company. 1. Deposit of $760, representing cash receipts of June 30, did not appear on the bank statement. 2. Outstanding checks totaled $340. 3. Bank service charges for June amounted to $25 4. The bank collected a note receivable for the company for $1,400 plus $56 interest revenue. 5. An NSF check for $80 from a customer was returned with the statement. Instructions a. Prepare a bank reconciliation for June 30. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 218 (a)

(25 min.) CATES COMPANY Bank Reconciliation June 30 Cash balance per bank Add: (1) Deposit in transit

$ 1,730 760 2,490 340 $ 2,150

Less: (2) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (4) $1,400 Note collected by bank plus interest of $56 1,456

$ 799

2,255 Less: (3) Bank service charge (5) NSF check Adjusted cash balance per books (b) June 30

$ 25 80

105 $ 2,150

Cash ............................................................................... Notes Receivable ................................................... Interest Revenue ..................................................... (To record collection of note receivable and interest by the bank)

1,456 1,400 56

Accounts Receivable ....................................................... Cash ....................................................................... (To record NSF check)

Miscellaneous Expense.................................................... Cash ........................................................................

Ex. 219 The bank statement for Adcock Company indicates a balance of $830 on July 31. The cash balance per books had a balance of $390 on this date. The following information pertains to the bank transactions for the company. 1. 2. 3. 4. 5.

Deposit of $840, representing cash receipts of July 31, did not appear on the bank statement. Outstanding checks totaled $390. Bank service charges for June amounted to $30. The bank collected a note receivable for the company for $1,200 plus $48 interest revenue. A NSF check for $328 from a customer was returned with the statement.

Instructions a. Prepare a bank reconciliation for July 31. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 219 (a)

(25 min.) ADCOCK COMPANY Bank Reconciliation July 31

Cash balance per bank Add: (1) Deposit in transit

830 840 1,670 390 $ 1,280

Less: (2) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (4) $1,200 Note collected by bank plus interest of $48 Less: (3) Bank service charge (5) NSF Check Adjusted cash balance per books (b) July

$ 30 328

390 1,248 1,638

358 $ 1,280

Accounts Receivable ...................................................... Cash ...................................................................... (To record NSF check)

328

Miscellaneous Expense ................................................... Cash .......................................................................

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1,248 1,200 48

328

Ex. 220 Grier Food Store used the following information in recording its bank reconciliation for the month of April. Balance per books April 30 $ 905 Balance per bank statement April 30 $11,300 ___________________________________________________________________________ (1) Checks written in April but still outstanding $6,300. (2) Checks written in March but still outstanding $2,800. (3) Deposits of April 30 not yet recorded by bank $4,900. (4) NSF check of customer returned by bank $500. (5) Check No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $549. (6) Bank service charge for April was $40. (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 April. (8) The bank collected a note receivable for the company of $6,000 plus $240 interest revenue.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

7-54

Ex. 220 (Cont.) Instructions Prepare a bank reconciliation at April 30. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 220

(20 min.) GRIER FOOD STORE Bank Reconciliation April 30

Cash balance per books Add: (7) Error on check No. 318 (8) Collect $6,000 note and interest $240

Less: (4) NSF check (5) Error on check No. 210 (6) Bank service Charge Adjusted cash balance per books

$ 905 $ 540 6,240

500 45 40

Cash balance per bank $11,300 Add: (3) Deposit in transit 4,900

16,200

6,780 7,685

585 $7,100

Less: (1) Apr. outstanding checks 6,300 (2) Mar. outstanding checks 2,800 9,100 Adjusted cash balance per bank $ 7,100

Ex. 221 Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item. Code A Add to cash balance per books B Deduct from cash balance per books C Add to cash balance per bank D Deduct from cash balance per bank E Does not affect the bank reconciliation Items: ____ 1. Outstanding checks ____

2. Bank service charge

____

3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230

____

4. Deposit in transit

____

5. Bank returns customer deposited check marked NSF

____

6. Bank collects notes receivable and interest for depositor

____

7. Bank debit memorandum for check printing fees

____

8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.

Fraud, Internal Control, and Cash

Ex. 221 ____

7-55

(Cont.) 9. Bank charged a check against the company, which should have been charged to another company.

____ 10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263 Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Solution 221 1. D 2. B 3. B 4. C 5. B

(10 min.) 6. A 7. B 8. E 9. C 10. A

Ex. 222 The cash balance per books for Wellmeyer Company on November 30, 2014, is $10,740.93. The following checks and receipts were recorded for the month of December 2014:

No. 17 18 19 20 21

Amount $372.96 780.62 157.00 587.50 234.15

Checks No. 22 23 24 25

Receipts Amount $ 578.84 1,687.50 921.30 246.03

Amount $ 843.86 941.54 808.58 1,367.00

Date 12/5 12/21 12/27 12/31

In addition, the bank statement for the month of December is presented below:

Balance Last Statement

Deposits and Credits No. Total Amount

Checks and Debits No. Total Amount

Balance This Statement

$5,404.84 5 $9,578.36 10 $3,632.19 $11,351.01 ________________________________________________________________________ Checks and other debits _________________________________________

Deposits

Date

Balance

No. Amount No. Amount No. Amount ________________________________________________________________________ 14 18 19 21

148.29 17 372.96 22 578.84 5,484.38 12/1 $9,875.13 708.62 24 921.30 843.86 12/8 $9,219.03 157.00 25 246.03 941.54 12/23 $9,541.58 234.15 15.00 SC 808.58 12/29 $10,101.01 250.00 NSF 1,500.00 CM 12/31 $11,351.01 ________________________________________________________________________

Symbols: NSF (Not sufficient funds)

SC (Service charge) .

CM (Credit Memo)

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

7-56 Ex. 222

(Cont.)

Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Gill, a customer, in settlement of an account receivable. An entry has not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 that has not been accrued. The bank service charge is $15.00. Instructions (a) Prepare a bank reconciliation at December 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 30, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 222 (a)

(30-35 min.) WELLMEYER COMPANY Bank Reconciliation December 31, 2014

Cash balance per bank statement ........................................ Add: Deposits in transit .......................................................

$11,351.01 1,367.00 12,718.01

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 ($1,440 principal plus $60 interest) ...

Less: Bank service charge ................................................... NSF check .................................................................. Adjusted cash balance per books .........................................

2,275.00 $ 10,443.01 $ 9,136.01*

72.00 1,500.00 15.00 250.00

1,572.00 10,708.01 265.00 $ 10,443.01

*11/30 balance per books + Receipts – Checks written = 12/31 balance per books $10,740.93 + $3,960.98 – $5,565.90 = $9,136.01 (b) Dec. 31 Cash

72.00 Accounts Payable ................................................ (To correct recording error on check No. 18)

31 Cash

72.00

1,500.00 Notes Receivable ................................................ Interest Revenue ................................................. (To record collection of note and interest)

31 Miscellaneous Expense ................................................ Cash .................................................................... (To record bank service charge for the month of December)

1,440.00 60.00

15.00 15.00

Fraud, Internal Control, and Cash

Solution 222

7-57

(Cont.)

31 Accounts Receivable—S. Gill ....................................... Cash .................................................................... (To record NSF check)

250.00 250.00

Ex. 223 Seaver Company received a notice with its bank statement that the bank had collected a note receivable for $18,000 plus $600 of interest. The bank had credited these amounts to Seaver's account less a collection fee of $30. Seaver Company had already accrued the interest for this note on its books. (a) How will these items affect Seaver Company's bank reconciliation? (b) Prepare the journal entry that Seaver Company will make to record this information on its books. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223 (5 min.) (a) Seaver 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 $18,570 (b)

Cash ........................................................................................... Miscellaneous Expense .............................................................. Notes Receivable ............................................................... Interest Receivable ............................................................

18,570 30 18,000 600

Ex. 224 The cash records of the Dillon Company show the following: 1. The July 31 bank reconciliation indicated that deposits in transit totaled $390. During August the general ledger account, Cash shows deposits of $11,800, but the bank statement indicates that only $9,540 in deposits were received during the month. 2. The July 31 bank reconciliation also reported outstanding checks of $850. During the month of August, the Dillon Company books show that $11,670 of checks were issued, yet the bank statement showed that $10,500 of checks cleared the bank in August. There were no bank debit or credit memoranda and no errors were made by either the bank or the Dillon Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

7-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 224 (10 min.) (a) Deposits in Transit: Deposits per books in August ....................................... Deposits per the bank in August .................................. Less: July 31 deposits in transit ................................... August receipts deposited in August ............................ Deposits in transit, August 31 ......................................

$ 11,800 $ 9,540 390 $

9,150 2,650

(b) Outstanding Checks: Checks per books in August ........................................ Checks clearing the bank in August .............................. Less: Outstanding checks, July 31 .............................. August checks clearing in August ................................ Outstanding checks, August 31 ....................................

$11,670 $10,500 850 9,650 $ 2,020

Ex. 225 The cash records of Grayson Company show the following: 1. In February, deposits per the bank statement totaled $37,700; deposits per books $38,000; and deposits in transit at February 28 were $3,550. 2. In February cash disbursements per books were $37,500; checks clearing the bank were $37,300; and outstanding checks at February 28 were $2,500. There were no bank debit or credit memoranda and no errors were made by either the bank or Grayson Company. Answer the following questions: (a) What were the deposits in transit at January 31? (b) What were the outstanding checks at January 31? Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 225 (10 min.) (a) Deposits in Transit: Deposits per bank statement in February .................. Add: Deposits in transit, February 28 ........................ Total deposits to be accounted for ............................ Less: Deposits per books .......................................... Deposits in transit, January 31 .................................. (b)

$37,700 3,550 41,250 38,000 $ 3,250

Outstanding Checks: Checks clearing the bank in February ........................ Add: Outstanding checks, February 28 ...................... Total checks to be accounted for .............................. Less: Cash disbursements per books ....................... Outstanding checks, January 31 ...............................

$37,300 2,500 39,800 37,500 $ 2,300

Fraud, Internal Control, and Cash

7-59

Ex. 226 Listed below are items that may be useful in preparing the March 2014, bank reconciliation for the Carrinton Machine Works. Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process. Code Located or Treated A Add to the cash balance per books B Deduct from the cash balance per books C Add to the cash balance per bank D Deduct from the cash balance per bank E Does not affect the bank reconciliation ____ 1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped "account closed”. ____ 2. A personal deposit by Ron Carrinton to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account. ____ 3. The bank statement included a debit memorandum for $22.00 for four books of blank checks for Carrinton Machine Works. ____ 4. The bank statement contains a credit memorandum for $42.75 interest on the average checking account balance. ____ 5. The daily deposits of March 30 and March 31 for $3,362 and $3,125, respectively, were not included in the bank statement postings. ____ 6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement. ____ 7. The bank statement included a credit memorandum dated March 28, 2014, for $62.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. ____ 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March. ____ 9. On March 24, 2014, Carrinton Machine Works delivered to the bank for collection a $3,400, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2014, indicated the collection of the note and $102.00 of interest. ____ 10. The bank statement included a debit memorandum for $20.00 for the collection service on the above note and interest. Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 226 1. B 2. D 3. B 4. A 5. C

(10 min.) 6. E 7. A 8. D 9. A 10. B

7-60

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 227 On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $920, 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 354 650 357 615 358 159 359 275 360 890 363 480 362 750

Cash Payments Journal Checks Paid Date Check No. Amount 5/2 358 159 5/5 359 275 5/10 360 890 5/15 361 800 5/22 362 750 5/24 363 480 5/29 364 840

Instructions Using step 2 in the reconciliation procedure, list the outstanding checks at May 31. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227 (3 min.) The outstanding checks are as follows: No. 355 361 364

Amount $ 920 800 840 Total $2,560

Ex. 228 The information below relates to the Cash account in the ledger of Remington Company. Balance September 1—$25,720 Cash deposited—$96,000. Balance September 30—$26,100 Checks written—$95,620. The September bank statement shows a balance of $24,635 on September 30 and the following memoranda. Credits Collection of $3,750 note plus interest $50 Interest earned on checking account

$3,800 $65

Debits NSF check: J. E. Hoover Safety deposit box rent

$635 $75

At September 30, deposits in transit were $7,195, and outstanding checks totaled $2,575. Instructions Prepare the bank reconciliation at September 30. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 228

7-61

(10 min.) REMINGTON COMPANY Bank Reconciliation September 30

Cash balance per bank statement .................................................. Add: Deposits in transit ..................................................................

$24,635 7,195 31,830 2,575 $29,255

Less: Outstanding checks .............................................................. Adjusted cash balance per bank .................................................... Cash balance per books ................................................................ Add: Collection of note receivable ($3,750 + $50) .......................... Interest earned .......................................................................

$26,100 $3,800 65

Less: NSF check ............................................................................ Safety deposit box rent.......................................................... Adjusted cash balance per books ..................................................

635 75

3,865 29,965 710 $29,255

Ex. 229 The cash records of Landis Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $1,080. During July the general ledger account Cash shows deposits of $24,820, 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 $1,020. During the month of July, Landis 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 $3,150. 4. In September, cash disbursements per books were $35,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $2,150. There were no bank debit or credit memoranda. No errors were made by either the bank or Landis 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

7-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 229 (10 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 ................................ (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 .............................

$24,820 $23,400 (1,080) 22,320 $ 2,500 $25,800 $24,600 (1,020) 23,580 $ 2,220

(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 3,150 43,250 38,100 $ 5,150

(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 2,150 39,650 35,550 $ 4,100

Ex. 230 Lowe Inc.'s bank statement from Western Bank at August 31, 2014, gives the following information. Balance, August 1 August deposits Checks cleared in August Bank credit memorandum: Interest earned

$18,600 71,000 66,678

Bank debit memorandum: Safety deposit box fee Service charge Balance, August 31

25 30 22,912

A summary of the Cash account in the ledger for August shows the following: balance, August 1, $21,100, receipts $81,000; disbursements $73,570; and balance, August 31, $28,530. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $7,000 and outstanding checks of $4,500. In addition, you determine that there was an error involving a company check drawn in August: A check for $400 to a creditor on account that cleared the bank in August was journalized and posted for $40. Instructions (a) Determine deposits in transit. (b) Determine outstanding checks. (c) Prepare a bank reconciliation at August 31. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Fraud, Internal Control, and Cash

7-63

Solution 230 (10 min.) (a) Deposits in transit = $81,000 – ($71,000 – $7,000) = $17,000 (b)

Outstanding checks = ($73,570 + $360) – ($66,678 – $4,500) = $11,752

(c) LOWE INC. Bank Reconciliation August 31, 2014 Cash balance per bank statement ....................................... Add: Deposits in transit .......................................................

$22,912 17,000 39,912 11,752 $28,160

Outstanding checks ............................................................ Adjusted cash balance per bank ......................................... Cash balance per books ..................................................... Add: Interest earned ...........................................................

Less: Service charge........................................................... Error in recording check ($400 – $40) ........................ Safety deposit box rent............................................... Adjusted cash balance per books .......................................

$28,530 45 28,575 $ 30 360 25

415 $28,160

Proof of cash balance per bank statement: $18,600 + $71,000 – $66,678 + $45 – $25 – $30 = $22,912 Proof of cash balance per books: $21,100 + $81,000 – $73,570 = $28,530 Ex. 231 Holcomb Company expects to have a cash balance of $43,000 on January 1, 2014. These are the relevant monthly budget data for the first two months of 2014. 1. Collections from customers: January $85,000, February $132,000 2. Payments to suppliers: January $40,000, February $50,000 3. Wages: January $34,000, February $40,000. Wages are paid in the month they are incurred. 4. Administrative expenses: January $24,000, February $31,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred. 5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $12,000 in cash. Holcomb has a line of credit at a local bank that enables it to borrow up to $40,000. The company wants to maintain a minimum monthly cash balance of $25,000. Instructions Prepare a cash budget for January and February. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

7-64

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 231

(5 min.) HOLCOMB COMPANY Cash Budget For the Two Months Ending February 28, 2014

Beginning cash balance ........................................................ Add: Receipts Collections from customers .......................................... Sale of short-term investments ..................................... Total receipts ................................................................ Total available cash............................................................... Less: Disbursements Payments to suppliers .................................................. Wages .......................................................................... Administrative expenses ............................................... Selling expenses .......................................................... Total disbursements ..................................................... Excess (deficiency) of available cash over disbursements .................................................................... Financing Borrowings ................................................................... Repayments ................................................................. Ending cash balance .............................................................

January $ 43,000

February $ 28,000

85,000 12,000 97,000 140,000

132,000 0 132,000 160,000

40,000 34,000 23,000 15,000 112,000

50,000 40,000 30,000 20,000 140,000

28,000

20,000

0 0 $ 28,000

5,000 0 $ 25,000

Ex. 232 Shatner Company has budgeted sales revenue as follows: January February March April May June

Budgeted Sales Revenues $55,000 80,000 90,000 65,000 50,000 15,000

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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 232

7-65

(20-25 min.) SHATNER COMPANY Expected Cash Receipts from Sales For the Quarter Ended June 30 April

February sales Credit sales: ($80,000 × .80 × .05)

May

June

$ 3,200

March sales Credit sales: ($90,000 × .80 × .30) ($90,000 × .80 × .05)

21,600 $ 3,600

April sales Credit sales: ($65,000 × .80 × .60) ($65,000 × .80 × .30) ($65,000 × .80 × .05) Cash sales: ($65,000 × .20)

31,200 15,600 $ 2,600 13,000

May sales Credit sales: ($50,000 × .80 × .60) ($50,000 × .80 × .30) Cash sales: ($50,000 × .20)

24,000 12,000 10,000

June sales Credit sales: ($15,000 × .80 × .60) Cash sales: ($15,000 × .20) Total cash receipts

$69,000

$53,200

7,200 3,000 $24,800

Ex. 233 Palmer Company has budgeted sales revenues as follows: June $35,000 18,000 $53,000

Credit sales Cash sales Total sales

July $30,000 51,000 $81,000

August $28,000 39,000 $67,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are: June July August

$65,000 53,000 21,000

7-66

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 233 (Cont.) Other budgeted cash disbursements: (a) selling and administrative expenses of $7,000 each month, (b) dividends of $19,000 will be paid in July, and (c) purchase of a computer in August for $6,000 cash. The company wishes to maintain a minimum cash balance of $10,000 at the end of each month. The company borrows money from the bank at 9% interest, if necessary, to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $10,000. Assume that borrowed money in this case is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 233

(25-35 min.) PALMER 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 Computer purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance

July $10,000

August $10,000

32,000 51,000 83,000 93,000

28,800 39,000 67,800 77,800

59,000 7,000 19,000

37,000 7,000

85,000 8,000

6,000 50,000 27,800

2,000 $10,000

(2,015)* $25,785

*$2,000 × 9% × 1/12 = $15 + $2,000 = $2,015. Schedule of Expected Collections from Customers Credit sales June (35,000 × 40%) July ($30,000 x 60%), Aug ($30,000 x 40%) August ($28,000 × 60%) Total collections

July $14,000 18,000 $32,000

August $ 12,000 16,800 $28,800

Fraud, Internal Control, and Cash

7-67

Solution 233 (Cont.) Schedule of Expected Payments for Purchase of Inventory Inventory purchases June ($65,000  50%) July ($53,000  50%) August ($21,000  50%) Total payments

July $32,500 26,500 $59,000

August $26,500 10,500 $37,000

Ex. 234 The management of Morton Company estimates that credit sales for August, September, October, and November will be $180,000, $200,000, $230,000, and $160,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale

25% 60% 10%

Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 234 (13–18min.) Collections from Customers August Sales ($180,000 × .10) September Sales ($200,000 × .60) ($200,000 × .10) October Sales ($230,000 × .25) ($230,000 × .60) November Sales ($160,000 × .25) Total collections

October

November

$ 18,000

-0-

120,000 20,000 57,500 138,000 -0$ 195,500

40,000 $ 198,000

Ex. *235 On October 1, 2014, Finley Company establishes a petty cash fund by issuing a check for $200 to Sara Mead, the custodian of the petty cash fund. On October 31, 2014, Sara Mead submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $7 cash in the fund: Freight-in Office Supplies Expense Entertainment of Clients Postage Expense

$70 35 60 23

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

7-68 Ex. *235

(Cont.)

Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution *235 (10 min.) Oct. 1 Petty Cash .......................................................................... Cash .......................................................................... (To establish a petty cash fund) 31

200 200

Cash Over and Short ......................................................... 5 Freight-In ........................................................................... 70 Supplies Expense .............................................................. 35 Entertainment Expense ...................................................... 60 Postage Expense ............................................................... 23 Cash .......................................................................... 193 (To record expenses for October and to replenish the petty cash fund)

Ex. *236 On September 1, 2014, Watkins Company establishes a petty cash fund by issuing a check for $250 to Mike Martz, the custodian of the petty cash fund. On September 30, 2014, Mike Martz submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $35 cash in the fund: Freight-in Office Supplies Expense Entertainment of Clients Postage Expense

$25 75 37 80

Instructions Prepare the journal entries required to establish the petty cash fund on September 1 and the replenishment of the fund on September 30. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution *236 (10 min.) Sept. 1 Petty Cash .......................................................................... Cash .......................................................................... (To establish a petty cash fund) 30

250 250

Freight-In ........................................................................... 25 Supplies Expense .............................................................. 75 Entertainment Expense ...................................................... 37 Postage Expense ............................................................... 80 Cash Over and Short ................................................. 2 Cash .......................................................................... 215 (To record expenses for September and to replenish the petty cash fund)

Fraud, Internal Control, and Cash

7-69

Ex. *237 The petty cash fund of $200 for Tomkins Company appeared as follows on December 31, 2014 Cash Petty cash vouchers Freight-in Postage Balloons for a special occasion Meals

$50.60 $58.40 40.00 20.00 25.00

Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare the general journal entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry. Ans: N/A, LO: 9, 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.) 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 ................................................................. Cash Over and Short ..................................................................... Cash .....................................................................................

58.40 40.00 45.00 6.00

3. Petty Cash .................................................................................... Cash .....................................................................................

50.00

149.40 50.00

Ex. *238 During October, Guiding Light Company experiences the following transactions in establishing a petty cash fund. Oct.

1 31

A petty cash fund is established with a check for $150 issued to the petty cash custodian. A count of the petty cash fund disclosed the following items: Currency $19.00 Coins 0.40 Expenditure receipts (vouchers): Office supplies $28.10 Telephone, Internet, and fax 16.40 Postage 75.00 Freight-out 6.80 A check was written to reimburse the fund and increase the fund to $200.

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Ex. *238

(Cont.)

Instructions Journalize the entries in October that pertain to the petty cash fund. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 238

(5 min.)

Oct. 1 Petty Cash ............................................................................. Cash ............................................................................... 31

150.00 150.00

Postage Expense............................................................ Supplies .......................................................................... Miscellaneous Expense .................................................. Freight-Out ..................................................................... Cash Over and Short ...................................................... Cash ($150.00 – $19.40) ............................................

75.00 28.10 16.40 6.80 4.30

Petty Cash ...................................................................... Cash ........................................................................

50.00

130.60

50.00

COMPLETION STATEMENTS 239. Internal control consists of the related methods and measures adopted within a business to ____________ its assets and enhance the ______________ and ______________ of its accounting records. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

240. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

241. The ______________ of an asset should not have access to the accounting records of that asset. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

242. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

243. Using _______________ documents is a control measure that helps to prevent a transaction from being recorded more than once or to prevent the transactions from not being recorded. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

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244. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

245. Two limitations of systems of internal control are the concept of ______________ and the ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

246. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

247. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Economics

248. A debit memorandum issued by the bank ______________ the cash balance in the depositor's account. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

249. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

250. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

251. A check correctly written for $370 was incorrectly entered in the cash payments journal for $730. In preparing a bank reconciliation, $____________ must be ______________ the cash balance per ______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

252. A basic principle of cash management is to delay payment of _____________. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

253. Three major sections of a cash budget are: (1)________________, (2)_______________, and (3)______________. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*254. A __________________ fund is used to pay relatively small expenditures. Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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*255. A debit balance in Cash Over and Short is reported in the income statement as ______________. Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 239. 240. 241. 242. 243. 244. 245.

safeguard, accuracy, reliability segregation of duties custodian internal auditors prenumbered bonded reasonable assurance, human element 246. check, cash 247. electronic funds transfer (EFT)

248. 249. 250. 251. 252. 253.

reduces time lags, errors deducted, bank $360, added to, books liabilities cash receipts, cash disbursements financing *254. petty cash *255. miscellaneous expense

MATCHING 256. Match the items below by entering the appropriate code letter in the space provided. A. B.

C. D. E. F.

Prenumbered documents Custody of an asset should be kept separate from the record-keeping for that asset Television monitors, garment sensors and burglar alarms are examples Bonding employees Collusion Cash

G. H. I. J. K. L. M. N.

Cash budget Restricted cash Invest idle cash Canceled checks NSF checks Outstanding checks Petty cash receipt Cash equivalents

____

1. Segregation of duties.

____

2. Cash that is not available for general use, but instead is restricted for a particular purpose.

____

3. Two or more employees circumventing prescribed procedures.

____

4. Prevent a transaction from being recorded more than once.

____

5. Checks which have been returned by the maker's bank for lack of funds.

____

6. Checks which have been paid by the depositor's bank.

____

7. A projection of anticipated cash flows.

____

8. Anything that a bank will accept for deposit.

Fraud, Internal Control, and Cash

256. ____

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(Cont.) 9. Physical control devices.

____ 10. A basic principle of cash management. ____ 11. Insurance protection against misappropriation of assets. ____ 12. Document indicating the purpose of a petty cash expenditure. ____ 13. Issued checks that have not been paid by the bank. ____ 14. Highly liquid investments. Ans: N/A, LO: 1 - 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, 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.

D M L N

SHORT-ANSWER ESSAY QUESTIONS S-A E 257 Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 257 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 258 (a) Explain the control principle of independent internal verification? (b) What practices are important in applying this principle? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 258 (a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action. S-A E 259 Your friend, Jeff, has opened a movie theater. Jeff states that he does not have time to develop and implement a system of internal controls. a. Provide Jeff with the objectives of a system of internal control. b. Explain to Jeff why he should develop a system of internal control. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 259 a. The objectives of a system of internal control 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. Jeff, here are some reasons why you must develop a system of internal control, 1. You will not be able to oversee every function of your business. For this reason, you must establish policies and procedures for your employees to follow. By designing these policies and procedures around the principles of internal control, you have a foundation for safeguarding assets and enhancing the accuracy and reliability of the accounting records. 2. A good system of internal controls will help you attract investors and creditors because they will value the rewards of the system. 3. A good system of internal controls works to eliminate fraud. No business can assume that fraud will not take place. S-A E 260 One of your accounting professors has alerted you about a job opportunity as an internal auditor. a. What is the role of an internal auditor? b. Is this position justified? Why or Why not? Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 260 a. Internal auditors evaluate, on a continuous basis, the effectiveness of a company’s system of internal control. They periodically review the activities of departments and individuals to determine whether prescribed internal controls are being followed.

Fraud, Internal Control, and Cash

Solution 260

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(Cont.)

b. Yes, the position is justified. Most fraud is uncovered through internal controls and internal audits. Internal auditors are trained to evaluate the effectiveness of internal control systems and make recommendations for improvements. They are independent of the day-to-day operations and thus can provide objective reviews. Internal auditors can deter fraud and ensure that procedures are being followed. This can help prevent fraud. S-A E 261 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business affect the implementation of a system of internal controls. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 261 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 262 How do these principles apply to cash disbursements: (a) Physical controls? (b) Human resource controls? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 262 (a) Physical controls apply to cash disbursements when: blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and a check-writing machine is used to print amounts on checks with indelible ink. (b) Human resource controls apply when the company bonds personnel who handle cash, requires employees to take vacations, and conducts background checks.

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S-A E 263 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 263 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.). S-A E 264 A basic principle of cash management involves the investment of idle cash. a. Explain why this should be done. b. What type of investment is appropriate for the idle cash? Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Business Economics

Solution 264 a. Companies should have a policy for investing idle cash because cash on hand earns nothing. Excess (idle) cash should be invested so it can earn a return for the company. b. The excess cash is generally invested for short periods of time. Thus, it should be invested in highly liquid and risk-free securities. The most common form of liquid investment is interest-paying U.S. government securities. S-A E 265 (Ethics) Samson Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Fraud, Internal Control, and Cash

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Solution 265 Internal controls exist, not because most people can't be trusted, but to protect the company's assets from those few who can't be trusted and to reduce the risk of unintentional errors. It is true that anyone is capable of practically any action, if motivation and opportunity are both present. Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone to monitor changes in motivation, a company's best recourse is to prevent opportunity. Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them is dishonest. S-A E 266 (Communication) Clinix is a medical office management franchise. There are currently twenty-five medical offices managed by a Clinix franchisee. One of the services provided to franchisees is assistance in training various staff members. Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls

Solution 266 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.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

IFRS QUESTIONS 1.

The principles of internal control activities are used a. in the U.S. but not globally. b. internationally but not in the U.S. c. in the U.S. and Canada but not globally. d. globally.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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: A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The fraud triangle applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

What percentage of companies worldwide have experienced fraud in the last two years? a. 1% b. 10% c. 50% d. 100%

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Tangible frauds include a. asset misappropriation. b. false pretenses. c. counterfeiting. d. all of these answer choices are correct.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

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

Ans: B, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

GAAP's, accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are: Accounting and internal control procedures Definition of cash equivalents a. essentially similar essentially similar b. essentially different essentially similar c. essentially similar essentially different d. essentially different essentially different

Ans: A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Cash is defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. cash on hand, demand deposits, and highly liquid investments.

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

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, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 8 REPORTING AND ANALYZING RECEIVABLES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 1 1 2 2 3 3

K K K K K K K K K C C

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

3 3 3 3 3 3 3 3 3 3 3

56 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

K. K K K K K K AP K C AP AP K K K AP C K K K C K AN AN AN K C C AN C 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. 112. 113. 114. 115. 116. 117.

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 3 3

Item

True-False Statements C 23. 3 K 34. C 24. 3 K 35. C 25. 3 K 36. C 26. 3 C 37. C 27. 3 K 38. C 28. 3 C 39. C 29. 3 C 40. C 30. 3 C 41. K 31. 3 C 42. K 32. 3 K 43. K 33. 3 C 44. Multiple Choice Questions AP 118. 3 AP 149. AP 119. 3 AP 150. AP 120. 3 AP 151. C 121. 3 AP 152. C 122. 3 C 153. K 123. 3 K 154. K 124. 3 C 155. K 125. 3 AP 156. K 126. 3 AP 157. K 127. 3 AP 158. K 128. 3 AP 159. C 129. 3 C 160. AN 130. 3 AP 161. K 131. 3 AP 162. K 132. 3 AN 163. AN 133. 3 AP 164. C 134. 3 AN 165. AP 135. 3 AP 166. C 136. 3 AN 167. AN 137. 3 AP 168. K 138. 3 AN 169. AP 139. 3 K 170. AP 140. 3 C 171. AP 141. 4 K 172. AP 142. 4 K 173. AP 143. 4 K 174. AP 144. 4 K 175. AP 145. 4 AP 176. K 146. 4 AP 177. CC 147. 4 AP 178. AP 148. 4 AP 179.

Item

4 4 4 4 4 4 4 4 4 5 5

K K K C K K K K C K C

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

5 6 6 7 7 7 8 8 9 9 9

C C C C K AN K K K K K

4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 6 7 7 8 8 8 8

AP AP K C K AP AP K AP K AN AN AP AP AP K K AP AP AP C C AP AP C C K K K K K

180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209.

8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9

K AP AP AP AP K K AP AP C AN C AP K K AN AN AP C K K K K K AN AP K AP AP K

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

210. 211. 212.

1 1 2

K AP AP

213. 214. 215.

2 2,3 3

224. 225. 226. 227.

2 2,3 2, 3 2, 3

AP AP AP AP

228. 229. 230. 231.

2,5 3 3 3

244. 245. 246.

1 2 3

K K K

247. 248. 249.

3 3 3

258.

1-9

Brief Exercises 216. 3 AP 219. 217. 2,3 AP 220. 218. 4,5 AP 221. Exercises AP 232. 3 AP 236. AP 233. 3 AP 237. AP 234. 3 AP 238. AP 235. 4 AN 239. Completion Statements K 250. 3 C 253. K 251. 3 C 254. K 252. 4 AP 255. Matching AP AP AP

Short Answer Essay 259. 4 K 262. 5 K 265. 8 AP 268. 260. 3 AN 263. 7 C 266. 9 K 269. 261. 4 C 264. 7 K 267. 9 C *This topic is dealt with in an Appendix to the chapter.

4 4,5 3

AP AP AP

222. 223.

8 9

AP AP

4,5 4,5 4,5 4,5

AP AP AP AP

240. 241. 242. 243.

4,5 7,8 8 9

AP AN AP AP

5 5 7

C K K

256. 257.

8 9

K K

3 3

E C

Item 258

Type MA

Item 233 234 246 247 248 249 250 251 258 260 268 269

Type Ex Ex CS CS CS CS CS CS MA SA SA SA

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item 1 2 3 4

Type TF TF TF TF

Item 5 6 7 56

Type TF TF TF MC

Learning Objective 1 Item Type Item Type 57 MC 61 MC 58 MC 62 MC 59 MC 63 MC 60 MC 64 MC

8 9 66 67

TF TF MC MC

68 69 70 71

MC MC MC MC

212 213 214 217

Item 10. 11. 12 13 14 15 16 17 18 19 20 21 22

Type TF TF TF TF TF TF TF TF TF TF TF TF TF

Item 31 32 33 72 73 74 75 76 77 78 79 80 81

Type TF TF TF MC MC MC MC MC MC MC MC MC MC

Item 90 91 92 93 94 95 96 97 98 99 100 101 102

Learning Objective 2 BE 224 Ex BE 225 Ex BE 226 Ex BE 227 Ex Learning Objective 3 Type Item Type MC 111 MC MC 112 MC MC 113 MC MC 114 MC MC 115 MC MC 116 MC MC 117 MC MC 118 MC MC 119 MC MC 120 MC MC 121 MC MC 122 MC MC 123 MC

Item 65 210 211 244

Type MC BE BE CS

228 245 258

Ex CS MA

Item 132 133 134 135 136 137 138 139 140 214 215 216 217

Type MC MC MC MC MC MC MC MC MC BE BE BE BE

Reporting and Analyzing Receivables

8-3

23 24 25 26 27 28 29

TF TF TF TF TF TF TF

82 83 84 85 86 87 88

MC MC MC MC MC MC MC

103 104 105 106 107 108 109

MC MC MC MC MC MC MC

124 125 126 127 128 129 130

MC MC MC MC MC MC MC

221 225 226 227 229 230 231

BE Ex Ex Ex Ex Ex Ex

110

131

232

Item 259 261

Type SA SA

Item

Type

Item 238 239 240 253 254

Type Ex Ex Ex CS CS

Item 258 262

Type MA SA

Item

Type

Item

Type

Item 34 35 36 37 38 39 40 41 42 142

Type TF TF TF TF TF TF TF TF TF MC

Item 141 143 144 145 146 147 148 149 150 151

Type MC MC MC MC MC MC MC MC MC MC

Item 152 153 154 155 156 157 158 159 160 218

Item 43 44 45 161 162

Type TF TF TF MC MC

Item 163 164 165 166 167

Type MC MC MC MC MC

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Item 46

Type TF

Item 47

Type TF

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Learning Objective 4 Type Item Type MC 219 BE MC 220 BE MC 235 Ex MC 236 Ex MC 237 Ex MC 238 Ex MC 239 Ex MC 240 Ex MC 252 CS BE 258 MA Learning Objective 5 Type Item Type MC 218 BE MC 220 BE MC 228 Ex MC 236 Ex MC 237 Ex Learning Objective 6 Type Item Type MC 258 MA

Item 48 49

Type TF TF

Item 50 174

Type TF MC

Item 175 241

Learning Objective 7 Type Item Type MC 255 CS Ex 258 MA

Item 263 264

Type SA SA

Item

Type

Item 51 52 176 177

Type TF TF MC MC

Item 178 179 180 181

Type MC MC MC MC

Item 182 183 184 185

Learning Objective 8 Type Item Type MC 186 MC MC 187 MC MC 188 MC MC 189 MC

Item 190 191 222 241

Type MC MC BE Ex

Item 242 256 258 265

Type Ex CS MA SA

8-4

Item 53 54 55 192 193

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Type TF TF TF MC MC

Item 194 195 196 197 198

Type MC MC MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

Learning Objective 9 Item Type Item Type 199 MC 204 MC 200 MC 205 MC 201 MC 206 MC 202 MC 207 MC 203 MC 208 MC

Item 209 223 243 257 258

Type MC BE Ex CS MA

Item 266 267

Type SA SA

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES 1. Identify the different types of receivables. Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. 2. Explain how accounts receivable are recognized in the accounts. Companies record accounts receivable when they provide a service on account or at the point-of-sale of merchandise on account. Sales revenues are reduced by sales returns and allowances. Cash discounts reduce the amount received on accounts receivable. 3. Describe the methods used to account for bad debts. The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach. 4. Compute the interest on notes receivable. The formula for computing interest is: Face value  Interest rate  Time. 5. Describe the entries to record the disposition of notes receivable. Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off. 6. Explain the statement presentation of receivables. Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement.

Reporting and Analyzing Receivables

8-5

7. Describe the principles of sound accounts receivable management. To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary. 8. Identify ratio to analyze a company’s receivables. The accounts receivable turnover and the average collection period both are useful in analyzing management’s effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information. 9. Describe methods to accelerate the receipt of cash from receivables. If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.

TRUE-FALSE STATEMENTS 1.

Trade receivables occur when two companies trade or exchange notes receivables.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Trade receivables can be an account receivable or a note receivable.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Other receivables include non-trade receivables such as loans to company officers.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Advances to employees are referred to as accounts receivable.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Accounts receivable are one of a company’s least liquid assets.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Accounts receivable are the result of cash and credit sales.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The two accounting problems with accounts receivable are: (1) recognizing and (2) disposing.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

8-6 9.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

11.

The allowance method of accounting for bad debts violates the matching principle.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

12.

When using the allowance method bad debt expense is recorded when an individual customer defaults.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debt adjusting entry is recorded.

Ans: F, LO: 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 accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered carefully prior to adjusting for estimated uncollectible accounts.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17.

Under the direct write-off method, no attempt is made to match bad debt expense to sales revenues in the same accounting period.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18.

Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Receivables

19.

8-7

When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

21.

The Allowance for Doubtful Accounts is a liability account.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23.

If bad debt losses are significant, the direct write-off method is acceptable for financial reporting purposes.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Bad debt losses are a cost of selling on credit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

25.

The allowance method of handling bad debts violates the matching principle.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26.

The allowance for doubtful accounts is similar to accumulated depreciation in that it shows the total of all accounts written off over the years.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

The direct write-off method of recognizing uncollectible accounts is not in accordance with good accounting practice.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28.

When using the direct write-off method year-end adjustments for bad debt expense must be made.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

29.

When using the allowance method year-end adjustments for bad debt expense must be made.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

8-8 30.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33.

When an account receivable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customer’s account before recording the collection.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

34.

A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35.

The two key parties to a note are the maker and the payee.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36.

In a promissory note, the party to whom payment is to be made is called the maker.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

37.

In computing the maturity date of a note, the date the note is issued is included but the due date is omitted.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

38.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

39.

There is only one way to calculate interest correctly.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

40.

Interest on a 6-month, 10 percent, $10,000 note is calculated by multiplying $10,000  0.10  6/12.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

41.

8-9

The basic formula for computing interest on an interest-bearing note is face value of note x annual interest rate x time in terms of one year = interest.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

42.

When a note is written to settle an open account no entry is necessary.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43.

A dishonored note is a note that is not paid in full at maturity.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

44.

If a promissory note is dishonored, the payee should not record interest income.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45.

The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Revenue.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

46.

Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the balance sheet.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

Bad debt expense and interest revenue are reported in the income statement under other revenues and expenses.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

If a company has a significant concentration of credit risk, it is not required to discuss that in its notes to its financial statements as that could increase the related risk.

Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49.

A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

50.

If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.

Ans: T, LO: 7, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

8-10 51.

The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

52.

The average collection period is frequently used to assess the effectiveness of a company’s credit and collection policies.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

53.

A factor buys receivables from businesses for a fee and collects the payment directly from customers.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

54.

A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

55.

If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.

F T T F T F F F

9. 10. 11. 12. 13. 14. 15. 16.

F F F F T T F T

17. 18. 19. 20. 21. 22. 23. 24.

T F F T F F F T

25. 26. 27. 28. 29. 30. 31. 32.

F F T F T F T F

33. 34. 35. 36. 37. 38. 39. 40.

T T T F F F F T

41. 42. 43. 44. 45. 46. 47. 48.

T F T F T T F F

49. 50. 51. 52. 53. 54. 55.

T T F T T F F

MULTIPLE CHOICE QUESTIONS 56.

Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

57.

8-11

The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable.

Ans: B, LO: 1, 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 receivables would not be classified as an "other receivable”? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61.

Receivables are a. one of the most liquid assets and thus are always considered current assets. b. claims that are expected to be collected in cash. c. shown on the income statement at cash realizable value. d. always the result of revenue recognition.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

62.

Non-trade receivables should be reported separately from trade receivables. Why is this statement either true or false? a. It is true because trade receivables are current assets and non-trade receivables are long term. b. It is false because all current receivables must be grouped together in one account. c. It is true because non-trade receivables do not result from business operations and should not be included with accounts receivable. d. It is false because management can decide how to report receivables.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8-12 63.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

M. Cornett is a corporation that sells breakfast cereal. Based on the accounts listed below, what are M. Cornett’s total trade receivables? Income tax refund due Advance due to the company from the company president 3-month note due from M. Cornett’s main customer Interest due this month on the above note Due and unpaid from this month’s sales Due and unpaid from last month’s sales a. b. c. d.

$ 500 300 2,000 100 7,000 1,000

$8,000 $10,000 $9,000 $10,900

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000 + $7,000 + $1,000 = $10,000

64.

Which of the following would probably be the most significant type of a claim held by a company? a. notes receivable b. non-trade receivables c. accounts receivable d. interest receivable

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

Dorman Company had the following items to report on its balance sheet: Employee advances Amounts owed by customers for the sale of services (due in 30 days) Refundable income taxes Interest receivable Accepted a formal instrument of credit for services (due in 18 months) A loan to company president Dishonored a note for principal and interest which will eventually be collected

$ 1,580 3,050 1,120 950 2,220 8,000 1,380

Based on this information, what amount should appear in the "Other Receivables" category? a. $18,300 b. $11,650 c. $13,030 d. $15,250 Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,580 + $1,120 + $950 + $8,000 = $11,650

Reporting and Analyzing Receivables

66.

8-13

On January 15, Nifty Company sells merchandise on account to Martinez Associates for $3,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $600 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received? a. $2,400 b. $2,328 c. $2,310 d. $1,680

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($3,000 − $600)]  .97 = $2,328

67.

Wilton sells softball equipment. On November 14, they shipped $3,000 worth of softball uniforms to Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High School for $1,800 worth of custom printed bats to be produced in December. On November 30, Paola Middle School returned $300 of defective merchandise. Wilton 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. $4,800 b. $4,500 c. $3,000 d. $2,700

68.

Which one of the following is not an accounting problem (issue) associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Accelerating cash receipts from accounts receivable

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

69.

Accounts receivable are valued and reported on the balance sheet a. in the investments section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and accelerating collections. d. accrual, bad debts, and accelerating collections.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

8-14 71.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Carson Company on July 15 sells merchandise on account to Tayler Co. for $2,000, terms 2/10, n/30. On July 20 Tayler Co. returns merchandise worth $800 to Carson Company. On July 24 payment is received from Tayler Co. for the balance due. What is the amount of cash received? a. $1,200 b. $1,176 c. $1,160 d. $2,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($2,000 − $800)]  .98 = $1,176

72.

The Allowance for Doubtful Accounts is necessary because a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay. b. uncollectible accounts that are written off must be accumulated in a separate account. c. a liability results when a credit sale is made. d. management needs to accumulate all the credit losses over the years.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73.

The account Allowance for Doubtful Accounts is classified as a(n) a. liability. b. contra account of Bad Debt Expense. c. expense. d. contra account to Accounts Receivable.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74.

Under the allowance method, Bad Debt Expense is recorded a. when an individual account is written off. b. when the loss amount is known. c. for an amount that the company estimates it will not collect. d. several times during the accounting period.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

75.

The expense recognition a. requires that all credit losses be recorded when an individual customer cannot pay. b. necessitates the recording of an estimated amount for bad debts. c. results in the recording of a known amount for bad debt losses. d. is not involved in the decision of when to expense a credit loss.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Receivables

77.

8-15

The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

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, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79.

If the amount of uncollectible account expense is understated at year end a. net income will be understated. b. stockholders’ equity will be understated. c. Allowance for Doubtful accounts will be overstated. d. net Accounts Receivable will be overstated.

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

80.

If the amount of uncollectible account expense is overstated at year end a. net income will be overstated. b. stockholders’ equity will be overstated. c. Allowance for Doubtful accounts will be understated. d. net Accounts Receivable will be understated.

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

81.

The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded a. in the same period as allowed for tax purposes. b. in the period of the sale. c. for an exact amount. d. in the period of the loss.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

8-16 83.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

When an account becomes uncollectible and must be written off a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debt Expense should be credited. d. Sales Revenue should be debited.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84.

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, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

85.

The direct write-off method of accounting for uncollectible accounts a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

86.

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,500. b. debit to Allowance for Doubtful Accounts for $3,300. c. debit to Bad Debt Expense for $3,300. d. credit to Allowance for Doubtful Accounts for $4,500.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $4,500 − $1,200 = $3,300

87.

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,500. b. debit to Bad Debt Expense for $6,100. c. debit to Bad Debt Expense for $2,900. d. credit to Allowance for Doubtful Accounts for $4,500.

Reporting and Analyzing Receivables

88.

8-17

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,500. b. debit to Allowance for Doubtful Accounts for $2,900. c. debit to Bad Debt Expense for $2,900. d. credit to Allowance for Doubtful Accounts for $4,500.

89.

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,500. b. debit to Allowance for Doubtful Accounts for $5,700. c. debit to Bad Debt Expense for $5,700. d. credit to Allowance for Doubtful Accounts for $4,500.

90.

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 receivables method of estimating bad debts is used.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

91.

Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

92.

An alternative name for Bad Debt Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8-18 93.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

94.

Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

95.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

96.

Bad Debt Expense is reported on the income statement as a. part of cost of goods sold. b. an expense subtracted from net sales to determine gross profit. c. an operating expense. d. a contra revenue account.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

97.

When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

98.

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 Debt Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Receivables

99.

8-19

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 Debt Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.

Ans: C, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

100.

When using the balance sheet approach, the balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods? a. Net realizable method b. Direct write-off method c. Accrual method d. Allowance method

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

101.

Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is deducted from accounts receivable.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102.

When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. net accounts receivable will decrease. c. allowance account will increase. d. net accounts receivable will stay the same.

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

103.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

104.

You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Allowance for Doubtful Accounts and credit Bad Debt Expense. b. debit Allowance for Doubtful Accounts and credit Accounts Receivable. c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts. d. debit Bad Debt Expense and credit Accounts Receivable.

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

8-20 105.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106.

Under the allowance method, when a specific account is written off a. total assets will be unchanged. b. net income will decrease. c. total assets will decrease. d. total assets will increase.

Ans: A, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debts expense. c. income statement relationships. d. the relationship between sales and accounts receivable.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108.

Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment? a. Bad Debt Expense 8,000 Allowance for Doubtful Accounts 8,000 b. Bad Debt Expense 6,000 Allowance for Doubtful Accounts 6,000 c. Bad Debt Expense 6,000 Accounts Receivable 6,000 d. Bad Debt Expense 8,000 Accounts Receivable 8,000

109.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the balance after adjustment? a. $45,000 b. $11,000 c. $56,000 d. $34,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 estimated uncollectible accounts

Reporting and Analyzing Receivables

110.

8-21

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the amount of bad debt expense for that period? a. $45,000 b. $11,000 c. $56,000 d. $34,000

111.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 credit before adjustment what is the amount of bad debt expense for that period? a. $30,000 b. $26,000 c. $34,000 d. $4,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,000 − $4,000 = $26,000

112.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 debit before adjustment what is the balance after adjustment? a. $30,000 b. $34,000 c. $26,000 d. $4,000

113.

Kinsler Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Kinsler Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment? a. Bad Debt Expense 14,000 Allowance for Doubtful Accounts 14,000 b. Bad Debt Expense 12,000 Allowance for Doubtful Accounts 12,000 c. Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000 d. Bad Debt Expense 8,000 Accounts Receivable 8,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($200,000  .06) − $2,000 = $10,000

8-22 114.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $34,000. If the balance of the Allowance for Doubtful Accounts is $9,000 debit before adjustment what is the amount of bad debt expense for that period? a. $34,000 b. $ 9,000 c. $43,000 d. $25,000

115.

Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. total assets decrease. b. total assets are unchanged. c. net income is unchanged. d. liabilities decrease.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116.

One might infer from a debit balance in Allowance for Doubtful Accounts that a. a posting error has been made. b. more accounts have been written off than had been estimated. c. the direct method is being used. d. Bad Debt Expense has been overestimated.

Ans: B, LO: 3, Bloom: CC, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117.

Using the allowance method, the uncollectible accounts for the year are estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the balance after adjustment? a. $9,000 b. $31,000 c. $40,000 d. $49,000

118.

Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the amount of bad debt expense for the period? a. $9,000 b. $31,000 c. $40,000 d. $49,000

Reporting and Analyzing Receivables

119.

8-23

Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period? a. $9,000 b. $31,000 c. $40,000 d. $49,000

120.

In reviewing the accounts receivable, the cash receivable value is $21,000 before the write-off of a $1,500 account. What is the cash receivable value after the write-off? a. $21,000 b. $1,500 c. $22,500 d. $19,500

121.

In 2014 the Golic Co. had net credit sales of $600,000. On January 1, 2014, the Allowance for Doubtful Accounts had a credit balance of $15,000. During 2014, $24,000 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 $160,000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014? a. $16,000. b. $25,000. c. $31,000. d. $24,000.

122.

The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense a. is relevant when using the percentage-of-receivables basis. b. is relevant when using the direct write-off method. c. is relevant to both the percentage-of-receivables basis and the direct write-off method. d. will never show a debit balance at this stage in the accounting cycle.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

8-24 124.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Under the direct write-off method of accounting for uncollectible accounts a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debt expense is always recorded in the period in which the revenue was recorded.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

125.

A company has an ending accounts receivable balance of $900,000 and it estimates that uncollectible accounts will be 2% of the receivable balance. 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. $20,000. b. $18,000. c. $17,960. d. $16,000.

126.

Net credit sales for the month are $750,000. The accounts receivable balance is $160,000. The allowance is calculated as 5% of the receivables balance using the percentage-of-receivables basis. If the Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment? a. $ 8,000 b. $ 3,000 c. $13,000 d. $ 8,250

127.

In 2014 Wilkinson Company had net credit sales of $1,500,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $36,000. During 2014, $60,000 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 $400,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014? a. $ 40,000 b. $150,000 c. $ 64,000 d. $ 60,000

Reporting and Analyzing Receivables

128.

8-25

An analysis and aging of the accounts receivable of Watts Company at December 31 reveal these data: Accounts receivable $ 2,400,000 Allowance for doubtful accounts per books before adjustment (credit) 150,000 Amounts expected to become uncollectible 195,000 What is the cash realizable value of the accounts receivable at December 31 after adjustment? a. $2,055,000 b. $2,250,000 c. $2,400,000 d. $2,205,000

129.

The bookkeeper recorded the following journal entry Allowance for Doubtful Accounts Accounts Receivable – Richard James

1,000 1,000

Which one of the following statements is false? a. This entry is only prepared on the last day of the accounting period. b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash. c. There could be a violation of internal control policies. d. James’ account was written off because it was determined to be uncollectible. Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

130.

The following information is related to December 31, 2013 balances. • Accounts receivable $700,000 • Allowance for doubtful accounts (credit) (60,000) • Cash realizable value 640,000 During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was a. $68,000 increase. b. $80,000 increase. c. $57,000 increase. d. $69,000 increase.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($700,000 + $195,000 − $115,000 − $11,000) − $72,000] − $640,000 = $57,000

8-26 131.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information is related to December 31, 2013 balances. • Accounts receivable $700,000 • Allowance for doubtful accounts (credit) (60,000) • Cash realizable value 640,000 During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. Bad debt expense for 2014 is: a. $23,000. b. $12,000. c. $72,000. d. $ 1,000.

132.

During 2014 Sedgewick Inc. had sales on account of $264,000, cash sales of $108,000, and collections on account of $168,000. In addition, they collected $2,900 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable balance indicates a a. $201,100 increase. b. $ 96,000 increase. c. $ 93,100 increase. d. $204,000 increase.

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $264,000 − $168,000 = $96,000

133.

Thompson Corporation’s unadjusted trial balance includes the following balances (assume normal balances): • Accounts receivable $1,492,000 • Allowance for doubtful accounts $ 28,400 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $89,520 b. $61,120 c. $59,416 d. $91,224

Reporting and Analyzing Receivables

134.

8-27

The following information is related to December 31, 2013 balances. • Accounts receivable $2,100,000 • Allowance for doubtful accounts (credit) (180,000) • Cash realizable value $1,920,000 During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was a a. $200,000 increase. b. $236,000 increase. c. $168,000 increase. d. $204,000 increase.

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($2,100,000 + $580,000 − $344,000 − $32,000) − $216,000] − $1,920,000 = $168,000

135.

The following information is related to December 31, 2013 balances. • Accounts receivable $2,100,000 • Allowance for doubtful accounts (credit) (180,000) • Cash realizable value $1,920,000 During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. Bad debt expense for 2014 is a. $ 68,000. b. $ 36,000. c. $216,000. d. $ 4,000.

136.

During 2014 Wheeler Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable indicates a a. $402,200 increase. b. $192,000 increase. c. $186,200 increase. d. $408,000 increase.

8-28 137.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Smithson Corporation’s unadjusted trial balance includes the following balances (assume normal balances): • Accounts Receivable $3,357,000 • Allowances for Doubtful Accounts $ 63,900 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $201,420 b. $137,520 c. $133,686 d. $205,254

138.

A write off of a specific accounts receivable under the allowance method a. increases bad debt expense for the accounting period. b. should occur on the last day of the accounting period. c. decreases the cash realizable value of accounts receivable. d. should be formally approved by an authorized employee.

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

139.

The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant. a. This is a false statement because the direct write-off method violates the matching principle. b. This is a true statement based on the concept of materiality. c. This is a false statement because the direct write-off method can only be used for tax reporting. d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

140.

Under the allowance method of accounting for bad debts, why must uncollectible accounts receivable be estimated at the end of the accounting period? a. To allow the collection department to schedule work for the next accounting period. b. To determine the gross realizable value of accounts receivable. c. The IRS rules require the company to make the estimate. d. To match bad debt expense to the period in which the revenues were earned.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

142.

8-29

Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

143.

The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

144.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

145.

The interest on a $5,000, 10%, 1-year note receivable is a. $5,000. b. $500. c. $5,500. d. $5,450.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $5,000  .10 = $500

146.

The interest on a $10,000, 6%, 60-day note receivable is a. $680. b. $100. c. $200. d. $300.

147.

The interest on a $6,000, 6%, 90-day note receivable is a. $360. b. $180 c. $90. d. $270.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $6,000  .06  90/360 = $90

8-30 148.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The interest on a $9,000, 10%, 1-year note receivable is a. $9,000. b. $75. c. $900. d. $9,900.

149.

The interest on a $7,000, 6%, 60-day note receivable is a. $35. b. $420 c. $210. d. $70.

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $7,000  .06  60/360 = $70

150.

The interest on a $4,000, 9%, 90-day note receivable is a. $90. b. $360. c. $30. d. $60.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $4,000  .09  90/360 = $90

151.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

152.

When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

153.

The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. at which the note receivable is recorded. d. remaining after a service charge has been deducted.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

154.

8-31

Rosen Company receives a $5,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note? a. Notes Receivable 5,075 Accounts Receivable—Bay Company 5,075 b. Notes Receivable 5,075 Accounts Receivable—Bay Company 5,000 Interest Revenue 75 c. Notes Receivable 5,000 Interest Receivable 75 Accounts Receivable—Bay Company 5,000 Interest Revenue 75 d. Notes Receivable 5,000 Accounts Receivable—Bay Company 5,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $5,000 face value

155.

Doane Company receives a $7,000, 3-month, 6% promissory note from Ray Company in settlement of an open accounts receivable. What entry will Doane Company make upon receiving the note? a. Notes Receivable 7,035 Accounts Receivable—Ray Company 7,035 b. Notes Receivable 7,105 Accounts Receivable—Ray Company 7,000 Interest Revenue 105 c. Notes Receivable 7,000 Interest Receivable 105 Accounts Receivable—Ray Company 7,000 Interest Revenue 105 d. Notes Receivable 7,000 Accounts Receivable—Ray Company 7,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $7,000 face value

156.

Short-term notes receivable a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. present the same valuation problems as long-term notes receivables.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157.

A 90-day note dated June 30, 2014, would mature on: a. September 30, 2014. b. September 27, 2014. c. September 28, 2014. d. September 29, 2014.

Ans: C, LO: 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: $90 − (1 + 31 + 31) = 27

8-32 158.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest? a. Daily b. Monthly c. Quarterly d. Annual

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

159.

Ramos Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $700, then what is the principal of the note? a. $8,750 b. $35,000 c. $50,400 d. $22,400

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: P  .08  90/360 = $700; P = ($700  360/90)  .08 = $35,000

160.

Douglas Company has a $51,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $3,400, then what is the duration of the note in months? a. 6 months b. 4 months c. 12 months d. 8 months

Ans: D, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,400  ($51,000  .10) = 666; .666  12 = 8

161.

Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9month, 12% interest note. If Young prepares it financial statements as of December 31, 2014, what adjusting entry must it make? a. Interest Receivable 2,000 Interest Revenue 2,000 b. Accounts Receivable 2,000 Interest Receivable 2,000 c. Cash 2,000 Interest Revenue 2,000 d. Notes Receivable 2,000 Interest Revenue 2,000

Reporting and Analyzing Receivables

162.

8-33

Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9month, 12% interest note. If Young accrued interest at its December 31, 2014 year-end, what entry must it make to record the collection of the note and interest at its maturity date? a. Cash 43,600 Notes Receivable 40,000 Interest Revenue 3,600 b. Cash 43,600 Notes Receivable 43,600 c. Notes Receivable 40,000 Interest Receivable 2,000 Interest Revenue 1,600 Cash 43,600 d. Cash 43,600 Notes Receivable 40,000 Interest Receivable 2,000 Interest Revenue 1,600

163.

Young Company lends Dobson industries $40,000 on January 1, 2014, accepting a 9month, 12% interest note. If Dobson dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries should most likely be made by Young Company? a. Cash 40,000 Notes Receivable 40,000 b. Accounts Receivable 40,000 Notes Receivable 40,000 c. Accounts Receivable 43,600 Notes Receivable 40,000 Interest Revenue 3,600 d. Accounts Receivable 43,600 Notes Receivable 40,000 Interest Receivable 3,600

164.

Which of the following is a way of disposing of a note receivable? a. Honoring it on maturity date. b. Selling it to receive cash before the maturity date. c. Default by the maker. d. All of these are ways to dispose of notes receivable.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

8-34

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

165.

A dishonored note receivable a. Is no longer negotiable. b. Must be written off by the lender. c. Creates a claim against the maker for the amount of principal only. d. Is one that is not paid in full within 10 days of maturity.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

166.

The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is a. $40,000. b. $44,000. c. $43,600. d. $40,400.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40,000 + ($40,000  .09  40/360) = $40,400

167.

Barber Company lends Monroe Company $30,000 on April 1, accepting a four-month, 6% interest note. Barber Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable 30,000 Cash 30,000 b. Interest Receivable 150 Interest Revenue 150 c. Cash 150 Interest Revenue 150 d. Interest Receivable 450 Interest Revenue 450

168.

The maturity value of a $5,000, 6%, 60-day note receivable dated February 10th is a. $5,050. b. $5,025. c. $5,000. d. $5,300.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $5,000 + ($5,000  .06  60/360) = $5,050

169.

When a note is dishonored, the payee’s entry includes a a. debit to Interest Revenue. b. credit to Accounts Receivable. c. debit to Interest Expense. d. credit to Notes Receivable.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Receivables

170.

8-35

A note receivable is executed in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a a. credit to Interest Receivable. b. credit to Cash. c. debit to Notes Receivable. d. debit to Interest Income.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

171.

The maturity value of a $40,000, 12%, 3-month note receivable is a. $41,200. b. $40,480. c. $44,800. d. $40,400.

172.

Nance Co. holds Gant Inc.’s $25,000, 120 day, 9% note. The entry made by Nance Co. when the note is collected, assuming no interest has previously been accrued is: a. Cash 25,000 Notes Receivable 25,000 b. Accounts Receivable 25,750 Notes Receivable 25,000 Interest Revenue 750 c. Cash 25,750 Notes Receivable 25,000 Interest Revenue 750 d. Accounts Receivable 25,750 Notes Revenue 25,000 Interest Revenue 700

173.

All of the following statements regarding the financial statement presentation of receivables are true except: a. Short-term receivables are reported in the current assets section of the balance sheet. b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables. c. Short-term receivables are reported above the short-term investments in the balance sheet. d. Companies report bad debts expense under "Selling Expenses" in the operating expenses section of the income statement.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8-36 174.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following is least likely to help a company minimize losses as credit standards are relaxed? a. Require potential customers to provide bank guarantees. b. Ask a potential customer for references regarding payment history. c. Increase the estimate of uncollectible accounts at the end of each period. d. Check a potential customer's credit rating.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

175.

Which one of the following is not a principle of sound accounts receivable management? a. Determine to whom to extend credit. b. Delay cash receipts from receivables if necessary. c. Monitor collections. d. Determine a payment period.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

176.

The accounts receivable turnover is computed by dividing a. total sales by average receivables. b. total sales by ending receivables. c. net credit sales by average receivables. d. net credit sales by ending receivables.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177.

The accounts receivable turnover is used to analyze a. profitability. b. liquidity. c. risk. d. long-term solvency.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178.

A high accounts receivable turnover ratio indicates a. the company’s sales are increasing. b. a large proportion of the company’s sales are on credit. c. customers are making payments very quickly. d. customers are making payments slowly.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

179.

The accounts receivable turnover is needed to calculate a. the average collection period in days. b. market risk. c. return on assets. d. current ratio.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

180.

8-37

The average collection period for receivables is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

181.

The financial statements of the Nelson Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Nelson? a. 3.8 times b. 6 times c. 10.0 times d. 7.5 times

182.

The financial statements of the Melton Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days? a. 96.1 b. 48.7 c. 36.5 d. 60.8

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $300,000  [($50,000 + $30,000)  2] = 7.5; 365  7.5 = 48.7

183.

The financial statements of the Phelps Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps? a. 8.3 times b. 12.5 times c. 6.3 times d. 4.2 times

184.

The financial statements of the Belfry Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days? a. 29.2 times b. 86.9 times c. 44.0 times d. 57.9 times

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $500,000  [($80,000 + $40,000)  2] = 8.3; 365  8.3 = 44

8-38 185.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A popular variation of the accounts receivable turnover is the a. credit risk ratio. b. concentration of credit risk. c. bad debts ratio. d. average collection period.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

186.

The accounts receivable turnover a. Is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period. b. Can be used to compute the average collection period. c. Is a method of evaluating the solvency of net accounts receivable. d. Is only important to internal users of accounting information.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

187.

Leary Corporation had net credit sales during the year of $900,000 and cost of goods sold of $540,000. The balance in receivables at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover? a. 6.0 b. 7.5 c. 5.0 d. 3.6

188.

Windsor Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 8. What is its average collection period (days)? a. 80 b. 30 c. 46 d. 36

189.

All of the following statements are true regarding the average collection period except: a. it is a popular variant of the accounts receivable turnover . b. it is used to assess the effectiveness of a company's credit and collection policies. c. it should generally exceed the credit term period. d. its increase may suggest a decline in the financial health of customers.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

190.

8-39

In the table below the information for four companies is provided. Company Accounts Receivable Average collection period turnover Martin 13.9 26.3 Lewis 13.3 27.4 Danforth 10.4 35.1 Garner 14.5 25.2 Industry Average 13.0 28.1 If Garner's net credit sales are $290,000, what are its average net accounts receivable? a. $11,508 b. $20,000 c. $42,050 d. $73,080

Ans: B, LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $290,000  14.5 = $20,000

191.

In the table below the information for four companies is provided. Company Accounts Receivable Average collection period turnover Martin 13.9 26.3 Lewis 13.3 27.4 Danforth 10.4 35.1 Garner 14.5 25.2 Industry Average 13.0 28.1 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations? a. Martin b. Lewis c. Danforth d. Garner

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

192.

Simonic Retailers accepted $90,000 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 Simonic Retailers will include a credit to Sales Revenue of $90,000 and a debit(s) to a. Cash $86,400 and Service Charge Expense $3,600. b. Accounts Receivable $86,400 and Service Charge Expense $3,600. c. Cash $86,400 and Interest Expense $3,600. d. Accounts Receivable $90,000.

Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 90,000  .04 = $3,600

8-40 193.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30 a. represent common business practices. b. represent ways to accelerate receivables collections. c. result in collections that are less than the gross accounts receivable. d. All of these answer choices are correct.

Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

194.

Factoring arrangements a. are ways to accelerate receivable collections. b. involve no commissions or service charges because the factor is guaranteed collections on the due date. c. are generally used by businesses that are insolvent. d. are mainly used in the textile and furniture industries.

Ans: A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

195.

ABC Company accepted a national credit card for a $7,000 purchase. The cost of the goods sold is $5,600. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,358. b. Increase by $1,400. c. Increase by $1,190. d. Increase by $6,790.

Ans: C, LO: 9, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($7,000 − $5,600) − ($7,000  .03) = $1,190

196.

XYZ Company accepted a national credit card for a $7,500 purchase. The cost of the goods sold is $6,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,455. b. Increase by $1,500. c. Increase by $1,275. d. Increase by $7,275.

197.

A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should not include a a. debit to Interest Expense for $18,000. b. debit to Cash for $882,000. c. debit to Service Charge Expense for $18,000. d. credit to Accounts Receivable for $900,000.

Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $900,000  .02) = $18,000

Reporting and Analyzing Receivables

198.

8-41

The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a captive finance company. d. can be a quick way to generate cash for operating needs.

Ans: D, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

199.

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, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

200.

The sale or transfer of accounts receivable in order to raise funds is called a. pledging. b. factoring. c. leasing. d. collateralizing.

Ans: B, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

201.

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, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

202.

A captive finance company refers to a. a finance company that is owned by individuals who borrow money from the company. b. finance companies that won't allow early repayment of loans. c. a company that is wholly owned by another company and provides financing to purchasers of its owner company's goods. d. any company that issues a major credit card.

Ans: C, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

203.

Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value.

Ans: C, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

8-42 204.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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 expenses section of the income statement will increase each time accounts are sold.

Ans: C, LO: 9, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

205.

Gipson Furniture factors $500,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 3% service charge on the amount of receivables sold. Gipson Furniture factors its receivables regularly with Kwik Factors. What journal entry does Gipson make when factoring these receivables? a. Cash 485,000 Loss on Sale of Receivables 15,000 Accounts Receivable 500,000 b. Cash 485,000 Accounts Receivable 485,000 c. Cash 500,000 Accounts Receivable 485,000 Gain on Sale of Receivables 15,000 d. Cash 485,000 Service Charge Expense 15,000 Accounts Receivable 500,000

Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000  (1 − .03) = $485,000

206.

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, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

207.

On April 5 Donna’s Boutique accepted a Visa card for a $600 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a a. credit to Cash of $588. b. debit to Cash of $600. c. debit to Service Charge Expense of $12. d. credit to Service Charge Expense of $12.

Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600  .02 = $12

Reporting and Analyzing Receivables

208.

8-43

Schofield Retailers accepted $60,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $60,000 and a debit(s) to a. Cash for $57,600 and Service Charge Expense for $2,400. b. Accounts receivable for $57,600 and Service Charge Expense for $2,400. c. Cash for $60,000. d. Accounts Receivable for $60,000.

209.

The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales.

Ans: A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to Multiple Choice Questions 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

b b c c a b c b c b b d a c c b a d c b a a

78.

79.

80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.

d b c b d d c b c c b d b c d b c b

98. 99.

b c

100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

d d d d b c a a b a c b a c c a b c

122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.

a c b b a c d a c a b b c a b b

138 139.

d b

118. 119.

b d

120. 121.

a b

140. 141. 142. 143.

d b a c

144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.

c b b c c d a b c c d d c c d b d a d d

166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186.

d b a d a a c c c b c b c a d d b a c d b

163.

164. 165.

187.

188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209.

c c b d a d a c c a d a b a c c c d b c a a

8-44

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BRIEF EXERCISES Be. 210 Presented below are various receivable transactions entered into by Renner Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. Advanced $1,000 to a trusted employee. b. Accepted a $2,000 promissory note from a customer as payment on account. c. Determined that a $10,000 income tax refund is due from the IRS. d. Sold goods to a customer on account for $5,000. e. Recorded $500 accrued interest on a note receivable due next year. f. Loaned a company officer $4,000. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 210 (5 min.) a. Other Receivables b. Notes Receivable c. Other Receivables d. Accounts Receivable e. Other Receivables f. Other Receivables Be. 211 Finney had the following transactions during March 2012. 1. Finney sold and delivered $14,000 of merchandise to LJ Enterprises, terms 2/10, n30. 2. LJ Enterprises also ordered an additional $5,000 worth of goods on the last day of the month. th 3. Finney lent $1,000 to its company president who promised to repay the loan on the 15 day of the next month. 4. Finney sold old storage sheds to Alt Traders on 3/31. Alt Traders gave a $2,500 promissory note to Finney agreeing to pay for the sheds in 3 months. 5. Other current assets totaled $50,000. Finney received no cash arising from the above transactions during March. Based only on the above transactions, and ingnoring beginning balances, compute the percentage Accounts Receivable is of the total current assets as of month end. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211 (5 min.) Current Assets: Accounts Receivable Notes Receivable Employee Receivable Other Total Current Assets

$14,000 2,500 1,000 50,000 $67,500

$14,000/$67,500 = 21% Note: LJ Enterprises order of $5,000 does not generate a current asset.

Reporting and Analyzing Receivables

8-45

Be. 212 The following are sales of The Holiday Store during February. The Store sells seasonal holiday items. 2/3 2/8 2/10 2/14 2/27 2/28

Sold 50 heart balloons for $5 cash each. Sold 100 boxes of chocolates at $10 each, terms 2/10, n/30. Collected within the discount period. Sold 50 heart necklaces for $25 each with no discount. Have not collected as of month end. Sold 100 bouquets of roses at $30 per bouquet. Half the sales were on account. By month end, 75% of the credit sales were collected. Sold 20 leftover heart necklaces to a discount store for $15 each on credit. Sold a display cabinet at a swap meet for $100 on account.

Determine the balance in Accounts Receivable at 2/28. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 212 (5 min.) 2/10 50 necklaces  $25 2/14 50 bouquets (½  100 bouquets)  $30  25% 2/27 20 necklaces  $15 Total Accounts Receivable

$1,250 375 300 $1,925

Note: The receivable from the sale of the display cabinet should be included as an other receivable. Be. 213 Prepare journal entries to record the following transactions entered into by the Castagno Company: 2014 Nov. 1

Sold merchandise on account to Mercer, Inc., for $18,000, terms 2/10, n/30.

Nov.

Mercer, Inc., returned merchandise worth $1,000.

Nov.

Received payment in full from Mercer, Inc.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 213 (5 min.) 2014 Nov. 1 Accounts Receivable—Mercer, Inc. ................................... Sales Revenue........................................................... Nov.

Nov.

18,000 18,000

Sales Returns and Allowances .......................................... Accounts Receivable—Mercer, Inc. ..........................

1,000

Cash ................................................................................ Sales Discounts ($17,000  .02) ........................................ Accounts Receivable—Mercer, Inc. ..........................

16,660 340

1,000

17,000

8-46

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 214 Assuming that the allowance method is being used, prepare general journal entries without explanations to record the following transactions. January 1 February 1 July 1 September 1

Sold merchandise to Mary Baden for $500 on account. Received $300 from Baden. Wrote off Baden’s account as uncollectible. Unexpectedly received payment in full from Baden.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

(5 – 8 min.) Accounts Receivable—Baden .................................... Sales .................................................................

500

Cash

....................................................................... Accounts Receivable—Baden ...........................

300

Allowance for Doubtful Accounts ................................ Accounts Receivable—Baden ...........................

200

September 1Accounts Receivable—Baden .......................................... Allowance for Doubtful Accounts ......................

200

Cash .......................................................................... Accounts Receivable—Baden ........................... (To record collection on account)

200

Solution 214 January 1 February July 1

500 300 200

200 200

Be. 215 The ledger of the Ramirez Company at the end of the current year shows Accounts Receivable of $200,000. Instructions (a) If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) (b) If Allowance for Doubtful Accounts has a debit balance of $3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Receivables

Solution 215 (5 – 8 min.) (a) Bad Debt Expense ....................................................................... 13,000 Allowance for Doubtful Accounts ($16,000 – $3,000).......... (To adjust the allowance account to total estimated uncollectible, $200,000  .08 = $16,000) (b) Bad Debt Expense ....................................................................... 19,000 Allowance for Doubtful Accounts ($16,000 + $3,000).......... (To adjust the allowance account to total estimated uncollectible)

8-47

13,000

19,000

Be. 216 Benson Products uses the allowance method in estimating uncollectible accounts. On December 31, 2014, the balance in Accounts Receivable was $650,000. An aging analysis of the accounts receivable indicated that $29,500 in accounts are expected to be uncollectible. Prepare the adjusting entry to record estimated bad debts expense using the percentage of receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,000 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $830 before adjustment. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216 (5 min.) (a) Bad Debt Expense ($29,500 – $3,000) ........................................ Allowance for Doubtful Accounts .......................................... (b) Bad Debt Expense ($29,500 + $830) ........................................... Allowance for Doubtful Accounts ..........................................

26,500 26,500 30,330 30,330

Be. 217 Strickman Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions: January

Sold merchandise to Sue Land for $1,800, terms n/15.

April

Received $400 from Sue Land on account.

August

Wrote off as uncollectible the balance of the Sue Land account when she declared bankruptcy.

October

Unexpectedly received a check for $650 from Sue Land.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

8-48

Solution 217 (5 – 8 min.) January 5 Accounts Receivable – S. Land ....................................... Sales Revenue ........................................................ April

1,800 1,800

15 Cash ............................................................................... Accounts Receivable—S. Land ..............................

400

August 21 Allowance for Doubtful Accounts ..................................... Accounts Receivable—S. Land ..............................

1,400

October 5 Accounts Receivable—S. Land ....................................... Allowance for Doubtful Accounts ............................

650

Cash ............................................................................... Accounts Receivable—S. Land ..............................

650

400 1,400 650 650

Be. 218 Compute the maturity value as indicated for each of the following notes receivable. 1. A $9,000, 6%, 3-month note dated July 20. Maturity value $____________. 2. A $16,000, 9%, 150-day note dated August 5. Maturity value $____________. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218 (5 – 8 min.) 1. Maturity value: $9,135 $9,000  6%  3  12 = $135 + $9,000 = $9,135 2. Maturity value: $11,198 $16,000  9%  150  360 = $600 + $16,000 = $16,600 Be. 219 Determine the interest on the following notes: (a) (b) (c) (d)

$5,000 at 6% for 90 days. $800 at 9% for 5 months. $6,000 at 8% for 60 days $1,600 at 7% for 6 months

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Receivables

Solution 219 (a) $75 (b) $30 (c) $80 (d) $56

8-49

(5 min.) ($5,000  .06  90  ) ($800  .09  5  ) ($6,000  .08  60  ) ($1,600  .07  6  )

Be. 220 Trent Distributors has the following transactions related to notes receivable during the last two months of the year. Dec.

Loaned $16,000 cash to E. Kinder on a 1-year, 6% note.

Sold goods to J. Jones, receiving a $4,800, 60-day, 7% note.

Accrued interest revenue on all notes receivable.

Instructions Journalize the transactions for Trent Distributors. Ans: N/A, LO: 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 220 (10 min.) Dec 1 Notes Receivable................................................................ Cash ........................................................................ (To record loan made to E. Kinder) Dec 16

Dec. 31

16,000 16,000

Notes Receivable................................................................ Sales Revenue........................................................... (To record sale to J. Jones)

4,800

Interest Receivable ............................................................ Interest Revenue* ..................................................... (To record accrued interest)

*Calculation of interest revenue Kinder note: $16,000  6%  30/360 = $80 Jones note: 4,800  7%  15/360 = 14 Total accrued interest $94

4,800

8-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 221 Merry Co. sells Christmas angels. Merry determines that at the end of December, they have the following aging schedule of Accounts Receivable: Customer Total Number of Days Past Due Not yet due 1–30 31–60 61–90 Over 90 K. Brant D. Eaton S Klein C. Sheen

$500 300 150 200 ?

$300

$200

100

200 50

% uncollectible Total Estimated Uncollectible Amounts ?

100

200 300 1%

300 5%

250 10%

200 25%

100 50%

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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 221

(10 min.)

($1,150 – $143 = $1,007) Customer Total

K. Brant D. Eaton S Klein C. Sheen % uncollectible Total Estimated Uncollectible Amounts

$500 300 150 200 1,150 $143

Not yet due

Number of Days Past Due 1–30

31–60

$300

$200

100

61–90

Over 90

200 50

200 300 1% $3

300 5% $15

250 10% $25

100 200 25% $ 50

100 50% $50

Be. 222 The following data exists for Mather Company.

Accounts Receivable Net Sales

2014 $ 80,000 560,000

2013 $ 70,000 410,000

Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2014. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Receivables

Solution 222 (5 min.) Accounts receivable turnover =

Average collection period =

$560,000 ($80,000 + $70,000)/2

= 7.5 times

365 days 7.5

= 48.7 days

8-51

Be. 223 Donaldson Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15

Sold $30,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge.

25 Made sales of $900 on Visa credit cards. The credit card service charge is 2%. Instructions Journalize the transactions. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223 (a) Oct. 15

(5 min.) Cash ............................................................................ Service Charge Expense ($30,000  3%) .................... Accounts Receivable ............................................ Cash ............................................................................ Service Charge Expense ($900  2%) ......................... Sales Revenue ......................................................

29,100 900 30,000 882 18 900

EXERCISES Ex. 224 On January 10 Donna Stark uses her Baver Co. credit card to purchase merchandise from Baver Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12 Stark pays $1,600 on the balance due. On March 10 Stark is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12. Instructions Prepare the entries on Baver Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

8-52

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 224 (5 min.) Jan. 10 Accounts Receivable—Stark ........................... Sales Revenue .......................................... Feb. 12 Cash ............................................................... Accounts Receivable—Stark ..................... Mar. 10 Accounts Receivable—Stark ......................... Interest Revenue [1%  ($2,600 – $1,600)] ......................

2,600 2,600 1,600 1,600 10 10

Ex. 225 At the beginning of the current period, Emler Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had net credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period. Instructions (a) Prepare the entries to record sales and collections during the period. (b) Prepare the entry to record the write-off of uncollectible accounts during the period. (c) Prepare the entries to record the recovery of the uncollectible account during the period. (d) Prepare the entry to record bad debts expense for the period. (e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts. (f) Calculate the net realizable value of the receivables at the end of the period. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 225 (8 min.) (a) Accounts Receivable ...................................................... Sales Revenue.......................................................... Cash ............................................................................... Accounts Receivable................................................. (b) Allowance for Doubtful Accounts .................................... Accounts Receivable................................................. (c) Accounts Receivable ...................................................... Allowance for Doubtful Accounts ............................... Cash ............................................................................... Accounts Receivable................................................. (d) Bad Debts Expense ........................................................ Allowance for Doubtful Accounts ...............................

650,000 650,000 590,000 590,000 5,000 5,000 3,000 3,000 3,000 3,000 13,000 13,000

Reporting and Analyzing Receivables

Solution 225 (Cont.) (e) Accounts Receivable Beg. Bal. 200,000 Collections 590,000 Sales Rev. 650,000 Write-off 5,000 Recovery 3,000 Collections 3,000 End Bal 255,000 (f)

8-53

Allowance for Doubtful Accounts Beg. Bal. 9,000 Write-off 5,000 Recovery 3,000 Bad Debts 13,000 End Bal 20,000

Net realizable value of receivables is $235,000 ($255,000 – $20,000)

Ex. 226 The December 31, 2013, balance sheet of the Kramer Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2014, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected. Instructions (a) Journalize the 2014 transactions. (b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2014? Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 226 (15–20 min.) (a) Accounts Receivable ................................................................... 1,550,000 Sales Revenue ................................................................... (To record credit sales) Sales Returns and Allowances .................................................... Accounts Receivable ......................................................... (To record credits to customers)

100,000 100,000

Cash ........................................................................................... 1,250,000 Accounts Receivable ......................................................... (To record collection of receivables) Allowance for Doubtful Accounts ................................................. Accounts Receivable ......................................................... (To write off specific accounts)

35,000

Accounts Receivable ................................................................... Allowance for Doubtful Accounts ....................................... (To reverse write-off of account)

8,000

Cash ........................................................................................... Accounts Receivable ......................................................... (To record collection of account)

8,000

1,550,000

1,250,000

35,000

8,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

8-54

Solution 226 (Cont.) (b) Percentage of receivables basis: Allowance For Doubtful Accounts 35,000 Bal. 33,000 8,000 Bal. 6,000

Accounts Receivable 650,000 100,000 1,550,000 1,250,000 8,000 35,000 8,000 815,000

Bal.

Required balance ($815,000  .06) ............................................................ Balance before adjustment ......................................................................... Adjustment required ................................................................................... Dec. 31

Bad Debt Expense ....................................................... Allowance for Doubtful Accounts .........................

$48,900 6,000 $42,900

42,900 42,900

Ex. 227 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Dec. 17

Cash ................................................................................... Sales Discounts .................................................................... Accounts Receivable .................................................... (To record collection of 12/4 sales, terms 2/10, n/30)

2,940 60

Cash

................................................................................... Bad Debt Expense ....................................................... (Collection of account previously written off as uncollectible under allowance method)

1,200

Bad Debt Expense ................................................................ Allowance for Doubtful Accounts .................................. (To recognize estimated bad debts based on 3% of accounts receivable of $600,000)

1,800

3,000

1,200

1,800

Instructions Prepare the correcting entries. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227 (12 min.) Dec. 17 Accounts Receivable .......................................................... Sales Discounts ......................................................... (To correct accounts for granting sales discount when discount period had lapsed) 27

Accounts Receivable........................................................... Allowance for Doubtful Accounts ............................... (To reverse write off of collected account)

60 60

1,200 1,200

Reporting and Analyzing Receivables

Solution 227 (Cont.) 27 Bad Debt Expense ............................................................. Accounts Receivable ................................................. (To correct erroneous collection entry) 31

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1,200 1,200

Bad Debt Expense ............................................................. 16,200 Allowance for Doubtful Accounts ............................... [To adjust balance in Bad Debts Expense to $18,000 or (3%  $600,000); previous allowance is $0]

16,200

Ex. 228 Prepare journal entries to record the following transactions entered into by the Merando Company: 2013 June 1

Received a $10,000, 6%, 1-year note from Dan Gore as full payment on his account.

Nov.

Sold merchandise on account to Barlow, Inc., for $14,000, terms 2/10, n/30.

Nov.

Barlow, Inc., returned merchandise worth $1,000.

Nov.

Received payment in full from Barlow, Inc.

Dec. 31

Accrued interest on Gore's note.

2014 June 1

Dan Gore honored his promissory note by sending the face amount plus interest.

Ans: N/A, LO: 2,5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 228 (15 min.) 2013 June 1 Notes Receivable ............................................................... Accounts Receivable—D. Gore ................................. Nov.

Nov.

Dec. 31

10,000 10,000

Accounts Receivable—Barlow, Inc. ................................... Sales Revenue...........................................................

14,000

Sales Returns and Allowances .......................................... Accounts Receivable—Barlow, Inc. ...........................

1,000

Cash ................................................................................ Sales Discounts ($13,000  .02) ........................................ Accounts Receivable—Barlow, Inc. ...........................

12,740 260

Interest Receivable ............................................................ Interest Revenue ....................................................... ($10,000  6%  7  12 = $315)

350

14,000

1,000

13,000

350

8-56

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 228 (Cont.) 2014 June 1 Cash ................................................................................ Notes Receivable ...................................................... Interest Receivable .................................................... Interest Revenue ....................................................... ($10,000  6%  5  12)

10,600 10,000 350 250

Ex. 229 The Garvey Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2013, and December 31, 2014, appear below: 12/31/2013 $400,000 80,000 4,000

Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts

12/31/2014 $500,000 100,000 ?

Instructions (a) Record the following events in 2014. Aug. 10 Determined that the account of Kurt West for $900 is uncollectible. Sept. 12 Determined that the account of Jill Lynch for $3,000 is uncollectible. Oct. 10 Received a check for $300 as payment on account from Kurt West, whose account had previously been written off as uncollectible. (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2014. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2014? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 229 (a) Aug. 10

Sept. 12

Oct. 10

(20 min.) Allowance for Doubtful Accounts ............................... Accounts Receivable—Kurt West ..................... (To write off Jack Dune account)

900 900

Allowance for Doubtful Accounts ............................... Accounts Receivable—Jill Lynch ...................... (To write off Jill Lynch account)

3,000

Accounts Receivable—Kurt West .............................. Allowance for Doubtful Accounts ...................... (To reinstate Kurt West account previously written off)

300

Cash .......................................................................... Accounts Receivable—Kurt West ..................... (To record collection on account)

300

3,000

300

Reporting and Analyzing Receivables

Solution 229 (b) Dec. 31

(Cont.) Bad Debt Expense [($100,000  6%) – $400*] .......... Allowance for Doubtful Accounts ...................... (To record estimate of uncollectible accounts) *($4,000 – $900 – $3,000 + $300 = $400).

8-57

5,600 5,600

(c) Balance of Allowance for Doubtful Accounts at December 31, 2014, is $6,000 or $100,000  6%) Ex. 230 Erickson Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2014, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $170,000 1% 1–30 days past due 15,000 3% 31–60 days past due 12,000 6% 61–90 days past due 5,000 15% Over 90 days past due 9,000 30% Total Accounts Receivable $211,000 Instructions (a) Prepare the adjusting entry on December 31, 2014, to recognize bad debts expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 230

(15 min.)

Current Accounts 1–30 days past due 31–60 days past due 61–90 days past due Over 90 days past due Total Accounts Receivable

$170,000 15,000 12,000 5,000 9,000 $211,000

Estimated Percentage Uncollectible 1% 3% 6% 15% 30%

Estimated Uncollectible $1,700 450 720 750 2,700 $6,320

(a) Bad Debt Expense ....................................................................... 6,020 Allowance for Doubtful Accounts ($6,320 – $300) .............. (To adjust the allowance account to total estimated uncollectible)

6,020

(b) Bad Debt Expense ....................................................................... 6,620 Allowance for Doubtful Accounts ($6,320 + $300) .............. (To adjust the allowance account to total estimated uncollectible)

6,620

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 231 On December 31, 2013, when its Allowance for Doubtful Accounts had a credit balance of $1,500, Leeds Company estimates that 6% of its accounts receivable balance of $95,000 will become uncollectible. On March 3, 2014, Leeds Company determined that Megan Jost’s account of $950 was uncollectible. On May 15, 2014, Jost paid the amount previously written off. Instructions Prepare the journal entries for December 31, 2013, March 3, 2014 and May 15, 2014. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 231 Dec. 31, 2013

Mar. 3, 2014

May 15

(10 min.) Bad Debt Expense [($95,000  .06) – $1,500] ........ Allowance for Doubtful Accounts .................... (To record the bad debt expense)

4,200 4,200

Allowance for Doubtful Accounts ............................ Accounts Receivable—M. Jost ....................... (To write off M. Jost account deemed uncollectible)

950

Accounts Receivable—M. Jost ................................ Allowance for Doubtful Accounts .................... (To reinstate an account previously written off)

950

Cash

950

.................................................................... Accounts Receivable—M. Jost ....................... (To record payment on account in full)

950

Ex. 232 The percentage of receivables approach to estimating bad debts expense is used by Hayes Company. On February 28, the firm had accounts receivable in the amount of $585,000 and Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Mark Dole for $2,100 was determined to be uncollectible and written off. However, on March 31, Dole received an inheritance and immediately paid his past due account in full. (a) Prepare the journal entries made by Hayes Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Receivables

Solution 232 (15 min.) (a) 1. Feb. 28 Bad Debt Expense [($585,000  .05) – $370] ........ Allowance for Doubtful Accounts ................... (To record the bad debt expense for February)

28,880 28,880

2. Mar. 10 Allowance for Doubtful Accounts ............................ Accounts Receivable—M. Dole ..................... (To write off M. Dole account deemed uncollectible)

2,100

3. Mar. 31 Accounts Receivable—M. Dole .............................. Allowance for Doubtful Accounts ................... (To reinstate an account previously written off)

2,100

Mar. 31 Cash

.................................................................... Accounts Receivable—M. Dole ..................... (To record payment on account in full)

8-59

2,100

2,100 2,100

(b) $370 + 28,880 – $2,100 + $2,100 = $29,250. Ex. 233 Hess Computer Store has credit sales of $450,000 in 2013 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2013, $130,000 of accounts receivable remain uncollected. The credit manager of Hess prepared an aging schedule of accounts receivable and estimates that $7,800 will prove to be uncollectible. On March 4, 2014 the credit manager authorizes a write-off of the $1,000 balance owed by A. Myers. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2013. (b) Show the balance sheet presentation of accounts receivable on December 31, 2013. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the appropriate entry to record the write off of the Myers account. Also show the balance sheet presentation of accounts receivable before and after the write-off. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 233 (15 min.) (a) Bad Debt Expense ($7,800 + $600) ............................................. Allowance for Doubtful Accounts ....................................... (b) Accounts Receivable Less: Allowance for Doubtful Accounts

8,400 8,400 $130,000 7,800

$122,200

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 233 (Cont.) (c) Allowance for Doubtful Accounts .................................................. Accounts Receivable—A. Myers ........................................ Before Write-off $145,000 5,000 $140,000

Accounts Receivable Less: Allowance for Doubtful Accounts Cash Realizable Value

1,000 1,000 After Write-off $144,000 4,000 $140,000

Ex. 234 Hachey Company has accounts receivable of $95,100 at March 31, 2014. An analysis of the accounts shows these amounts. Balance, March 31 2014 2013 $65,000 $75,000 12,600 8,000 10,100 2,400 7,400 1,100 $95,100 $86,500

Month of Sale March February December and January November and October

Credit terms are 2/10, n/30. At March 31, 2014, there is a $2,500 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company's estimates of bad debts are as shown below Estimated Percentage Age of Accounts Uncollectible Current 2% 1–30 days past due 7 31–90 days past due 25 Over 90 days past due 50 Instructions (a) Determine the total estimated uncollectibles. (b) Prepare the adjusting entry at March 31, 2014, to record bad debts expense. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 234 (5 min.) (a) Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due

(b)

Mar. 31

Amount $65,000 12,600 10,100 7,400

% 2 7 25 50

Bad Debt Expense........................................ Allowance for Doubtful Accounts ($8,407 – $2,500) ........................

Estimated Uncollectible $1,300 882 2,525 3,700 $8,407 5,907 5,907

Reporting and Analyzing Receivables

8-61

Ex. 235 Compute the missing amount for each of the following notes: Principal Annual Interest Rate Time Total Interest ______________________________________________________________________ (a) $50,000 5% 2.5 years ? ______________________________________________________________________ (b) $120,000 ? 9 months $7,200 ______________________________________________________________________ (c) ? 9% 90 days $1,350 ______________________________________________________________________ (d) $60,000 6% ? $1,200 ______________________________________________________________________ Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 235 (a) $6,250 (b) 8% (c) $60,000 (d) 4 months

(15 min.) ($50,000  .05  2.5 years) ($120,000  ?  9  12 = $7,200; ? = 8%) (?  .07  90  360 = $1,350; ? = $60,000) ($60,000  .06  ? = $1,200; ? = 4  12)

Ex. 236 Record the following transactions in general journal form for the Newell Company. July

Received a $9,000, 8%, 3-month note, dated July 1, from Lois Patton in payment of her open account.

Oct.

Received notification from Lois Patton that she was unable to honor her note at this time. It is expected that Patton will pay at a later date.

Nov. 15

Received full payment from Lois Patton for note receivable previously dishonored.

Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 236 (15 min.) July 1 Notes Receivable ............................................................... Accounts Receivable—Lois Patton ........................... (To record acceptance of Lois Patton note as payment on account) Oct.

Nov. 15

9,000 9,000

Accounts Receivable— Lois Patton ................................... Notes Receivable ...................................................... Interest Revenue ($9,000  8%  1/4) ...................... (To record dishonored note, $9,000, plus interest)

9,180

Cash ................................................................................ Accounts Receivable— Lois Patton .......................... (To record payment on account)

9,180

9,000 180

9,180

8-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 237 Grey Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Grey Boat Company. Feb. 12

Accepted a $35,000, 6%, 60-day note from Bill Bazil for a 19-foot motorboat built to his specifications.

April 14

Received notification from Bill Bazil that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

May 26

Received a check from Bill Bazil for the total amount owed.

June 10

Received notification by the bank that Bill Bazil’s check was being returned “NSF” and that Mr. Bazil had declared personal bankruptcy.

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 237 (15 min.) Feb. 12 Notes Receivable ............................................................... Sales Revenue ...........................................................

35,000

April 14

Accounts Receivable—B. Bazil .......................................... Notes Receivable ...................................................... Interest Revenue ($35,000  6%  60 ÷ 360) .............

35,350

Cash .................................................................................. Accounts Receivable—B. Bazil .................................

35,350

Accounts Receivable—B. Bazil .......................................... Cash ..........................................................................

35,350

Allowance for Doubtful Accounts ........................................ Accounts Receivable—B. Bazil .................................

35,350

May 26 June 10

35,000 35,000 350 35,350 35,350 35,350

Reporting and Analyzing Receivables

8-63

Ex. 238 Compute the maturity value as indicated for each of the following notes receivable. 1. An $8,000, 6%, 3-month note dated April 20. Maturity value $____________. 2. A $20,000, 9%, 72-day note dated March 5. Maturity value $____________. 3. A $12,000, 5%, 30-day note dated September 10. Maturity value $____________. 4. A $9,000, 7%, 6-month note dated November 15. Maturity value $____________. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 238 (15 min.) 1. Maturity value: $8,120 $8,000  6%  3  12 = $120 + $8,000 = $8,120 2. Maturity value: $20,360 $20,000  9%  72  360 = $360 + $20,000 = $20,360 3. Maturity value: $12,050. $12,000  5%  30  360 = $50 + $12,000 = $12,050 4. Maturity value: $9,315. $9,000  7%  6  12 = $315 + $9,000 = $9,315 Ex. 239 Great Plains Supply Co. has the following transactions related to notes receivable during the last 2 months of the year. Nov. Dec.

1 11 16 31

Loaned $75,000 cash to B. Benson on a 1-year, 8% note. Sold goods to Roswell, Inc., receiving a $9,000, 90-day, 7% note. Received a $20,000, 6-month, 9% note to settle an open account from M. Ling. Accrued interest revenue on all notes receivable.

Instructions Journalize the transactions for Great Plains Supply Co. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

8-64

Solution 239 (8 min.) Nov. 1 Notes Receivable .......................................... Cash ...................................................... Dec. 11 Notes Receivable .......................................... Sales Revenue ...................................... 16 Notes Receivable .......................................... Accounts Receivable—M. Ling .............. 31 Interest Receivable ......................................... Interest Revenue* ................................... *Calculation of interest revenue: Benson's note: $75,000  8%  2/12 Roswell's note: 9,000  7%  20/360 Ling's note: 20,000  9%  15/360 Total accrued interest

75,000 75,000 9,000 9,000 20,000 20,000 1,110 1,110

= $1,000 = 35 = 75 = $1,110

Ex. 240 These transaction took place for Sanders Co. 2013 May

1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account receivable from T. Foley. 31 Accrued interest revenue on the T. Foley note.

Dec. 2014 May

1 Received principal plus interest on the T. Foley note. (No interest has been accrued since December 31, 2013.)

Instructions Record the transactions in general journal. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 240 May

Dec.

May

(5 min.)

2013 Notes Receivable ................................................ Accounts Receivable—T. Foley ................... Interest Receivable ............................................. Interest Revenue ($15,000  9%  8/12). 2014 Cash ................................................................... Notes Receivable ......................................... Interest Receivable ...................................... Interest Revenue ($15,000  9%  4/12) .....

15,000 15,000 900 900

16,350 15,000 900 450

Reporting and Analyzing Receivables

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Ex. 241 Presented here is basic financial information (in millions) from the annual reports of Nike and Adidas. Nike $18,627 71.5 78.4 2,566.2 2,873.7

Sales Allowance for doubtful accounts, Jan. 1 Allowance for doubtful accounts, Dec. 31 Accounts receivable balance (gross), Jan 1 Accounts receivable balance (gross), Dec. 31

Adidas $10,299 112 111 1,527 1,570

Instructions Calculate the accounts receivable turnover and average collection period for both companies. Comment on the difference in their collection experiences. Ans: N/A, LO: 7,8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 241 Accounts receivable turnover

(5 min.)

Nike

Adidas

$18,627 a

$10,299 b

($1,415c + $1,459d)/2

($2,494.7 + $2,795.3 )/2 $18,627 $2,645 2,566.2 – 71.5

2,873.7 – 78.4

Average collection period

365 7.0

$10,299 $1,437

= 7.0 times 1,527 – 112

1,570 – 111

365 7.2

= 52.1 days

= 7.2 times

= 50.7 days

Adidas's accounts receivable turnover was about 3% higher [(7.2 – 7.0)  7.0] than Nike's, which means that Adidas was slightly more efficient than Nike in turning accounts receivable into cash. Ex. 242 The following information is available from the annual reports of Nite and Day Companies. (In millions) Nite Day Sales $112,500 $32,000 Beginning receivables, net 19,000 3,500 Ending receivables, net 18,500 4,400 Instructions (a) Based on the preceding information, compute the following for each company: 1. Accounts receivable turnover. (Assume all sales were credit sales.) 2. Average collection period. (b) What conclusion concerning the management of accounts receivable can be drawn from these data? Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Solution 242 (10 min.) (a) 1. Accounts receivable turnover

2. Average collection period

Nite $112,500 ($19,000 + $18,500) ÷ 2 $112,500 ÷ $18,750 = 6.0 times

Day $32,000 ($3,500 + $4,400) ÷ 2 $32,000 ÷ $3,950 = 8.1 times

365 days ÷ 6.0 = 60.8 days

365 days ÷ 8.1 = 45.1 days

(b) Generally, companies like to have a high accounts receivable turnover and a correspondingly low average collection period. Day’s accounts receivable turnover is 35% higher than Nite’s ratio and Day’s average collection period is only 74% (45.1 ÷ 60.8) as long as Nite’s collection period. It can be concluded that Day does a better job of managing its accounts receivable than Nite. Ex. 243 Shafer Company has the following accounts in its general ledger at July 31: Accounts Receivable $49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions occurred. Aug. 15

Sold $30,000 of accounts receivable to More Factors, Inc. who assesses a 2% finance charge. Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.

28 Made sales of $4,000 on Shafer credit cards. Instructions (a) Journalize the transactions. (b) Indicate the statement presentation of service charges. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 243 (a) Aug. 15

(10 min.) Cash ............................................................................. Service Charge Expense ($30,000  2%) ..................... Accounts Receivable .............................................

29,400 600 30,000

Cash ............................................................................. Service Charge Expense ($2,500  3%) ....................... Sales Revenue .......................................................

2,425 75

Accounts Receivable .................................................... Sales Revenue..........................................................

4,000

(b) Service Charge Expense is reported as a selling expense.

2,500

4,000

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COMPLETION STATEMENTS 244. Notes and accounts receivable that result from sales transactions are often called ______________ receivables. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

245. Two accounting problems associated with accounts receivable are (1) ______________ and (2) ______________ accounts receivable. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

246. The net amount expected to be collected in cash from receivables is the _____________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

247. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

248. The two methods used in accounting for uncollectible accounts are the ____________ method and the ______________ method. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

249. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

250. When the allowance method is used to account for uncollectible accounts, ____________ is debited when an account is determined to be uncollectible. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

251. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

252. A 75-day note receivable dated July 5 would mature on ______________. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

253. 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

254. A note that is not paid on the maturity date is said to be ______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

255. A concentration of ______________ is a threat of nonpayment from a single customer or class of customers. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

256. The ratio used to assess the liquidity of accounts receivable is the ______________. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

257. A finance company or bank that purchases receivables from businesses is known as a ______________. Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Answers to Completion Statements 244. trade 245. recognizing, valuing 246. cash realizable value 247. Bad Debt 248. allowance, direct write-off 249. contra, deducted 250. Allowance for Doubtful Accounts

251. 252. 253. 254. 255. 256. 257.

percentage of receivables, cash realizable September 18 Notes Receivable, Interest Revenue dishonored credit risk accounts receivable turnover factor

MATCHING 258. Match the items below by entering the appropriate code letter in the space provided. A. Aging the accounts receivable B. Direct write-off method C. Obligation due D. Trade receivables E. Accounts receivable turnover ____ ____ ____ ____ ____ ____ ____ ____ ____

F. G. H. I. J.

Percentage of receivables basis Promissory note Dishonored note Cash net realizable value Credit card sales

1. A written promise to pay a specified amount on demand or at a definite time. 2. Sales that involve the customer, the retailer, and the credit card issuer. 3. A measure of the liquidity of receivables. 4. Notes and accounts receivable that result from sales transactions. 5. A note which is not paid in full at maturity. 6. Analysis of customer account balances by length of time they have been unpaid. 7. Emphasizes expected cash realizable value of accounts receivable. 8. Bad debt losses are not estimated and no allowance account is used. 9. The net amount expected to be received in cash.

Ans: N/A, LO: 1-9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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

G J E D H

6. 7. 8. 9.

A F B I

SHORT-ANSWER ESSAY QUESTIONS S-A E 259 a. List the characteristics of promissory notes. b. List the reasons for obtaining promissory notes from customers. c. What action relating to promissory notes must be taken at the end of the accounting period? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 259 (5 min.) (a) Characteristics of promissory notes include 1. Promissory notes give the holder stronger legal claims to assets than accounts receivable, thus they are preferable if the maker declares bankruptcy. 2. Promissory notes have definite due dates and bear interest at a stated rate. 3. Promissory notes are formal promises to pay. (b) Reasons for obtaining promissory notes from customers include 1. individuals and companies lending or borrowing money. 2. settlement of accounts receivable. 3. accommodation of transactions for which the credit period exceeds normal limits. (c) At the end of the accounting period, it is necessary to accrue interest from the date of the note to the end of the accounting period. This creates Interest Revenue that is reported on the income statement and interest receivable that is reported on the balance sheet. S-A E 260 Two methods can be used in accounting for uncollectible accounts. Identify and contrast the two methods. How do the methods differ regarding the time periods in which Bad Debt Expense is recognized? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 260 (5 min.) The two methods used in accounting for uncollectible accounts are: (1) the allowance method and (2) the direct write-off method. Under the allowance method, the emphasis is on establishing the proper amount to carry as a balance in the allowance account. Uncollectible accounts receivable are estimated and matched against sales revenue in the same accounting period in which the sales occurred. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. With the direct write-off method, bad debt expense is often recorded in a period different from the period in which the revenue was recorded.

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S-A E 261 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 261 (5 min.) A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest. S-A E 262 Jenkins Company dishonors a note at maturity. What are the options available to the lender? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 262 (5 min.) When Jenkins Company has dishonored a note, the lender can renegotiate new terms for the receivable which is equal to the full amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection, the company will write-off the note receivable. S-A E 263 An article in the Wall Street Journal indicated that companies are selling receivables at a record rate. Why do companies sell their receivables? Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 263 (5 min.) The reasons companies are selling their receivables are: (1) For competitive reasons, companies often must provide financing to purchasers of their goods. Such financing can result in receivables balances that are larger than the company wishes to hold. Selling the receivables reduces the excessive balance. (2) Receivables may be sold because they may be the only reasonable source of cash. (3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivables to another party that has expertise in billing and collecting receivable S-A E 264 Your friend Mark has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Mark do to reduce potential bad debts? Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 264 (5 min.) 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.

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Solution 264 (Cont.) 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. S-A E 265 Company Net Credit Beginning Ending Name Sales Net Receivables Net Receivables Brown $180,000 $ 5,000 $30,000 Pink $400,000 $52,000 $42,000 Yellow $ 75,000 $ 5,400 $ 5,800 (a) Which company is doing the best job of managing its accounts receivable? Why? Be sure to support your answer with computations. (b) What are your concerns about these companies? Ans: N/A, LO: 8, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 265

(5 min.)

Accounts receivable Turnover Brown $180,000 = 10.3 times $ 17,500 Average Collection Period Brown 365 = 35.4 days 10.3

Pink $400,000 = 8.5 times $ 47,000

Yellow $75,000 = 13.4 times $ 5,600

Pink 365 8.5

Yellow

= 42.9 days

365 13.4

= 27.2 days

(a) Yellow is doing the best job of managing its accounts receivable because it has the shortest collection period. It is able to collect accounts receivable in about 27 days.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 265

(Cont.)

(b) 1

Yellow is the smallest company in size of net credit sales and accounts receivable. Its average collection period may be lower because it has well established customers and is not trying to expand.

The net receivables for Brown increased $25,000 or 500% during the year. This indicates that Brown is expanding and increasing its credit sales. The company should have appropriate policies for extending credit and making collections. One major concern is that the credit sales can be collected.

It is taking Pink about 43 days to collect its receivables. Management should determine if this period can be shortened.

S-A E 266 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Solution 266 (5 min.) 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 267 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 or MasterCard). Ans: N/A, LO: 9, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 267 (5 min.) 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.

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S-A E 268 (Ethics) Two Brothers, a small book publishing company, wrote off the debt of The Learning Place, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Two Brothers simply stopped sending bills. Nearly a year later, The Learning Place was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Two Brothers, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Two Brothers act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A, LO: 3, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Solution 268 (5 min.) Yes, it is ethical to reinstate the debt of The Learning Place, especially since there was no evidence given that The Learning Place attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Two Brothers. Two Brothers' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the state, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Two Brothers can 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 Place become bankrupt, Two Brothers could not have legally reinstated the debt, even if The Learning Place became solvent at some time in the future. S-A E 269 (Communication) Schmidt Company received a letter from Deborah Stine, a customer. Deborah had purchased $325 worth of clothing from Schmidt on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Schmidt. Her total debt presently, with interest and late fees, is $251.13. Deborah sent a letter to Schmidt in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Schmidt certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Schmidt write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Schmidt were among the best she had ever owned, and that she "told everybody" that Schmidt was definitely the best place to get clothes.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 269

(Cont.)

Required: You are the accounting manager for Schmidt. Write a short letter to Deborah explaining why her debt cannot be written off. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Solution 269

(5 min.)

(Letterhead) (Date) Ms. Deborah Stine 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Stine: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Schmidt clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) are $251.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Schmidt extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The Allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Schmidt or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Beverly in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely,

Martha King Accounting Manager

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IFRS QUESTIONS 1.

Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

IFRS requires loans and receivables to be recorded at a. amortized cost. b. amortized cost, adjusted for allowances for doubtful accounts. c. unamortized cost. d. unamortized cost, adjusted for allowances for doubtful accounts.

Ans: B, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

IFRS sometimes refers to allowances as a. revenues. b. discounts. c. provisions. d. reserves.

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

IFRS a. implies that receivables with different characteristics should be reported separately. b. requires that receivables with different characteristics should be reported separately. c. implies that receivables with different characteristics should be reported as one unsegregated amount. d. requires that receivables with different characteristics should be reported as one unsegregated amount.

Ans: A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which board(s) has(have) worked to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB.

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. Both FASB and IASB. d. Neither FASB nor IASB.

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which is part of IFRS accounting for financial instruments? Disclosure of fair value information Optional recording of some financial for receivables in the notes instruments at fair value a. Yes Yes b. Yes No c. No Yes d. No No

Ans: A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

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, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

10.

What criteria are used to determine how to record a factoring transaction? GAAP IFRS a. risks and rewards, and loss of control risks and rewards, and loss of control b. risks and rewards, and loss of control loss of control c. loss of control loss of control d. loss of control risks and rewards, and loss of control

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

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11.

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Which permits partial derecognition of receivables? GAAP IFRS a. yes no b. yes yes c. no no d. no yes

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

CHAPTER 9 REPORTING AND ANALYZING LONG-LIVED ASSETS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXOMONY Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9.

1 1 1 1 1 1 1 2 2

K K K K K K K K K

10. 11. 12. 13. 14. 15. 16. 17. 18.

2 2 2 2 3 3 3 4 4

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. 73. 74. 75. 76. 77. 78. 79. 80. 81.

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 1 1 1 1 2 2 2 2 2

AP AP K K K K K K K K AP AP AP AP AP AP AP K C C AP AP AP AP AP AP AP AP K K K K K K K K

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. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

2 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 3 3 3 3 3 3 3 3 3 3

Item

True-False Statements K 19. 4 K 28. K 20. 4 K 29. K 21. 4 K 30. K 22. 4 K 31. K 23. 4 K 32. K 24. 4 K 33. K 25. 5 K 34. K 26. 5 K 35. K 27. 5 K 36. Multiple Choice Questions K 118. 3 AP 154. K 119. 1, 3 AP 155. K 120. 3 AP 156. K 121. 1, 3 AP 157. K 122. 1, 3 AP 158. K 123. 1, 3 AP 159. K 124. 3 AP 160. K 125. 4 C 161. K 126. 4 C 162. AP 127. 4 K 163. AP 128. 4 K 164. AP 129. 4 AP 165. AP 130. 4 AP 166. AN 131. 4 AP 167. AN 132. 4 AP 168. AP 133. 4 AP 169. AP 134. 4 AP 170. C 135. 4 K 171. C 136. 4 K 172. K 137. 4 K 173. K 138. 4 C 174. K 139. 4 C 175. C 140. 4 C 176. AP 141. 4 K 177. AP 142. 4 AP 178. AP 143. 5 AP 179. AP 144. 5 K 180. AP 145. 5 K 181. K 146. 5 K 182. AN 147. 5 AP 183. AN 148. 5 AP 184. AP 159. 5 AP 185. AP 150. 5 AP 186. AP 151. 5 AP 187. AP 152. 5 AP 188. AP 153. 5 C 189.

Item

5 5 5 5 6 6 6 7 7

K K K K K C K K K

37. 38. 39. 40. 41. 42. 43. *44. *45.

7 7 7 7 7 7 8 9 9

K K K K K K K K K

5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7

C K AP AP AP C AP AP AN AP AP AP AN AN AN AN C C AP AP AP K K K K K AP AP K K K K K C K K

190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. *204. *205. *206. *207. *208. *209. *210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221.

7 7 7 7 7 7 7 7 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9

K K C C K K K AP AP C K AP K AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP AP AP C

9-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Brief Exercises 228. 4 K 231. 229. 4 K 232. 230. 2,7 K 233. Exercises 234. 1 AN 240. 5 AP 247. 6 AP 254. 235. 1 AP 241. 5 AP 248. 6 AP *255. 236. 1 AP 242. 5 AP 249. 7 AP *256. 237. 1, 3. 243. 5 AP 250. 7 AP *257. 4 AP 244. 5 AP 251. 7 AP *258. 238. 3,4 AN 245. 5 AP 252. 7 AP *259. 239. 4 AN 246. 5 AP 253. 7 AP *260. Completion Statements 264. 1 K 269. 1 AP 274. 3 K 279. 265. 1 K 270. 2 K 275. 4 K 280. 266. 1 K 271. 2 K 276. 4 K 281. 267. 1 K 272. 2 K 277. 4 K 282. 268. 1 K 273. 3 K 278. 5 K 283. Matching 287. 1 - 4 K 288. 5 - 7 K Short-Answer Essay 289. 1 K 292. 3 C 295. 6 C 298. 290. 1 K 293. 4 K 296. 7 C 291. 2 C 294. 5 K 297. 7 E * This topic is dealt with in an Appendix to the chapter. 222. 223. 224.

1 1 1, 3

K K AP

225. 226. 227.

1 4 4

AP AP AP

6 8 9

AP K AP

8 3,9 3,9 3,9 3,9 3,9 3,9

AP AP AP AP AP AP AP

*261. *262. *263.

5 5 6 6 7

K AP K K K

284. 285. *286.

1, 3, 5

3,9 3,9 3, 5, 9

AP AN

7 7 9

K K K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

1. 2. 3. 4. 5. 6. 7. 46. 47.

TF TF TF TF TF TF TF MC MC

48. 49. 50. 51. 52. 53. 54. 55. 56.

MC MC MC MC MC MC MC MC MC

57. 58. 59. 60. 61. 62. 63. 64. 65.

MC MC MC MC MC MC MC MC MC

66. 67. 68. 69. 70. 71. 72. 73. 222.

MC MC MC MC MC MC MC MC Be

223. 224. 225. 234. 235. 236. 264. 265. 266.

Be Be Be Ex Ex Ex C C C

267. 268. 269. 287. 289. 290. 298.

C C C Ma SA SA SA

MC MC MC MC MC

88. 89. 90. 230. 270.

MC MC MC Be C

271. 272. 287. 291.

C C Ma SA

Learning Objective 2

8. 9. 10. 11. 12.

TF TF TF TF TF

13. 74. 75. 76. 77.

TF MC MC MC MC

78. 79. 80. 81. 82.

MC MC MC MC MC

83. 84. 85. 86. 87.

Reporting and Analyzing Long-Lived Assets

9-3

Learning Objective 3 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

14. 15. 16. 91. 92. 93. 94. 95. 96.

TF TF TF MC MC MC MC MC MC

97. 98. 99. 100. 101. 102. 103. 104. 105.

MC MC MC MC MC MC MC MC MC

106. 107. 108. 109. 110. 111. 112. 113. 114.

MC MC MC MC MC MC MC MC MC

115. 116. 117. 118. 119. 120. 121. 122. 123.

MC MC MC MC MC MC MC MC MC

124. 224. 225. 255. 256. 257. 258. 259. 260.

MC Be Be Ex Ex Ex Ex Ex Ex

261. 262. 263. 273. 274. 287. 292. 298

Ex Ex Ex C C Ma SA SA

MC MC MC MC MC Be Be

228. 229. 237. 238. 239. 275. 276.

Be Be Ex Ex Ex C C

277. 278. 287. 293.

C C Ma SA

MC MC MC MC MC MC MC

164. 165. 240. 241. 242. 243. 244.

MC MC Ex Ex Ex Ex Ex

245. 246. 279. 280. 288. 294. 298.

Ex Ex C C Ma SA SA

Be Ex Ex C

282. 288. 295.

C Ma SA

Learning Objective 4

17. 18. 19. 20. 21. 22. 23.

TF TF TF TF TF TF TF

24. 125. 126. 127. 128. 129. 130.

TF MC MC MC MC MC MC

131. 132. 133. 134. 135. 136. 137.

MC MC MC MC MC MC MC

138. 139. 140. 141. 142. 226. 227.

Learning Objective 5

25. 26. 27. 28. 29. 30. 31.

TF TF TF TF TF TF TF

143. 144. 145. 146. 147. 148. 149.

MC MC MC MC MC MC MC

150. 151. 152. 153. 154. 155. 156.

MC MC MC MC MC MC MC

157. 158. 159. 160. 161. 162. 163.

Learning Objective 6

32. 33. 34. 166.

TF TF TF MC

167. 168. 169. 170.

MC MC MC MC

171. 172. 173. 174.

MC MC MC MC

231. 247. 248. 281.

9-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Learning Objective 7 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

35. 36. 37. 38. 39. 40. 41. 42.

TF TF TF TF TF TF TF TF

175. 176. 177. 178. 179. 180. 181. 182.

MC MC MC MC MC MC MC MC

183. 184. 185. 186. 187. 188. 189. 190.

MC MC MC MC MC MC MC MC

191. 192. 193. 194. 195. 196. 197. 230.

MC MC MC MC MC MC MC Be

249. 250. 251. 252. 253. 283. 284. 285.

Ex Ex Ex Ex Ex C C C

288. 296. 297.

Ma SA SA

MC Be

254.

MC MC Be Ex Ex Ex

258. 259. 260. 261. 262. 263.

Ex Ex Ex Ex Ex Ex

286.

Learning Objective 8

43. 198.

TF MC

199. 200.

MC MC

201. 202.

MC MC

203. 232.

Learning Objective 9

44. 45. 204. 205. 206. 207.

TF TF MC MC MC MC

208. 209. 210. 211. 212. 213.

MC MC MC MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

214. 215. 216. 217. 218. 219.

MC MC MC MC MC MC

220. 221. 233. 255. 256. 257.

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES 1. Describe how the historical 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. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life. 2. Explain the concept of depreciation. Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, and it is not a process that results in an accumulation of cash. Depreciation reflects an asset’s decreasing usefulness and revenueproducing ability, resulting from wear and tear and from obsolescence. 3. Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods. The formula for straight-line depreciation is: Cost – Salvage value Useful life (in years) The expense patterns of the three depreciation methods are as follows: Method Annual Depreciation Pattern Straight-line Constant amount Declining-balance Decreasing amount Units-of-activity Varying amount .

Reporting and Analyzing Long-Lived Assets

9-5

4. Describe the procedure for revising periodic depreciation. Companies make revisions of periodic depreciation in present and future periods, not retroactively. 5. Explain how to account for the disposal of plant assets. The procedure for accounting for the disposal of a plant asset through sale or retirement is: (a) Eliminate the book value of the plant asset at the date of disposal. (b) Record cash proceeds, if any. (c) Account for the difference between the book value and the cash proceeds as a gain or a loss on disposal. 6. Describe methods for evaluating the use of plant assets. Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio. The return on assets ratio consists of two components: the asset turnover ratio and the profit margin ratio. 7. Identify the basic issues related to reporting intangible assets. Companies report intangible assets at their cost less any amounts amortized. If an intangible asset has a limited life, its cost should be allocated (amortized) over its useful life. Intangible assets with indefinite lives should not be amortized. 8. Indicate how long-lived assets are reported in the financial statements. Companies usually show plant assets under “Property, plant, and equipment”; they show intangibles separately under “Intangible assets”. Either within the balance sheet or in the notes, companies disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They describe the depreciation and amortization methods used, and disclose the amount of depreciation and amortization expense for the period. In the statement of cash flows, depreciation and amortization expense are added back to net income to determine net cash provided by operating activities. The investing section reports cash paid or received to purchase or sell property, plant, and equipment. *9. Compute periodic depreciation using the declining-balance method and the units-ofactivity method. The depreciation expense calculation for each of these methods is: Declining balance: =

Book value at beginning of year

Decliningbalance rate

Depreciation Expense

Units-of-activity: =

Depreciation cost per unit

Units of activity during year

Depreciation Expense

TRUE-FALSE STATEMENTS 1.

All plant assets (fixed assets) must be depreciated for accounting purposes.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Equipment.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9-6 4.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Land improvements are generally charged to the Land account.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under an operating lease, both the leased asset and the liability are shown on the balance sheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Certain types of leases, called capital leases, allow the lessee to account for the transaction as a rental.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The book value of a plant asset is always equal to its fair market value.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Recording depreciation on plant assets affects the balance sheet and the income statement.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

The depreciable cost of a plant asset is its original cost minus obsolescence.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

Recording depreciation each period is an application of the matching principle.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

The Accumulated Depreciation account represents a cash fund available to replace plant assets.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

13.

In calculating depreciation, both plant asset cost and useful life are based on estimates.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

15.

Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straightline method had been used.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

16.

9-7

The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

Ans: T, LO: 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 in prior periods.

Ans: T, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19.

When a change in estimate is made, there is no correction of previously recorded depreciation expense.

Ans: T, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

Capital expenditures are expenditures that increase the company's investment in productive facilities.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

Ordinary repairs should be recognized when incurred as revenue expenditures.

Ans: T, LO: 4, 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

24.

A permanent decline in the market value of an asset is referred to as an impairment.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

25.

Companies only dispose of plant assets by either sale or exchange.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

26.

If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

27.

The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9-8 28.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

A plant asset must be fully depreciated before it can be removed from the books.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31.

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

32.

The return on assets ratio indicates how efficiently a company uses its assets.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

33.

The return on assets ratio can be computed from the profit margin ratio and the asset turnover ratio.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

34.

The asset turnover ratio is calculated as net sales divided by ending total assets.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35.

Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance.

Ans: T, LO: 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 an intangible asset must be amortized over a 20-year period.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37.

The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38.

If an acquired franchise or license is for an indefinite time period, then the cost of the asset should not be amortized.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39.

When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

40.

9-9

Research and development costs that result in a successful product that is patentable are charged to the Patent account.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41.

Franchises are classified as a plant asset.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

42.

Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43.

In the notes to the financial statements, the depreciation and amortization methods used should be described.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*44.

Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*45.

Under the double-declining-balance method, the depreciation rate used each year remains constant.

Ans: T, LO: 9, 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 1. 2. 3. 4. 5. 6. 7.

F F F F F F F

8. 9. 10. 11. 12. 13. 14.

F T F T F F F

15. 16. 17. 18. 19. 20. 21.

F T T F T F T

22. 23. 24. 25. 26. 27. 28.

T F T F T F T

29. 30. 31. 32. 33. 34. 35.

F F T F T F T

36. 37. 38. 39. 40. 41. 42.

F T T F F F T

43. T *44. T *45. T

MULTIPLE CHOICE QUESTIONS 46.

A company purchased land for $350,000 cash. Real estate brokers' commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at a. $385,000. b. $350,000. c. $375,000. d. $410,000.

9-10 47.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A company purchased land for $84,000 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. Proceeds from salvage of the demolished building was $1,200. Under the historical cost principle, the cost of land would be recorded at a. $94,800. b. $84,000. c. $89,800. d. $96,000.

Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $84,000 + $5,000 + ($7,000 − $1,200) = $94,800

48.

Which of the following is not properly classified as property, plant, and equipment? a. Building used as a factory. b. Land used in ordinary business operations. c. A truck held for resale by an automobile dealership. d. Land improvement, such as parking lots and fences.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49.

A characteristic of a plant asset is that it is a. intangible. b. used in the operations of a business. c. held for sale in the ordinary course of the business. d. not currently used in the business but held for future use.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50.

Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax. b. Truck license. c. Freight charges. d. Cost of lettering on side of truck.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

51.

Which of the following would not be included in the Equipment account? a. Installation costs. b. Freight costs. c. Cost of trial runs. d. Electricity used by the machine.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52.

Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment. b. Furnishings. c. Land. d. Fixtures.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

53.

9-11

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

55.

The Land account would include all of the following costs except a. drainage costs. b. the cost of building a fence. c. commissions paid to real estate agents. d. the cost of tearing down a building.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56.

Whyte Clinic purchases land for $280,000 cash. The clinic assumes $3,000 in property taxes due on the land. The title and attorney fees totaled $2,000. The clinic had the land graded for $4,400. What amount does Whyte Clinic record as the cost for the land? a. $284,400. b. $280,000. c. $289,400. d. $285,000.

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $280,000 + $3,000 + $2,000 + $4,440 = $289,400

57.

Burke Company purchases land for $90,000 cash. Burke assumes $2,500 in property taxes due on the land. The title and attorney fees totaled $1,000. Burke has the land graded for $2,200. They paid $10,000 for paving of a parking lot. What amount does Burke record as the cost for the land? a. $93,200. b. $105,700. c. $95,700. d. $90,000.

58.

Aber Company buys land for $145,000 on 12/31/13. As of 3/31/14, the land has appreciated in value to $152,000. On 12/31/14, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2014? a. $0. b. $7,000. c. $3,400. d. $10,400.

Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

9-12 59.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Givens Retail purchased land for a new parking lot for $75,000. The paving cost $105,000 and the lights to illuminate the new parking area cost $36,000. Which of the following statements is true with respect to these additions? a. $180,000 should be debited to the Land account. b. $141,000 should be debited to Land Improvements. c. $216,000 should be debited to the Land account. d. $216,000 should be debited to Land Improvements.

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $105,000 + $36,000 = $141,000

60.

Shaffer Company acquires land for $62,000 cash. Additional costs are as follows. Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560 Shaffer will record the acquisition cost of the land as a. $62,000. b. $63,690. c. $65,610. d. $65,370.

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $62,000 + ($300 − $120) + $1,500 + 1,130 + $560 = $65,370

61.

Ramirez Company acquires land for $210,000 cash. Additional costs are as follow. Removal of shed $ 2,000 Filling and grading 6,000 Salvage value of lumber of shed 1,280 Broker commission 4,520 Paving of parking lot 40,000 Closing costs 3,400 Ramirez will record the acquisition cost of the land as a. $224,640. b. $227,200. c. $225,920. d. $210,000.

Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $210,000 + ($2,000 − $1,280) + $6,000 + $4,520 + $3,400 = $224,640

62.

Wesley Hospital installs a new parking lot. The paving cost $45,000 and the lights to illuminate the new parking area cost $18,000. Which of the following statements is true with respect to these additions? a. $45,000 should be debited to the Land account. b. $18,000 should be debited to Land Improvements. c. $63,000 should be debited to the Land account. d. $63,000 should be debited to Land Improvements.

Reporting and Analyzing Long-Lived Assets

63.

9-13

Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

64.

National Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

65.

A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

66.

Arnold Company purchases a new delivery truck for $40,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes safety testing for $220. What does Arnold record as the cost of the new truck? a. $44,040. b. $43,920. c. $42,500. d. $41,920.

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 + $2,500 + $1,200 + $220 = $43,920

9-14

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

67.

Rodgers Company purchased equipment and these costs were incurred: Cash price $45,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $50,100 Rodgers will record the acquisition cost of the equipment as a. $45,000. b. $48,600. c. $49,240. d. $50,100.

68.

Kathy’s Blooms purchased a delivery van with a $50,000 list price. The company was given a $5,000 cash discount by the dealer, and paid $2,500 sales tax. Annual insurance on the van is $1,250. As a result of the purchase, by how much will Kathy’s Blooms increase its van account? a. $50,000. b. $45,000. c. $48,750. d. $47,500.

69.

Rains Company purchased equipment on January 1 at a list price of $75,000, with credit terms 2/10, n/30. Payment was made within the discount period. Rains paid $3,750 sales tax on the equipment, and paid installation charges of $1,320. Prior to installation, Rains paid $3,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $78,750. b. $81,570. c. $83,070. d. $75,750.

70.

Carpino Company purchased equipment and these costs were incurred: Cash price $70,000 Sales taxes 3,500 Insurance during transit 750 Installation and testing 1,500 Total costs $75,750 What amount should be recorded as the cost of the equipment? a. $70,000. b. $73,500. c. $74,250. d. $75,750.

Reporting and Analyzing Long-Lived Assets

71.

9-15

Ryan, Inc. purchased a delivery truck with a $42,000 list price. The company was given a $4,200 cash discount by the dealer, and paid $2,100 sales tax. Annual insurance on the truck is $1,050. As a result of the purchase, by how much will Ryan, Inc. increase its truck account? a. $42,000. b. $37,800. c. $40,950. d. $39,900.

72.

Runge Company purchased machinery on January 1 at a list price of $250,000, with credit terms 2/10, n/30. Payment was made within the discount period. Runge paid $12,500 sales tax on the machinery, and paid installation charges of $4,400. Prior to installation, Runge paid $10,000 to pour a concrete slab on which to place the machinery. What is the total cost of the new machinery? a. $261,900. b. $271,900. c. $276,900. d. $252,500.

73.

Schrock Company purchases a new delivery van for $60,000. The sales taxes are $4,500. The logo of the company is painted on the side of the van for $1,200. The van’s annual license is $120. The van undergoes safety testing for $220. What does Schrock record as the cost of the new van? a. $66,040. b. $65,920. c. $64,500. d. $63,920.

74.

All leases are classified as either a. capital leases or long-term leases. b. capital leases or operating leases. c. operating leases or current leases, d. long-term leases or current leases.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

9-16 76.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following is included in the cost of constructing a building? a. Cost of paving a parking lot. b. Cost of repairing vandalism damage incurred shortly after construction is complete. c. Interest incurred during construction. d. Cost of removing the demolished building existing on the land when it was purchased.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

77.

The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

The term applied to the periodic expiration of a plant asset’s cost is a. amortization. b. depletion. c. depreciation. d. cost expiration.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

80.

Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n) a. equal and equitable manner. b. accelerated and accurate manner. c. systematic and rational manner. d. conservative market-based manner.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

81.

The cost of a long-term asset is expensed a. when it is paid for. b. as the asset benefits the company. c. in the period in which it is acquired. d. in the period in which it is disposed of.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

82.

9-17

The book value of an asset is equal to the a. asset's fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset's cost less accumulated depreciation.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

83.

Accountants do not attempt to measure the change in a plant asset's market value during ownership because a. the assets are not held for resale. b. plant assets cannot be sold. c. losses would have to be recognized. d. it is management's responsibility to determine fair values.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

84.

Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

85.

Recording depreciation each period is necessary in accordance with the a. going concern principle. b. historical cost principle. c. expense recognition principle. d. asset valuation principle.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

86.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

87.

When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. vulnerability to obsolescence. c. expected repairs and maintenance. d. the intended use of the asset.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

9-18

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

88.

All the following are needed for the computation of depreciation except a. training costs of manufacturing personnel. b. cost. c. salvage value. d. estimated useful life.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

89.

All of the following statements are false regarding depreciation except a. depreciation is an asset valuation process. b. depreciation does not apply to land improvements. c. recognizing depreciation results in the accumulation of cash for asset replacement. d. depreciation does not apply to land.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

90.

All of the following statements about the useful life factor associated with depreciation are true except a. useful life is also called service life. b. useful life is an estimate of productive life. c. past experience with similar assets is helpful in establishing useful life. d. useful life is also called expected trade-in value.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

91.

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.

92.

Equipment was purchased for $68,000 on January 1, 2013. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used? a. $26,720. b. $13,360. c. $11,440. d. $22,880.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($68,000 + $2,800 + $8,000 − $12,000)  5]  2 = $26,720

Reporting and Analyzing Long-Lived Assets

93.

9-19

Equipment with a cost of $320,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,000 hours? a. $80,000. b. $87,500. c. $82,500. d. $72,500.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($320,000 − $30,000)  12,000]  3,000 = $72,500

94.

Equipment with a cost of $225,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? a. $56,250. b. $52,500. c. $56,700. d. $54,375.

95.

A machine was purchased for $180,000 and it was estimated to have an $12,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,400 was recorded using the straight-line method. The annual depreciation rate is a. 12%. b. 2%. c. 8%. d. 10%.

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($1,400  12)  ($180,000 − $12,000) = 10%

96.

A machine was purchased for $54,000 and it was estimated to have a $9,000 salvage value at the end of its useful life. Monthly depreciation expense of $750 was recorded using the straight-line method. The annual depreciation rate is a. 25%. b. 2%. c. 16%. d. 20%.

9-20 97.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A company purchased factory equipment on April 1, 2014, for $96,000. It is estimated that the equipment will have a $12,000 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, 2014, is a. $9,600. b. $8,400. c. $6,300. d. $7,200.

98.

A company purchased factory equipment on June 1, 2014, for $96,000. It is estimated that the equipment will have a $6,000 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, 2014, is a. $9,000. b. $5,250. c. $4,500. d. $3,750.

99.

The declining-balance method of depreciation produces a(n) a. decreasing depreciation expense each period. b. increasing depreciation expense each period. c. declining percentage rate each period. d. constant amount of depreciation expense each period.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

100.

Which of the following methods will result in the highest depreciation in the first year? a. Sum-of-year’s-digits. b. Time valuation. c. Straight-line. d. Declining-balance.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

101.

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that a. is used for tax purposes. b. must be used for financial statement purposes. c. is required by the SEC. d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

102.

9-21

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 answer choices are correct.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

103.

Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset's market value over its useful life. c. best measures the plant asset's contribution to revenue over its useful life. d. has been used most often in the past by the company.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

104.

The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. sum-of-year’s-digits. d. None of these answer choices are correct.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

105.

On November 1, 2013, Love Company places a new asset into service. The cost of the asset is $45,000 with an estimated 5-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for 2014 if Love Company uses the straightline method of depreciation? a. $2,000. b. $8,000. c. $1,333. d. $4,500.

106.

On October 1, 2014, Mann 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 2014 if Mann Company uses the straightline method of depreciation? a. $3,000. b. $16,000. c. $4,000. d. $8,000.

9-22 107.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, a machine with a useful life of five years and a residual value of $15,000 was purchased for $75,000. What is the depreciation expense for year 2 under straightline depreciation? a. $15,000. b. $45,000. c. $12,000. d. $36,000.

108.

On January 1, a machine with a useful life of four years and a residual value of $12,000 was purchased for $60,000. What is the depreciation expense for year 2 under straightline depreciation? a. $5,000. b. $24,000. c. $12,000. d. $30,000.

109

On January 1, a machine with a useful life of four years and a residual value of $9,000 was purchased for $57,000. What is the depreciation expense for year 2 under straightline depreciation? a. $6,000. b. $12,000. c. $24,000. d. $14,250.

110.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

111.

A plant asset was purchased on January 1 for $75,000 with an estimated salvage value of $15,000 at the end of its useful life. The current year's Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is a. 15 years. b. 12 years. c. 5 years. d. 7 years.

Reporting and Analyzing Long-Lived Assets

112.

9-23

A plant asset was purchased on January 1 for $45,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year's Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years.

113.

Mitchell Corporation bought equipment on January 1, 2014 .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. $30,000. d. $25,000.

114.

Mitchell Corporation bought equipment on January 1, 2014. 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 these answer choices are correct.

115.

Mitchell Corporation bought equipment on January 1, 2014. 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($180,000 − $30,000)  6 = $25,000; $180,000 − ($25,000  2) = $130,000

9-24 116.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Pearson Company bought a machine on January 1, 2014. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. The depreciable cost of the machine is a. $144,000. b. $120,000. c. $40,000. d. $24,000.

Ans: B, LO: 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: $144,000 − $24,000 = $120,000

117.

Pearson Company bought a machine on January 1, 2014. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. The depreciation expense using the straight-line method of depreciation is a. $40,000. b. $28,800. c. $24,000. d. none of these answer choices are correct.

118.

Pearson Company bought a machine on January 1, 2014. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. The book value of the machine at the beginning of the third year would be a. $144,000. b. $120,000. c. $96,000. d. $48,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($144,000 − $24,000)  5 = $24,000; $144,000 − ($24,000  2) = $96,000

119.

Stine Company purchased machinery with a list price of $64,000. They were given a 10% discount by the manufacturer. They paid $400 for shipping and sales tax of $3,000. Stine estimates that the machinery will have a useful life of 10 years and a residual value of $20,000. If Stine uses straight-line depreciation, annual depreciation will be a. $4,100. b. $4,072. c. $6,100. d. $3,760.

Ans: A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($64,000  .90) + $400 + $3,000 − $20,000]  10 = $4,100

Reporting and Analyzing Long-Lived Assets

120.

9-25

Bates Company purchased equipment on January 1, 2013, at a total invoice cost of $900,000. The equipment has an estimated salvage value of $22,500 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used? a. $180,000. b. $360,000. c. $175,500. d. $351,000.

121.

Newell Company purchased a machine with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Newell estimates that the machine will have a useful life of 10 years and a residual value of $30,000. If Newell uses straight-line depreciation, annual depreciation will be a. $6,150. b. $6,108. c. $9,150. d. $5,640.

Ans: A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($96,000  .90) + $600 + $4,500 − $30,000]  10 = $6,150

122.

Machinery was purchased for $170,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the machinery. It is estimated that the machinery 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. $39,400. b. $33,400. c. $28,600. d. $28,000.

Ans: B, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($170,000 + $7,000 + $20,000 − $30,000)  5 = $33,400

123.

Machinery was purchased for $170,000 on January 1, 2013. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $30,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2014, if the straight-line method of depreciation is used? a. $66,800. b. $33,400. c. $28,600. d. $57,200.

Ans: A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($170,000 + $7,000 + $20,000 − $30,000)  5]  2 = $66,800

9-26 124.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A machine that was purchased on January 1 for $45,000 has an estimated salvage value of $9,000. If the machine’s depreciation rate is 20%, its annual depreciation is a. $9,000. b. $36,000. c. $7,200. d. $10,800.

125.

A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

126.

Grant 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

127.

Expenditures that add to the utility of plant assets for more than one accounting period are a. committed expenditures. b. revenue expenditures. c. current expenditures. d. capital expenditures.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

128.

An expenditure for which of the following items would be considered a revenue expenditure? a. Plant asset. b. Ordinary repair. c. Addition. d. Improvements.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

129.

9-27

Jack's Copy Shop bought equipment for $150,000 on January 1, 2013. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014? a. $50,000. b. $20,000. c. $25,000. d. $37,500.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($150,000 − 0)  3 = $50,000; ($150,000 − $50,000)  (5 − 1) = $25,000

130.

An asset was purchased for $300,000. It had an estimated salvage value of $60,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $48,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. $36,000. b. $26,400. c. $18,000. d. $25,200.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 − $60,000)  5/12 = $120,000; [($300,000 − $120,000) − $48,000]  (10 − 5) = $26,400

131.

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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($40,000 − $8,000)  2/8 = $8,000; [($40,000 − $8,000) − $8,000]  (5 − 2) = $8,000

132.

Ron's Quik Shop bought equipment for $70,000 on January 1, 2013. 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, 2014, Ron decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2014? a. $11,200. b. $5,600. c. $9,333. d $14,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($70,000 − 0)  5 = $14,000; ($70,000 − $14,000)  (6 − 1) = $11,200

9-28 133.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

An asset was purchased for $100,000. It had an estimated salvage value of $25,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $20,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. $15,000. b. $10,625. c. $8,500. d. $12,500.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($100,000 − $25,000)  5/10 = $37.500; [($100,000 − $37,500) − $20,000]  (10 − 5) = $8,500

134.

Equipment costing $70,000 with a salvage value of $14,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years and no change in the salvage value, the depreciation expense for Year 3 would be a. $10,500. b. $9,333. c. $14,000. d. $7,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($70,000 − $14,000)  8]  2 = $14.000; [($70,000 − $14,000) − $14,000]  (6 − 2) = $10,500

135.

Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

136.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting

137.

Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the company’s investment in productive facilities. d. typically only benefit the current accounting period.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Long-Lived Assets

138.

9-29

All of the following statements regarding impairments are true except a. an impairment is a permanent decline in an asset's market value. b. after an impairment write-down, depreciation is generally lower in a subsequent periods. c. immediate recognition of impairment write-downs is now required. d. impairments are generally recorded when the book value falls below the market value.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

139.

Compton Inc. made a $500 ordinary repair to a piece of equipment. Compton's accountant debited this amount to the asset account, Equipment and credited Cash. Was this the correct entry and if not, why not? a. Yes, this was the correct entry. b. No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash. c. No, the correct entry would be a debit to Cash and a credit to Maintenance and Repairs Expense. d. No, the correct entry would be a debit to Service Revenue and a credit to Cash.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

140.

Jamison, Inc. is a regional air cargo carrier. Jamison made a $4,500 improvement to one of its airplanes. If Jamison's accountant expensed this amount, which of the following statements is true? a. The entry will improperly understate net income for the year. b. The entry will improperly overstate net income for the year. c. The entry is the correct treatment. d. The entry will overstate the balance sheet for the year.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

141.

All of the following are factors that a company should consider before a write-down impairment of an asset is recorded except a. an appraisal of the asset. b. market trends. c. company profits. d. obsolescence of the asset.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

142.

Brevard Corporation purchased a taxicab on January 1, 2013 for $25,500 to use for its shuttle business. The cab is expected to have a five-year useful life and no salvage value. During 2014, it retouched the cab's paint at a cost of $1,200, replaced the transmission for $3,000 (which extended its life by an additional 2 years), and tuned-up the motor for $150. If Brevard Corporation uses straight-line depreciation, what annual depreciation will Brevard report for 2014? a. $5,100. b. $3,900. c. $4,125. d. $4,100.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($25,500 − $5,100) + $3 000]  (5 − 1+ 2) = $3,900

9-30 143.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In 2014, Blanchard Corporation has plant equipment that originally cost $90,000 and has accumulated depreciation of $36,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should Blanchard use to record the retirement of the equipment? a. Loss on Disposal of Plant Assets 54,000 Equipment 54,000 b. Accumulated Depreciation – Equipment 36,000 Loss on Disposal of Plant Assets 54,000 Equipment 90,000 c. Loss on Disposal of Plant Assets 54,000 Accumulated Depreciation – Equipment 54,000 d. Plant Equipment 90,000 Accumulated Depreciation – Equipment 36,000 Loss on Disposal of Plant Assets 54,000

144.

A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset's original cost. b. book value of the asset with the asset's original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

145.

When an asset is sold, a gain occurs when the a. sale price exceeds the book value of the asset sold. b. sale price exceeds the original cost of the asset sold. c. book value exceeds the sale price of the asset sold. d. sale price exceeds the depreciable cost of the asset sold.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

146.

The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

147.

A company sells a plant asset that originally cost $225,000 for $75,000 on December 31, 2014. The accumulated depreciation account had a balance of $90,000 after the current year's depreciation of $22,500 had been recorded. The company should recognize a a. $150,000 loss on disposal. b. $60,000 gain on disposal. c. $60,000 loss on disposal. d. $37,500 loss on disposal.

Reporting and Analyzing Long-Lived Assets

148.

9-31

A company sells a plant asset that originally cost $240,000 for $80,000 on December 31, 2014. The accumulated depreciation account had a balance of $120,000 after the current year's depreciation of $20,000 had been recorded. The company should recognize a a. $40,000 loss on disposal. b. $40,000 gain on disposal. c. $80,000 loss on disposal. d. $80,000 gain on disposal.

149.

A truck costing $48,000 and on which $40,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a a. gain of $8,000. b. loss of $8,000. c. credit to Accumulated Depreciation for $40,000. d. credit to Accumulated Depreciation for $48,000.

150.

Equipment that cost $54,000 and on which $30,000 of accumulated depreciation has been recorded was disposed of for $27,000 cash. The entry to record this event would include a a. gain of $3,000. b. loss of $3,000. c. credit to the Equipment account for $9,000. d. credit to Accumulated Depreciation for $30,000.

151.

A truck costing $45,000 and on which $39,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a a. gain of $6,000. b. loss of $6,000. c. credit to Accumulated Depreciation for $39,000. d. credit to Accumulated Depreciation for $45,000.

152.

Equipment that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a a. gain of $6,000. b. loss of $6,000. c. credit to the Equipment account for $18,000. d. credit to Accumulated Depreciation for $60,000.

9-32 153.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

154.

If a plant asset is retired and is fully depreciated 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: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

155.

The book value of an asset will equal its fair value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

156.

A machine costing $132,000 was destroyed when it caught fire. At the date of the fire, the accumulated depreciation on the machine was $60,000. An insurance check for $150,000 was received based on the replacement cost of the machine. The entry to record the insurance proceeds and the disposition of the machine will include a a. gain on disposal of $18,000. b. credit to the Equipment account for $72,000. c. credit to the Accumulated Depreciation account for $60,000. d. gain on disposal of $78,000.

157.

On July 1, 2014, Dillman Kennels sells equipment for $66,000. The equipment originally cost $180,000, had an estimated 5-year life and an expected salvage value of $30,000. The Accumulated Depreciation account had a balance of $105,000 on January 1, 2014, using the straight-line method. The gain or loss on disposal is a. $9,000 gain. b. $6,000 loss. c. $9,000 loss. d. $6,000 gain.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($180,000 − $30,000)  5]  6/12 = $15,000; $66,000 − ($180,000 − $120,000) = $6,000

Reporting and Analyzing Long-Lived Assets

158.

9-33

A plant asset with a cost of $240,000 and accumulated depreciation of $228,000 is sold for $28,000. What is the amount of the gain or loss on disposal of the plant asset? a. $28,000 loss. b. $16,000 loss. c. $16,000 gain. d. $28,000 gain.

159.

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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

160.

Sprague Associates sold office furniture for $32,000. The furniture had an original cost of $96,000 and accumulated depreciation of $48,000. Ignoring the tax effect, as a result of the sale a. net income will increase $32,000. b. net income will increase $16,000. c. net income will decrease $16,000. d. net income will decrease $32,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $32,000 − ($96,000 − $48,000) = ($16,000)

161.

Nix Corporation sold equipment for $20,000. The equipment had an original cost of $60,000 and accumulated depreciation of $30,000. Ignoriing the tax effect, as a result of the sale a. net income will increase $20,000. b. net income will increase $10,000. c. net income will decrease $10,000. d. net income will decrease $20,000.

162.

Morton’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.

9-34 163.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Equipment costing $210,000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $84,000. An insurance check for $240,000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a a. gain on disposal of $30,000. b. credit to the Equipment account of $126,000. c. credit to the Accumulated Depreciation account for $84,000. d. gain on disposal of $114,000.

164.

On July 1, 2014, Fleming Company sells machinery for $120,000. The machinery 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, 2014, using the straight-line method. The gain or loss on disposal is a. $20,000 gain. b. $5,000 loss. c. $10,000 loss. d. $5,000 gain.

165.

A plant asset with a cost of $480,000 and accumulated depreciation of $456,000 is sold for $56,000. What is the amount of the gain or loss on disposal of the plant asset? a. $56,000 loss. b. $32,000 loss. c. $32,000 gain. d. $56,000 gain.

166.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $275  ($1,050 + $1,150) = 25%

Reporting and Analyzing Long-Lived Assets

167.

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Ans: D, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $390  [($3,000 + $4,000)  2] = 11.1%

168.

Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,500  [($1,050 + $1,150)  2] = 1.36

169.

Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $4,100  [($3,000 + $4,000)  2] = 1.17

9-36 170.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2014 $275 $390 Net sales 2014 1,500 4,100 Total assets 12/31/12 1,000 2,400 Total assets 12/31/13 1,050 3,000 Total assets 12/31/14 1,150 4,000 If Nguyen and Northwest are in the same industry and the industry average for the asset turnover ratio is equal to 1.20 times, which of the following statements is true? a. Nguyen is operating more efficiently than the industry. b. Northwest is operating more efficiently than Nguyen. c. Both Nguyen and Northwest are operating more efficiently than the average company in their industry. d. The asset turnover ratio does not address the question of efficient operations.

Ans: A, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

171.

The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2014 $275 $390 Net sales 2014 1,500 4,100 Total assets 12/31/12 1,000 2,400 Total assets 12/31/13 1,050 3,000 Total assets 12/31/14 1,150 4,000 If Nguyen and Northwest are in the same industry and the industry average for return on assets is equal to 30%, which of the following statements is true? a. Nguyen is more profitable than the average company in its industry. b. Northwest is more profitable than Nguyen. c. Both Nguyen and Northwest are more profitable than the average company in their industry. d. Nguyen is more profitable than Northwest.

Ans: D, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

172.

Using the following data for Stevenson Industries, compute the return on assets ratio. Net Income $ 150,000 Total Assets 12/31/14 2,410,000 Total Assets 12/31/13 1,980,000 Net Sales 250,000 a. 6.2% b. 10.4% c. 6.8% d. 11.4%

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $150,000  [($2,410,000 + $1,980,000)]  2 = 6.8

Reporting and Analyzing Long-Lived Assets

173.

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During 2014, Ronald Corporation reported net sales of $1,500,000, net income of $900,000, and depreciation expense of $100,000. Ronald 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. Ronald’s asset turnover ratio is a. 1.5 times. b. 1.2 times. c. 0.98 times. d. 0.72 times.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,500,000  [($1,000,000 + $1,500,000)]  2 = 1.2

174.

During 2014, Phelps Corporation reported net sales of $3,000,000, net income of $1,320,000, and depreciation expense of $80,000. Phelps 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. Phelps’s asset turnover ratio is a. 1.5 times. b. 1.2 times. c. 2.0 times. d. 2.4 times.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $3,000,000  [($1,000,000 + $1,500,000)] = 2.4

175.

Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depreciated over their useful life. c. have been exchanged at a gain. d. do not have physical substance.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

176.

A patent should a. be amortized over a period of 20 years. b. not be amortized. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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 value of the patent. d. recognized as a loss in the current period.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

9-38 178.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

180.

On July 1, 2014, Linden Company purchased the copyright to Norman Computer Tutorials for $140,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2014 would be a. $28,000. b. $13,125. c. $25,900. d. $14,000.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($140,000  5)  6/12 = $14,000

181.

On May 1, 2014, Irwin Company purchased the copyright to Quick Computer Tutorials for $90,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2014 would be a. $18,000. b. $12,000. c. $9,000. d. $9,600.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($90,000  5)  8/12 = $12,000

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

183.

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Which of the following is not considered an intangible asset? a. Goodwill. b. An oil well. c. A franchise. d. A patent.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

184.

The cost of an intangible asset with an indefinite life should a. be amortized over 20 years. b. be amortized over the life of the creator plus 70 years. c. not be amortized. d. None of these answer choices are correct.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

185.

Cost allocation of an intangible asset is referred to as a. amortization. b. depreciation. c. accretion. d. capitalization.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186.

A patent a. has a legal life of 20 years. b. is not amortized. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187.

If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a. Legal Expense. b. the Intangible Loss account. c. the Patent account. d. a revenue expenditure account.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

188.

Copyrights are granted by the federal government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

189.

Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

190.

In recording the acquisition cost of an entire business a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller's book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

191.

Research and development costs a. are classified as intangible assets. b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 20 years.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

192.

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 before taxes after these research and development 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, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000,000 − $2,500,000 = ($500,000)

193.

A computer company has $3,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $3,600,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for? a. $600,000 loss. b. $3,000,000 net income. c. $600,000 net income. d. Cannot be determined from the information provided.

Ans: C, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,600,000 − $3,000,000 = $600,000

Reporting and Analyzing Long-Lived Assets

194.

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Goodwill a. may be expensed upon purchase if desired. b. can be sold by itself to another company. c. can be purchased and charged directly to stockholders’ equity. d. is only recorded when the purchase of an entire business occurs.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

195.

Which of the following is not an intangible asset that is reported on the balance sheet? a. Goodwill. b. Trademarks. c. Employees. d. Copyrights.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

196.

Trademarks are generally shown on the balance sheet under a. Intangibles. b. Investments. c. Property, Plant, and Equipment. d. Current Assets.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

197.

Hopson 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, 2014. On July 31, 2014, Hopson 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.

198.

Given the following account balances at year end, compute the total intangible assets on the balance sheet of Janssen Enterprises. Cash $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 2,500,000 Research & Development Costs 2,000,000 a. $9,500,000. b. $5,500,000. c. $3,500,000. d. $7,500,000.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000 + $2,500,000 = $3,500,000

9-42 199.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following statements concerning financial statement presentation is false? a. Intangibles are reported separately under Intangible Assets. b. The balances of major classes of assets may be disclosed in the footnotes. c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, 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, LO: 8, 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 $5,000,000 $35,000,000 Copyrights 2,400,000 Patents 10,000,000 Land 12,000,000 The total amount reported under Property, Plant, and Equipment would be a. $59,400,000. b. $47,000,000. c. $57,000,000. d. $49,400,000.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $35,000,000 + $12,000 = $47,000,000

202.

Plant assets are ordinarily presented in the balance sheet a. at current market values. b. at replacement costs. c. at cost less accumulated depreciation. d. in a separate section along with intangible assets.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

203.

A company has the following assets: Buildings and Equipment, less accumulated depreciation of $4,000,000 $18,000,000 Copyrights 1,500,000 Patents 3,000,000 Land 5,000,000 The total amount reported under Property, Plant, and Equipment would be a. $27,500,000. b. $22,000,000. c. $24,500,000. d. $23,000,000.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $18,000,000 + $5,000,000 = $23,000,000

Reporting and Analyzing Long-Lived Assets

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*204. A company purchased office equipment for $30,000 and estimated a salvage value of $6,000 at the end of its 10-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 10%. b. 15%. c. 20%. d. 2%. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (100%  10)  2 = 20%

*205. 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. $75,600. Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($350,000 − $0)  .40 = $140,000; ($350,000 − $140,000)  .40 = $84,000

*206. A plant asset cost $128,000 and is estimated to have a $16,000 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. $10,720. b. $18,000. c. $15,750. d. $12,250. Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($128,000 − $0)  .25 = $32,000; ($128,000 − $32,000)  .25 = $24,000; ($128,000 − $56,000)  .25 = $18,000

*207. On January 1, a machine with a useful life of five years and a residual value of $40,000 was purchased for $120,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $28,800. b. $48,000. c. $38,400. d. $23,040. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($120,000 − $0)  .40 = $48,000; ($120,000 − $48,000)  .40 = $28,800

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*208. A factory machine was purchased for $70,000 on January 1, 2014. It was estimated that it would have a $14,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. If the actual number of machine hours ran in 2014 was 4,000 hours and the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2014 would be a. $7,000. b. $11,200. c. $14,000. d. $5,600. Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($70,000 − $14,000)  40,000 = $1.40, $1.40  4,000 = $5,600

*209. A machine with a cost of $480,000 has an estimated salvage value of $30,000 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. $150,000. b. $90,000. c. $130,000. d. $160,000. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($480,000 − $30,000)  15,000 = $30; $30  5,000 = $150,000

*210. Equipment with a cost of $480,000 has an estimated salvage value of $30,000 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. $120,000. b. $135,600. c. $99,000. d. $112,500. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($480,000 − $30,000)  15,000 = $30; $30,000  3,300 = $99,000

*211. Equipment with a cost of $300,000 has an estimated salvage value of $20,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? a. $75,000. b. $70,000. c. $75,600. d. $72,500. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 − $20,000)  10,000 = $28; $28  2,700 = $75,600

Reporting and Analyzing Long-Lived Assets

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*212. On October 1, 2014, Hess 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, 2014, balance sheet assuming that Hess Company uses the double-declining-balance method of depreciation? a. $52,000. b. $60,000. c. $72,000. d. $76,000. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($80,000 − $0)  .40]  3/12 = $8,000; $80,000 − $8,000 = $72,000

*213. Vickers 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. $0.33. d. $0.36. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($36,000 − $3,000)  100,000 = $0.33

*214. Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset's use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company. Ans: C, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*215. The calculation of depreciation using the declining-balance method a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year's depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value. Ans: A, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*216. Foyle Company purchased a new van for floral deliveries on January 1, 2014. 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 2014? a. $9,600. b. $7,200. c. $14,400. d. $19,200. Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($48,000 − $0)  .40 = $19,200

9-46

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*217. Foyle Company purchased a new van for floral deliveries on January 1, 2013. 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 2014? a. $7,680. b. $23,040. c. $30,720. d. $11,520. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($48,000 − $0)  .40 = $19,200; [($48,000 − $19,200)  .40] + $19,200 = $30,720

*218. Conley Company purchased equipment for $60,000 on January 1, 2012, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $3,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2014 will be a. $8,640. b. $13,680. c. $14,400. d. $8,208. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($60,000 − $0)  .40 = $24,000; ($60,000 − $24,000)  .40 = $14,400; ($60,000 − $38,400)  .40 = $8,640

*219. Interline Trucking purchased a tractor trailer for $84,000. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $12,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Interline record? a. $5,333. b. $6,720. c. $5,760. d. $6,222. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($84,000 − $12,000)  1000,000 = $.072  80,000 = $5,760

*220. Danford Trucking purchased a tractor trailer for $126,000. Danford 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 $18,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Danford record? a. $8,000. b. $10,080. c. $8,640. d. $9,333. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($126,000 − $18,000)  1000,000]  80,000 = $8,640

Reporting and Analyzing Long-Lived Assets

9-47

*221. All of the following statements are true regarding the declining-balance method of depreciation except a. the declining-balance method ignores salvage value when calculating depreciation. b. the declining-balance method produces lower depreciation expense in the early years as opposed to the later years. c. the declining-balance method is compatible with the matching principle. d. the declining-balance method is appropriate when assets lose their usefulness rapidly. Ans: B, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Answers to Multiple Choice Questions 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.

d a c b b d c a b b c c a b d a d d c b b d d b d d

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. 97.

b b b a c d c c c b d a c c c a a d d b a d b d d c

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.

b a d a c c a b a c c b a d d b c c b c c a d a b a

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.

c c d d b c b c a c a a d c d b a c b b d a c c a b

150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.

a b a c d b d d c b c c d d a c c d b a a d c b d d

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.

d c b d d b a b c a a c b c a b a c d c a b c d d b

202. 203. *204. *205. *206. *207. *208. *209. *210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221.

c d c b b a d a c c c c c a d c a c c b

9-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BRIEF EXERCISES Be. 222 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Parking lots _____ 2. Electricity used by a machine _____ 3. Excavation costs _____ 4. Interest on building construction loan _____ 5. Cost of trial runs for machinery _____ 6. Drainage costs _____ 7. Cost to install a machine _____ 8. Fences _____ 9. Unpaid (past) property taxes assumed _____10. Cost of tearing down a building when land and a building on it are purchased Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 222 (5 min.) 1. 2. 3. 4. 5.

LI X B B E

6. 7. 8. 9. 10.

L E LI L L

Be. 223 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Computer installation cost _____ 2. Driveway cost _____ 3. Architect’s fee _____ 4. Surveying costs _____ 5. Grading costs _____ 6. Cost of lighting for parking lot _____ 7. Insurance while in transit and freight on computer purchased _____ 8. Material and labor costs incurred to construct factory _____ 9. Cost of tearing down a warehouse on land just purchased _____10. Utility cost during first year Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-49

Solution 223 (5 min.) 1. 2. 3. 4. 5.

E LI B L L

6. 7. 8. 9. 10.

LI E B L X

Be. 224 Dobler Company purchased factory equipment with an invoice price of $78,000. Other costs incurred were freight costs, $1,300; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,500. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be __________. Ans: N/A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 224 (5-8 min.) (a)

Invoice cost Freight costs Installation wiring and foundation Material and labor costs in testing Acquisition cost

$78,000 1,300 2,200 700 $82,200

(b)

If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be 12.5% (100% ÷ 8 years).

Be. 225 Revson Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $55,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 225 (5 min.) Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Land acquisition cost

$55,000 6,000 5,000 5,700 1,200 $72,900

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-50 Be. 226

Equipment was acquired on January 1, 2010, at a cost of $75,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2013, using the straight-line method. On January 1, 2014, the estimated salvage value was revised to $7,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2014. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 226 (5 min.) Calculate the book balue at the time of the revision: $75,000 - $5,000 10 years

= $7,000 annual depreciation expense

4 years have been depreciated: $7,000  4 = $28,000 Book value at the time of the revision: $75,000 – $28,000 = $47,000 Calculate the revised annual depreciation: $47,000 - $7,000 4 years remaining

= $10,000 revised annual depreciation

The depreciation expense for 2014 is $10,000. Be. 227 Equipment was acquired on January 1, 2011, at a cost of $170,000. The equipment was originally estimated to have a salvage value of $10,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2013, using the straight-line method. On January 1, 2014, the estimated salvage value was revised to $16,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2014. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227 (5 min.) Calculate the book value at the time of the revision: $170,000 - $10,000 10 years

= $16,000 annual depreciation expense

3 years have been depreciated: $16,000  3 = $48,000 Book value at the time of the revision: $170,000 – $48,000 = $122,000

Reporting and Analyzing Long-Lived Assets

9-51

Solution 227 (Cont.) Calculate the revised annual depreciation: $122,000 - $16,000 5 years remaining

= $21,200 revised annual depreciation

The depreciation expense for 2014 is $21,200. Be. 228 Gunselman Company purchased a machine on January 1, 2014. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) installation costs necessary to secure the machinery to the building flooring, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) annual city operating license. Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)_____________

(b)______________

(c)______________

(d)______________

(e)_____________

(f)______________

(g)______________

(h)______________

Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 228 (5 min.) (a) Capital

(b) Capital

(d) Capital

(e) Capital

(f)

(g) Revenue

(h) Revenue

Capital

Be. 229 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Replacing an old computer chip with a faster chip, which increases productive capacity. No extension of useful life expected. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. (h) Painting and lettering of a used truck upon acquisition of the truck. Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-52

Solution 229 (5 min.) (a) (b) (c) (d)

Revenue Capital Revenue Revenue

(e) (f) (g) (h)

Capital Capital Revenue Capital

Be. 230 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization

D—Depreciation

N—None of these

____ 1. Copyrights

_____

6. Research and Development Costs

____ 2. Land

_____

7. Equipment

____ 3. Buildings

_____

8. Franchises

____ 4. Patents

_____

9. Annual licensing fees

____ 5. Trademarks

_____ 10. Land Improvements

Ans: N/A, LO: 2,7, Bloom: K, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 230 (10 min.) 1. 2. 3. 4. 5.

A N D A A

6. 7. 8. 9. 10.

N D A N D

Be. 231 Using the following data for Hayes, Inc., compute its asset turnover ratio and the return on assets ratio. Hayes, Inc. Net Income 2014 $ 123,000 Total Assets 12/31/14 2,243,000 Total Assets 12/31/13 1,880,000 Net Sales 2014 2,135,000 Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 231 (5 min.)

Asset Turnover:

Net Sales Avg. Total Assets

Return on Assets:

Net Income Avg. Total Assets

$2,135,000 ($2,243,000 + $1,880,000) ÷ 2

= 1.04 times

$123,000 ($2,243,000 + $1,880,000) ÷ 2

= 6.0%

Reporting and Analyzing Long-Lived Assets

9-53

Be. 232 Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer: PPE I O N/A

Property, Plant, and Equipment Intangibles Other Not on the balance sheet

_____ 1.

Goodwill

_____ 6. Research and Development Costs

_____ 2.

Land Improvements

_____ 7. Land

_____ 3.

Buildings

_____ 8. Franchises

_____ 4.

Accumulated Depreciation

_____ 9. Licenses

_____ 5.

Trademarks

_____ 10. Equipment

Ans: N/A, LO: 8, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 232 (5 min.) 1. 2. 3. 4. 5.

I PPE PPE PPE I

Goodwill Land Improvements Buildings Accumulated Depreciation Trademarks

6. 7. 8. 9. 10.

N/A PPE I I PPE

Research and Development Costs Land Franchises Licenses Equipment

*Be 233 Kinney 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 $8,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity

Double-declining-balance

Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 233 (5-8 min.) Units-of-activity [($66,000 – $8,000) ÷ 100,000] × 27,000 = $15,660)

15,660

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

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-54

EXERCISES Ex. 234 For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required." (a)

The $70 cost of repairing a printer was charged to Equipment.

(b)

The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c)

The $6,000 closing costs associated with the acquisition of land were debited to Operating Expenses.

(d)

A $300 charge for transportation expenses on new equipment purchased was debited to Freight-In.

Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 234 (10 min.) (a)

(b)

(c)

(d)

Maintenance and Repairs Expense ............................................. Equipment...........................................................................

Equipment ................................................................................... Maintenance and Repairs Expense.....................................

5,500

Land ........................................................................................... Operating Expenses ...........................................................

6,000

Equipment ................................................................................... Freight-In ............................................................................

300

5,500

6,000

300

Ex. 235 Kendrick Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order. Debits 1. Cost of real estate purchased as a plant site (land and building) 2. Accrued real estate taxes paid at the time of the purchase of the real estate 3. Cost of demolishing building to make land suitable for construction of a new building 4. Architect's fees on building plans 5. Excavation costs for new building 6. Cost of filling and grading the land 7. Insurance and taxes during construction of building 8. Cost of repairs caused by a small fire shortly after completion of building 9. Interest paid during the year, of which $45,000 pertains to the construction period 10. Full payment to building contractor 11. Cost of parking lots and driveways 12. Real estate taxes paid for the current year on the land Total Debits

$ 130,000 4,000 10,000 14,000 30,000 5,000 6,000 7,000 74,000 955,000 36,000 4,000 $1,275,000

Reporting and Analyzing Long-Lived Assets

Ex. 235

9-55

(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, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 235 (15 min.) Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Totals

Land $130,000 4,000 10,000

Buildings

Other

Account Title

$ 7,000

Maintenance and Repairs Expense Interest Expense

14,000 30,000

5,000 6,000

45,000 955,000

(3,500) $145,500

29,000 36,000 4,000 (3,000) _____ $73,000

__ $1,050,000

Land Improvements Property Tax Expense Fire Loss Expense

Ex. 236 On March 1, 2014, Geoffrey Company acquired real estate, on which it planned to construct a small office building, by paying $85,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional expenditures before construction began included $1,500 attorney's fee for work concerning the land purchase, $5,500 real estate broker's fee, $9,100 architect's fee, and $16,000 to put in driveways and a parking lot. Instructions (a) Determine the amount to be reported as the cost of the land. (b) For each cost not used in part (a), indicate the account to be debited. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-56

Solution 236 (5 min.) (a)

(b)

Cost of land Cash paid ........................................................................... Net cost of removing warehouse ($8,200 – $2,200) ............ Attorney's fee...................................................................... Real estate broker's fee ...................................................... Total.............................................................................

$85,000 6,000 1,500 5,500 $98,000

The architect's fee ($9,100) should be debited to the building account. The cost of the driveways and parking lot ($16,000) should be debited to Land Improvements.

Ex. 237 Mark’s Repair Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2013

July

Nov. 3 Dec. 31

Purchased equipment from the Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Incurred ordinary repairs on computer of $240. Recorded 2013 depreciation on the basis of a four-year life and estimated salvage value of $455

2014

Dec. 31

Recorded 2014 depreciation.

2015

Jan.

Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment.

Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, LO: 1, 3, 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 237 (15 min.) 2013

July Nov.

1 3

Dec. 31

2014 2015

Dec. 31 Jan.

Equipment ............................................................... Cash ...............................................................

6,055

Maintenance and Repairs Expense ......................... Cash ...............................................................

240

Depreciation Expense ............................................. Accumulated Depreciation .............................. [($6,055 – $455) ÷ 4 × 1/2]

700

Depreciation Expense ............................................. Accumulated Depreciation ($5,600 ÷ 4) ..........

1,400

Equipment ............................................................... Cash ...............................................................

1,800

6,055 240 700

1,400 1,800

Reporting and Analyzing Long-Lived Assets

9-57

Ex. 238 Mike Geary, the controller of Shellhammer Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2014. Here are his findings: Useful Life Accumulated (in Years) Salvage Value Date Depreciation, Type of Acquired Jan. 1, 2014 Cost Old Proposed Old Proposed Asset Building Jan. 1, 2006 $2,700,000 $516,000 40 50 $120,000 $84,000 Warehouse Jan. 1, 2009 240,000 46,000 25 20 10,000 8,000 All assets are depreciated by the straight-line method. Shellhammer Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Mike's proposed changes. (The "Proposed" useful life is total life, not remaining life.) Instructions (a) Compute the revised annual depreciation on each asset in 2014. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2014. Ans: N/A, LO: 3,4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 238 (10 min.) (a) Cost ................................................................... —Accumulated depreciation .............................. Book value, 1/1/14 ............................................. Less: Salvage value ......................................... Depreciable cost (1) ..........................................

(b)

Type of Asset Building Warehouse $2,700,000 $240,000 – 516,000 – 46,000 $2,184,000 $194,000 84,000 8,000 $2,100,000 $186,000

Revised remaining useful life in years (2) *(50 – 8) **(20 – 5) Revised annual depreciation (1)  (2)

42*

15**

$50,000

$12,400

Dec. 31

50,000

Depreciation Expense ................................. Accumulated Depreciation — Buildings ........................................

50,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-58 Ex. 239

On January 1, 2012, Keller 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, 2013, 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 Utilities Expense. Keller Company uses the straight-line method of depreciation. Instructions Prepare a schedule showing the effects of the error on Utilities Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2013 through the useful life of the new equipment. Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2013 2014 2015 2016 Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 239 (15 min.) Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2013 $10,000 $(2,500) $(7,500) 2014 (2,500) 2,500 2015 (2,500) 2,500 2016 (2,500) 2,500 Total $10,000 $(10,000) -0Ex. 240 (a)

Faster Company purchased equipment in 2007 for $104,000 and estimated an $8,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2013, there was $67,200 in the Accumulated Depreciation account for this equipment using the straightline method of depreciation. On March 31, 2014, the equipment was sold for $21,000. Prepare the appropriate journal entries to remove the equipment from the books of Faster Company on March 31, 2014.

(b)

Lewis Company sold equipment for $11,000. The equipment originally cost $25,000 in 2011 and $6,000 was spent on a major overhaul in 2014 (charged to the Equipment account). Accumulated Depreciation on the equipment to the date of disposal was $20,000. Prepare the appropriate journal entry to record the disposition of the equipment.

Reporting and Analyzing Long-Lived Assets

Ex. 240 (c)

9-59

(Cont.)

Selby Company sold equipment that had a book value of $13,500 for $15,000. The equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment. Prepare the appropriate journal entry to record the disposition of the equipment.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 240 (15 min.) (a)

(b)

(c)

Depreciation Expense ................................................................. Accumulated Depreciation—Equipment ............................. (To record depreciation expense for the first 3 months of 2014. $9,600 × 1/4 = $2,400)

2,400

Cash ........................................................................................... Loss on Disposal of Plant Assets ................................................ Accumulated Depreciation—Equipment ($67,200 + $2,400) ...... Equipment ......................................................................... (To record sale of equipment at a loss)

21,000 13,400 69,600

Cash ........................................................................................... Accumulated Depreciation—Equipment ...................................... Equipment .......................................................................... (To record disposition on delivery truck at book value)

11,000 20,000

Cash ........................................................................................... Accumulated Depreciation—Equipment ...................................... Equipment .......................................................................... Gain on Disposal of Plant Assets ........................................ (To record disposal of office equipment at a gain)

15,000 31,500

2,400

104,000

31,000

45,000 1,500

Ex. 241 Prepare the journal entries to record the following transactions for Reese Company, which has a calendar year end and uses the straight-line method of depreciation. (a)

On September 30, 2014, the company sold old equipment for $46,000. The equipment was purchased on January 1, 2012, for $96,000 and was estimated to have a $16,000 salvage value at the end of its 5-year life. Depreciation on the equipment has been recorded through December 31, 2013.

(b)

On June 30, 2014, the company sold old equipment for $24,000. The equipment originally cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-60

Solution 241 (15 min.) (a) September 30, 2014 Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ............................... (To record depreciation expense for the first 9 months of 2014. $80,000 ÷ 5 years = $16,000 × 9/12 = $9,000) Cash ................................................................................................. Accumulated Depreciation—Equipment ($32,000 + $12,000) .......... Loss on Disposal of Plant Assets ($52,000 – $46,000) ..................... Equipment ............................................................................ (To record sale of delivery equipment at a loss) (b) June 30, 2014 Cash ............................................................................................. Accumulated Depreciation—Equipment ........................................ Equipment ............................................................................ Gain on Disposal of Plant Assets ($24,000 – $21,000) ........ (To record sale of office equipment at a gain)

12,000 12,000

46,000 44,000 6,000 96,000

24,000 15,000 36,000 3,000

Ex. 242 a. A machine that cost $36,000 and on which $26,500 of depreciation had been recorded was disposed of for $10,200. Indicate whether a gain or loss should be recorded, and for what amount. b. Assume that the machine of Part a, above, was instead discarded. Indicate whether a gain or loss should be recorded, and for what amount. c. Assume that the machine of Part a, above, was instead sold for $9,400. Indicate whether a gain or loss should be recorded, and for what amount. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 242 (12 min.) a. $700 gain: ($36,000 – $26,500 = $9,500 book value; $10,200 – $9,500 = $700 gain) b. $9,500 loss: ($36,000 – $26,500 = $9,500 book value, all loss) c. $100 loss: ($36,000 – $26,500 = $9,500 book value; $9,400 – $9,500 = $100 loss) Ex. 243 Presented below are selected transactions for the Tinker Company for 2015. Jan.

Retired a piece of equipment that was purchased on January 1, 2005. The equipment cost $75,000 on that date, and had a useful life of 10 years with no salvage value.

April 30

Sold equipment for $38,000 that was purchased on January 1, 2012. The equipment cost $105,000, and had a useful life of 5 years with no salvage value.

Dec. 31

Discarded equipment that was purchased on June 30, 2011. The equipment cost $42,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Reporting and Analyzing Long-Lived Assets

Ex. 243

9-61

(Cont.)

Instructions Journalize all entries required as a result of the above transactions. Tinker Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2014. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 243 (15 min.) Jan.

April 30

Dec. 31

Accumulated Depreciation—Equipment.............................. Equipment..................................................................

75,000

Depreciation Expense......................................................... Accumulated Depreciation—Equipment ..................... ($105,000 × 1/5 × 4/12 = $7,000)

7,000

Cash ................................................................................... Accumulated Depreciation—Equipment ($21,000 × 3 1/3) .. Equipment.................................................................. Gain on Disposal of Plant Assets ($38,000 – $35,000)

38,000 70,000

Depreciation Expense......................................................... Accumulated Depreciation—Equipment .....................

8,000

Accumulated Depreciation—Equipment ($8,000 × 4 1/2) ... Loss on Disposal of Plant Assets ........................................ Equipment .................................................................

36,000 6,000

75,000

7,000

105,000 3,000

8,000

42,000

Ex. 244 Vineyard Company sold the following two pieces of equipment in 2014: Equipment A Equipment B Cost $116,000 $63,000 Purchase date 7/1/10 1/1/11 Useful life 8 years 5 years Salvage value $4,000 $3,000 Depreciation method Straight-line Straight-line Date sold 7/1/14 9/1/14 Sales price $49,000 $20,000 Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2014. The company has recorded depreciation on the equipment through December 31, 2013. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-62

Solution 244 (20 min.) Equipment A July 1 Depreciation Expense ............................................................. Accumulated Depreciation—Equipment A ........................ ($116,000 – $4,000) ÷ 8 years × 6/12 = $7,000 Cash........................................................................................ Accumulated Depreciation—Equipment A*.............................. Loss on Disposal of Plant Assets ($52,000 – $39,000) ............ Equipment A .................................................................... *2010 11 12 13 2014

7,000 7,000

49,000 56,000 11,000 116,000

($116,000 – $4,000) ÷ 8 years  6/12 = $7,000 ($116,000 – $4,000) ÷ 8 years = $14,000 $14,000 $14,000 ($116,000 – $4,000) ÷ 8 years  6/12 = $7,000 Total accumulated depreciation at date of disposal = $56,000

Equipment B Sept. 1 Depreciation Expense ............................................................. Accumulated Depreciation—Equipment B ........................ ($63,000 – $3,000) ÷ 5 years  8/12 = $8,000 Cash ...................................................................................... Accumulated Depreciation—Equipment B** ............................ Equipment B .................................................................... Gain on Disposal of Plant Assets ($20,000 – $19,000) ... **2011 12 13 2014

8,000 8,000 20,000 44,000 63,000 1,000

($63,000 – $3,000) ÷ 5 years = $12,000 $12,000 $12,000 ($63,000 – $3,000) ÷ 5 years  8/12 = $8,000 Total accumulated depreciation at date of disposal = $44,000

Ex. 245 Phill Co. has equipment that cost $50,000 and has been depreciated $30,000. Instructions Record entries for the disposal under the following assumptions. (a) It was scrapped as having no value. (b) It was sold for $23,000. (c) It was sold for $18,000. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 245 (10 min.) (a)

Accumulated Depreciation—Equipment............................... Loss on Disposal of Plant Assets ......................................... Equipment..................................................................

30,000 20,000 50,000

Reporting and Analyzing Long-Lived Assets

9-63

Solution 245 (Cont.) (b) Cash.................................................................................... Accumulated Depreciation—Equipment .............................. Gain on Disposal of Plant Assets ................................. Equipment ..................................................................

23,000 30,000

(c)

18,000 30,000 2,000

Cash.................................................................................... Accumulated Depreciation—Equipment .............................. Loss on Disposal of Plant Assets .................. Equipment ..................................................................

3,000 50,000

50,000

Ex. 246 Here are selected 2014 transactions of Howe Corporation. Jan.

Retired a piece of equipment that was purchased on January 1, 2004. The equipment cost $55,000 and had a useful life of 10 years with no salvage value.

June 30

Sold equipment that was purchased on January 1, 2012. The equipment cost $78,000 and had a useful life of 3 years with no salvage value. The equipment was sold for $9,000 cash.

Dec. 31

Sold equipment for $12,500 cash. The equipment cost $43,000 when it was purchased on January 1, 2011, and was depreciated based on a 5-year useful life with a $3,000 salvage value.

Instructions Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Howe Corporation uses straight-line depreciation. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 246 (12 min.) Jan. 1

June 30

Dec. 31

Accumulated Depreciation—Equipment .......................... Equipment...............................................................

55,000

Depreciation Expense ................................................... Accum. Depreciation—Equipment ($78,000  1/3  6/12) ......................................

13,000

Cash ............................................................................... Accumulated Depreciation—Equipment .......................... ($78,000  2/3 = $52,000; $52,000 + $13,000) Loss on Disposal of Plant Assets [$9,000 – ($78,000 – $65,000)] ................................ Equipment ..........................................................

9,000 65,000

Depreciation Expense ...................................................... Accumulated. Depreciation—Equipment [($43,000 – $3,000)  1/5) ..................................

8,000

55,000

13,000

4,000 78,000

8,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-64

Solution 246 (Cont.) 31

Cash .............................................................................. Accumulated Depreciation—Equipment [($43,000 – 3,000)  4/5] ......................................... Gain on Disposal of Plant Assets ....................... Equipment .........................................................

12,500 32,000 1,500 43,000

Ex. 247 Forcum Company reports the following information (in millions) during a recent year: net sales, $12,408.5; net earnings, $344.9; total assets, ending, $4,312.6; and total assets, beginning, $4,254.3. Instructions (a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios. (b) Prove mathematically how the profit margin and asset turnover ratios work together to explain return on assets, by showing the appropriate calculations. Ans: N/A, LO: 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 247 (10 min.) (a) ($ in millions) $344.9 ($4,312.6 + $4,254.3) ÷ 2

= 8.1%

(2) Asset turnover

$12,408.5 ($4,312.6 + $4,254.3) ÷ 2

= 2.9 times

(3) Profit margin

$344.9 $12,408.5

(1) Return on assets

= 2.8%

(b) Profit Margin  Asset Turnover - Return on Assets = 2.8%  2.9 times = 8.1% Ex. 248 The following information is available from the annual reports of Reser Company and Trent Company (Amounts in millions) Reser Trent Net Income $ 965 $ 1,271 Sales 22,653 33,812 Total Assets (average) 21,188 36,167 Instructions (a) Based on the preceding information, compute the following values for each company: 1. Asset turnover ratio 2. Return on assets

Reporting and Analyzing Long-Lived Assets

Ex. 248

9-65

(Cont.)

(b) What conclusion concerning the management of plant assets can be drawn from these data? Ans: N/A, LO: 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 248 (10 min.) (a) 1. Asset turnover ratio

2. Return on assets

Reser $22,653 ÷ $21,188 = 1.07 times

Trent $33,812 ÷ $36,167 = .93 times

$965 ÷ $21,188 = 4.6%

$1,271 ÷ $36,167 = 3.5%

(b) Reser’s asset turnover ratio is 15% higher than Trent's turnover ratio. In addition, Reser’s return on assets ratio is 31% higher than Trent’s ratio. It can be concluded that Reser is utilizing its assets more efficiently than Trent. Ex. 249 (a)

A company purchased a patent on January 1, 2014, 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, 2014, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2014.

(b) Milner Company purchased a franchise from the Tasty Food Company for $450,000 on January 1, 2014. The franchise is for an indefinite time period and gives Milner Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2014. (c)

Huerter Company incurred research and development costs of $500,000 in 2014 in developing a new product. Prepare the necessary journal entries during 2014 to record these events and any adjustments at year end on December 31, 2014.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 249 (15 min.) (a)

(b)

December 31, 2014 Amortization Expense ................................................................. Patent ................................................................................ (To record patents amortization) $2,500,000 ÷ 5 years $500,000 $162,000 ÷ 54 months = $3,000 × 6 18,000 $518,000 January 1, 2014 Franchise ................................................................................... Cash .................................................................................. (To record acquisition of Tasty Food franchise)

518,000 518,000

450,000 450,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-66

Solution 249 (Cont.) December 31, 2014 (No amortization of the franchise is required since it has an indefinite life.) (c)

2014 Research and Development Expense .......................................... Cash ................................................................................... (To record research and development expense for the current year)

500,000 500,000

December 31—no entry. Ex. 250 a. A patent that was acquired for $800,000 at the beginning of the current year expires in 20 years and is expected to have value for 5 years. Present the adjusting entry to amortize the patent for the current year. b. Research and development costs of $300,000 were incurred during the current fiscal year. Determine the minimum amount to be expensed for the current fiscal year. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 250 (10 min.) a. Amortization Expense ………....…………………………… Patents………………………………………………….. ($800,000 ÷ 5 = $160,000)

160,000 160,000

b. $300,000. Research and development costs are usually expensed when incurred. Ex. 251 For each of the following unrelated transactions, (a) determine the amount of the amortization for the current year, and (b) present the adjusting entries required to record amortization at year end. (1)

Costs (it was not acquired) of $39,000 were incurred on January 1 to obtain a patent. On January 31, $38,610 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

(2)

A company acquired a copyright for $160,000. The copyright has a useful life of 50 years.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 251 (10 min.) (1)

(a)

Legal costs to successfully defend a patent are capitalized. Therefore the legal costs will be amortized for 11 years, 11 months. (The remaining useful life of the patent.) The amortization will be ($38,610 ÷ 143 remaining months × 11 months = $2,970) + ($39,000 ÷ 12 years = $3,250) = $6,220.

(b)

Amortization Expense ......................................................... Patents ....................................................................

6,220 6,220

Reporting and Analyzing Long-Lived Assets

9-67

Solution 251 (Cont.) (2)

(a)

Maximum allowable write-off period is life of creator plus 70 years. Thus the 50 years of useful life is used. $160,000 ÷ 50 years = $3,200 per year.

(b)

Amortization Expense ......................................................... Copyrights ...............................................................

3,200 3,200

Ex. 252 During the current year Knight 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. Knight Company expected the trademark to contribute to revenue indefinitely.

(c)

Knight 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) Knight 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. Knight Company is very confident they will obtain this patent in the next few years. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 252 (10 min.) (a)

Operating Expense. Only successful patent defense costs can be capitalized.

(b)

Intangible Asset. Trademarks are considered to have indefinite lives, thus they are not amortized.

(c) Intangible Asset. The patent cost of $2,000,000 should be amortized over its remaining useful life of 15 years since this is shorter than the maximum allowable period of 20 years. The selling company’s costs are not relevant, or normally available, to the buyer. (d)

Operating Expense. Research and development costs are required by GAAP to be expensed.

Ex. 253 Nelson Company, organized in 2014, has these transactions related to intangible assets in that year: Jan. Apr. July Sept.

2 1 1 1

Purchased a patent (5-year life) $325,000. Goodwill purchased (indefinite life) $360,000. Acquired a 9-year franchise; expiration date July 1, 2023, $720,000. Research and development costs $185,000.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-68 Ex. 253

(Cont.)

Instructions (a) Prepare the necessary entries to record these intangibles. All costs incurred were for cash. (b) Make the entries as of December 31, 2014, recording any necessary amortization. (c) Indicate what the balance should be on December 31, 2014. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 253 (12 min.) (a)

1/2/14

Patents .......................................................... Cash ........................................................

325,000

Goodwill ........................................................ Cash ........................................................ (Part of the entry to record purchase of another company)

360,000

Franchise ...................................................... Cash ........................................................

720,000

Research and Development Expense ........... Cash ........................................................

185,000

Amortization Expense—Patents ($325,000  5)........... Amortization Expense—Franchise [($720,000  9)  6/12] ........................................... Patent .................................................................... Franchise ...............................................................

65,000

4/1/14

7/1/14 9/1/14

(b)

(c)

325,000 360,000

720,000 185,000

40,000 65,000 40,000

Ending balances, 12/31/14: Patents = $260,000 ($325,000 – $65,000) Goodwill = $360,000 Franchises = $680,000 ($720,000 – $40,000)

Ex. 254 Presented below is information related to plant assets and intangible assets at year end on December 31, 2014, for Looper Company: Buildings Goodwill Patents Land Accumulated Depreciation

$1,180,000 370,000 480,000 390,000 650,000

Instructions Prepare a partial balance sheet for Looper Company that shows how the above listed items would be presented. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-69

Solution 254 (10 min.) LOOPER COMPANY Balance Sheet (Partial) December 31, 2014 Property, Plant, and Equipment Buildings Less: Accumulated Depreciation Land Total Property, Plant, and Equipment

$1,180,000 650,000

$530,000 390,000 $920,000

Intangibles Assets Goodwill Patents Total Intangibles

$370,000 480,000 $850,000

Ex. 255 Jensen Company purchased a new machine on October 1, 2014, at a cost of $104,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 80,000 working hours during its 8-year life. Instructions Compute depreciation using the following methods in the year indicated. (a) Straight-line for 2014 and 2015, assuming a December 31 year-end. (b) Declining-balance using double the straight-line rate for 2014 and 2015. (c) Units-of-activity for 2014, assuming machine usage was 2,900 hours. (Round depreciation per unit to the nearest cent.) Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 255 (12 min.) (a) Straight-line method:

$104,000 - $8,000 8 years

= $12,000 per year

2014 depreciation = $12,000  3/12 = $3,000 2015 depreciation = $12,000. (b)

Declining-balance method:

2014 depreciation = $104,000  25%*  3/12 = $6,500 Book value January 1, 2014 = $104,000 – $6,500 = $97,500 2015 depreciation = $97,500  25% = 24,375. *(1/8)  2 = 25% (c) Units-of-activity method:

$104,000 - $8,000 80,000 units

2014 depreciation = 2,900 hours  $1.20 = $3,480.

= $1.20 per unit

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-70 *Ex. 256

Nichols Company purchased a new machine for $250,000. It is estimated that the machine will have a $25,000 salvage value at the end of its 5-year useful service life. The double-decliningbalance method of depreciation will be used. Instructions Prepare a depreciation schedule that shows the annual depreciation expense on the machine for its 5-year life. Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 256 (10 min.) Declining-balance rate = 1 ÷ 5 × 2 = 40%

Year 1 2 3 4 5

Book Value Annual Beginning Depreciation Depreciation of Year × Rate = Expense $250,000 × 40% $100,000 150,000 × 40% 60,000 90,000 × 40% 36,000 54,000 × 40% 21,600 32,400 × 40% 7,400*

End of Year Accumulated Book Value Depreciation End of Year $ 100,000 $150,000 160,000 90,000 196,000 54,000 217,600 32,400 225,000 25,000

*Adjusted to $7,400 because ending book value should not be less than expected salvage value. *Ex. 257 Redeker Company purchased equipment on January 1, 2013, 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, 2013, using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2013 and 24,000 units are produced in 2014, what is the book value of the equipment at December 31, 2014? 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, 2015? Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 257 (15 min.) 1. Straight-line method:

Cost - Salvage Years

$90,000 – $5,000 5

= $17,000 per year

Reporting and Analyzing Long-Lived Assets

9-71

*Solution 257 (Cont.) Cost – Salvage Units

2. Units-of-activity method:

2013 16,000 units × $.85 2014 24,000 units × $.85 Accumulated Depreciation

$90,000 – $5,000 100,000 units

= $0.85 per unit

Depreciation = Expense $36,000 21,600 12,960

Accumulated Depreciation $36,000 57,600 70,560

= $ 13,600 = 20,400 = $34,000

Cost of asset Less: Accumulated Depreciation Book value at December 31, 2014

$90,000 34,000 $56,000

3. Double-declining-balance method:

2013 2014 2015

Book Value Beginning of Year $90,000 54,000 32,400



Declining Balance Rate 40% 40% 40%

*Ex. 258 A plant asset acquired on October 1, 2014, at a cost of $800,000 has an estimated useful life of 10 years. The salvage value is estimated to be $50,000 at the end of the asset's useful life. Instructions Determine the depreciation expense for the first two years using the: (a) straight-line method. (b) double-declining-balance method. Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 258 (10 min.) (a)

Straight-line method Year 1 Year 2

(b)

$800,000 – $50,000 10 years

= $75,000 × (3 ÷ 12) = $18,750

$75,000

Double-declining-balance method Constant rate — 1 ÷ 10 = 10% × 2 = 20% Year 1

$800,000 × 20% × (3 ÷ 12) = $40,000

Year 2

$760,000 × 20% = $152,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

9-72 *Ex. 259

Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’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 $35,000 $5,000 75,000 $2,100 20,000 2 25,000 4,000 60,000 1,890 22,000 3 23,500 2,500 70,000 2,000 19,000 Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the Depreciation Expense for each car for the current year. (c) Make one compound journal entry to record the annual Depreciation Expense for the fleet. Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 259 (10 min.) (a) Car 1

$35,000 – $5,000 75,000 miles

= 0.40 per mile

Car 2

$25,000 – $4,000 60,000 miles

= 0.35 per mile

Car 3

$23,500 – $2,500 70,000 miles

= 0.30 per mile

20,000 miles × .40 = $8,000 22,000 miles × .35 = $7,700 19,000 miles × .30 = $5,700

(b)

Car 1— Car 2— Car 3—

(c)

Depreciation Expense.................................................................. Accumulated Depreciation—Car 1 ...................................... Accumulated Depreciation—Car 2 ...................................... Accumulated Depreciation—Car 3 ......................................

21,400 8,000 7,700 5,700

*Ex. 260 The Rowland Clinic purchased a new surgical laser for $84,000. The estimated salvage value is $4,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 2,400 hours in year 3; 1,900 hours in year 4; 2,000 hours in year 5. Instructions (a)

Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity. .

Reporting and Analyzing Long-Lived Assets

*Ex. 260

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(Cont.)

(b)

If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

(c)

Which method would result in the lower reported income in the first year? Which method would result in the lower total reported income over the five-year period?

Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 260 (10 min.) (a)

(1)

$84,000 – $4,000 Straight-line method: ———————— = $16,000 per year 5 years

(2)

$84,000 – $4,000 Units-of-activity method: ———————— = $8.00/hour 10,000 hours

Year 1 2 3 4 5

Year 1 Year 2 Year 3 Year 4 Year 5 Total

1,600 2,100 2,400 1,900 2,000

× × × × ×

$8.00 8.00 8.00 8.00 8.00

Straight-line $16,000 16,000 16,000 16,000 16,000 $80,000

= $ 12,800 = 16,800 = 19,200 = 15,200 = 16,000 Units of Activity $ 12,800 16,800 19,200 15,200 16,000 $80,000

(b)

The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life.

(c)

The straight-line method provides the higher depreciation expense for the first year, and therefore the lower first year income. Over the five-year period, both methods result in the same total depreciation expense ($80,000) and, therefore, the same total income.

*Ex. 261 Mideast Airlines purchased a 777 aircraft on January 1, 2012 at a cost of $40,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $6,000,000. Instructions Compute the accumulated depreciation and book value at December 31, 2014 using the straightline method and the double-declining-balance method. Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

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*Solution 261 (20 min.) Straight-line Depreciation × Rate = 5% 5% 5%

Year 2012 2013 2014

Depreciable Cost $34,000,000 $34,000,000 $34,000,000

Annual Depreciation $1,700,000 $1,700,000 $1,700,000

Accumulated Depreciation $1,700,000 3,400,000 5,100,000

Book Value $38,300,000 36,600,000 34,900,000

Year 2012 2013 2014

Declining-balance Book Value Depreciation Annual Beginning Year × Rate = Depreciation $40,000,000 10% $4,000,000 36,000,000  3,600,000 32,400,000 10% 3,240,000

Accumulated Depreciation $4,000,000 7,600,000 10,840,000

Book Value $36,000,000 32,400,000 29,160,000

*Ex. 262 Railsback Company purchased a machine on January 1, 2014, at a cost of $72,000. The machine is expected to have an estimated salvage value of $4,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2014 using the double-decliningbalance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2014, was $45,000 before taxes as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the corrected net income for 2014. (Show computations.) Ans: N/A, LO: 3,9, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 262 (10 min.) Depreciation taken: ($72,000 – 0) × .40 = Correct depreciation: ($72,000 – $4,000) ÷ 5 yrs. = Overstatement of depreciation =

$28,800 13,600 $15,200

Accumulated Depreciation—Equipment ......................................... Depreciation Expense ........................................................... Correct net income: Net income as reported Add: Overstatement of depreciation expense Correct net income

$45,000 15,200 $60,200

15,200 15,200

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*Ex. 263 Stan's Lumber Mill sold two pieces of equipment in 2014. The following information pertains to the two pieces of equipment: Purchase Useful Salvage Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $86,000 7/1/10 5 yrs. $6,000 Straight-line 7/1/14 $20,000 #2 $95,000 1/1/13 5 yrs. $5,000 Double-declining12/31/14 $37,000 balance Instructions (a)

Compute the depreciation on each piece of equipment to the date of disposal.

(b)

Prepare the journal entries in 2014 to record 2014 depreciation and the sale of each piece of equipment.

Ans: N/A, LO: 3, 5, 9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 263 (20 min.) (a) Machine #1 Year 2010 2011 2012 2013 2014

Depreciable Cost  $80,000

Depreciation Rate = 20%

   

Annual Depreciation $ 8,000* 16,000 16,000 16,000 8,000*

Accumulated Depreciation $ 8,000 24,000 40,000 56,000 64,000

Machine #2 Book Value Year Beginning of Year  2013 $95,000 2014 57,000 *One-half a year.

DDB Rate 40% 40%

(b) Depreciation Expense Accumulated Depr.—Equipment Cash Loss on Disposal of Plant Assets Accumulated Depreciation—Equipment Equipment Gain on Disposal of Plant Assets

Annual Depreciation $38,000 22,800

Accumulated Depreciation $38,000 60,800

Machine 1 8,000 8,000

Machine 2 22,800 22,800

20,000 2,000* 64,000

37,000 -060,800 86,000 -0-

*$86,000 – $64,000 = $22,000; $22,000 – $20,000 = $2,000. **$95,000 – $60,800 = $34,200; $37,000 – $34,200 = $2,800.

95,000 2,800**

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

COMPLETION STATEMENTS 264. The _______________ price is equal to the fair market value of the asset given up or the fair market value of the asset received. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

265. With the exception of land, plant assets experience a ______________ in service potential over their useful lives. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

266. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

267. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

268. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

269

Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________.

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

270. ______________ is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

271. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

272. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

273. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the useful life of the plant asset. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

274. The declining-balance method of computing depreciation is known as an _____________ depreciation method. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

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275. Ordinary repairs that maintain operating efficiency and expected productive life are called _______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

276. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as _________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

277. A _____________ decline in the market value of an asset is referred to as an impairment. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

278. 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

279. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

280. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

281. An overall measure of profitability is the ______________________ ratio. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

282. The _______________ ratio is calculated by dividing net sales by average total assets. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

283. The process of allocating to expense the cost of an asset over its useful life is called __________________ for tangible plant assets and __________________ for intangible assets. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

284. The cost of a patent should be amortized over its __________________ life or its _______________ life, whichever is shorter. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

285. In recording the purchase of a business, goodwill should be recorded for the excess of ________________ over the _________________ of the net assets acquired. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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*286. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage. Ans: N/A, LO: 9, 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 264. 265. 266. 267. 268. 269. 270. 271. 272. 273. 274. 275.

cash equivalent decline Land Land Land Improvement $20,900. Depreciation accumulated depreciation, cost cost, salvage value, useful life straight-line accelerated revenue expenditures

276. 277. 278. 279. 280. 281. 282. 283. 284. 285. *286.

capital expenditures permanent depreciation expense book value loss, 16,000 return on assets asset turnover depreciation, amortization legal, useful (or useful, legal) cost, fair market value declining, constant

MATCHING Set 1 287. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Plant assets Depreciation Book value Salvage value Straight-line method

F. G. H. I. J.

Units-of-activity method Double-declining-balance method MACRS Revenue expenditures Capital expenditures

____

1. Small expenditures which primarily benefit the current period.

____

2. Cost less accumulated depreciation.

____

3. An accelerated depreciation method used for financial statement purposes.

____

4. Tangible resources that are used in operations and are not intended for resale.

____

5. Equal amount of depreciation each period.

____

6. Expected cash value of the asset at the end of its useful life.

____

7. Process of allocating the cost of equipment over its service life.

____

8. Material expenditures that increase an asset's operating efficiency, productive capacity, or useful life.

____

9. An accelerated depreciation method used for tax purposes.

____ 10. Useful life is expressed in terms of units of production or expected use. Ans: N/A, LO: 1 - 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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

I C G A E

6. 7. 8. 9. 10.

D B J H F

Set 2 288. 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 Capital lease Asset turnover ratio

F. G. H. I. J.

Return on assets 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 recorded if the proceeds from the sale exceed the book value of the plant asset.

____

3. Examples are franchises and licenses.

____

4. A long-term agreement allowing the lessee to use the lessor’s asset where the arrangement is accounted for as a purchase.

____

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. Computed by dividing net income by average assets.

____ 10. Indicates how efficiently a company is able to generate sales with a given amount of assets. Ans: N/A, LO: 5 - 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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

H A I D G

6. 7. 8. 9. 10.

C B J F E

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SHORT-ANSWER ESSAY QUESTIONS S-A E 289 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 289 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 290 How is the cost for a plant asset measured in a cash transaction? In a noncash transaction? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA

Solution 290 In a cash transaction, cost is equal to the cash paid. In a noncash transaction, cost is equal to the cash equivalent price paid, which is the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. S-A E 291 Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.” Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 291 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 292 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Reporting and Analyzing Long-Lived Assets

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Solution 292 An accelerated depreciation method is a method that produces higher depreciation expense in the early years than in the later years. The choice of an accelerated method can be justified if the asset being depreciated contributes more to the revenue-earning process in the earlier years and less in the later years. An accelerated method can also be justified if the asset’s value is expected to decline very quickly. In such situations, an accelerated method would properly match expense to revenue. S-A E 293 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 293 An expenditure is classified as a revenue expenditure if it maintains the operating efficiency and expected productive life of the asset and primarily benefits the current accounting period. Revenue expenditures are usually small amounts that occur frequently throughout the life of the asset and are often called ordinary repairs. An expenditure is classified as a capital expenditure if it increases (rather than maintains) operating efficiency, productive capacity, or expected useful life, and therefore benefits more than one accounting period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset. Capital expenditures can be further classified as either additions or improvements. The distinction between a capital expenditure and a revenue expenditure is not always clear-cut. The purchase of an asset with a relatively insignificant cost (for example, the purchase of a $10 wastebasket with a 5-year useful life) may meet the criteria for classification as a capital expenditure, even though it is similar in many ways to a revenue expenditure (small amount, more frequent occurrence). The accounting concept of materiality would indicate that this item could be recorded as an expense (more expedient) since it is not material enough to influence the decision of a reasonably prudent creditor or investor. S-A E 294 How is a gain or a loss on the sale of a plant asset computed? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA

Solution 294 In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

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S-A E 295 You are comparing two companies in the same industry. You have determined that Nenn Corp. depreciates its plant assets over a 40-year life, whereas Henderson Corp. depreciates its plant assets over a 20-year life. Discuss the implications this has for comparing the results of the two companies. Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 295 By selecting a higher estimated useful life, Nenn Corp. is spreading the plant asset's cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Henderson's choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income. S-A E 296 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communication, IMA: Business Economics

Solution 296 Goodwill is the value of all favorable attributes that relate to a business enterprise. As goodwill is the product of these attributes, and would not exist apart from them, goodwill cannot be separated from the company and then sold. This is different from a copyright or patent that can exist independent of a company, and can be sold apart from any other assets. S-A E 297

(Ethics)

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding, and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years). This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.

Reporting and Analyzing Long-Lived Assets

S-A E 297

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(Cont.)

PRS' accountant, Kelly Hall, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Gilbert Brown, the controller, instructed Kelly to create an intangible asset, named "Goodwill," and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway." Required: 1. What are the ethical issues? 2. What should Kelly do? Ans: N/A, LO: 7, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA

Solution 297 1. The following are some of the ethical issues: a. Whether PRS should continue to obtain its information by deception b. Whether PRS makes a practice of pirating software c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS. 2. Kelly should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year. She cannot allow her integrity to be compromised by misrecording these economic events. She could also point out that Mr. Brown's attempt to delay recognition of the losses will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more scrutiny than would otherwise be the case. S-A E 298

(Communication)

The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2, 2010. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Old Fix-It decided on January 2, 2014, to purchase another very large home, this time in nearby Joplin, Missouri. On January 3, 2014, a realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain over purchase price was appropriate, and so he agreed to sell the showcase house. Only afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for four years. How in the world can we have a loss?" Due to the commercial aspects of the property and its expected traffic flow, the life of the showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no salvage or residual value. Old Fix-It took full years’ of depreciation in 2010 through 2013 and none in 2014 due to the sale date of January 3, 2014. .

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S-A E 298

(Cont.)

Required: Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address cost and depreciation as general numbers rather than specific values. Ans: N/A, LO: 1, 3, 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA

Solution 298

MEMO TO:

Mark Gibson, President

FROM:

Martha King, Accountant

RE:

Loss on Pittsburg showcase

I understand that you are concerned about the loss on the Pittsburg showcase house. You have said that a loss is not possible since we sold the house for more than we paid for it. Ordinarily, it would not be possible for any fixed asset to generate a loss if sold for more than the original purchase price. However, the cost basis of the showcase house was acquisition cost of $125,000 plus the many improvements totaling $155,000 resulting in a total cost of $280,000. The total cost of the showcase house after improvements were depreciated 27%, representing the four years of operations. This resulted in a book value of approximately $204,000. The publicity and lessons learned were substantial and very beneficial to Old Fix-It. When the possibility of a second, better, showcase house in Joplin, MO., arose, cash flow and funding were issues. The sale of the Pittsburg showcase house allowed us to “capitalize” on our lessons learned, withdraw a large portion of our cash, attain additional exposure to our product in Pittsburg as a commercial venture as luxury apartments, and open a second, better, showcase house in Joplin. All in all, I think that the Pittsburg house was still an excellent investment—we got far more benefit from the $30,000 "loss" than we would have had spending ten times that much in advertising. To prevent this situation in the future, however, you could have the Accounting Department calculate the book value before you negotiate a sales contract. That way, you'll know the effect of the transaction on our income. Remember that accounting’s book value may not represent market value; we'll still have to rely on real estate agents for that. Let me know if you have further questions.

(signature)

Reporting and Analyzing Long-Lived Assets

9-85

IFRS QUESTIONS 1.

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, LO: 10, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 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, 2014? a. ₤335,000 b. ₤200,000 c. ₤426,250 d. ₤376,250

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (₤8,000,000 − ₤600,000 − ₤750,000)  40 = ₤166,250; (600,000  10) + (₤750,000  5) + ₤166,250 = ₤376,250

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 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, 2014 statement of financial position? a. ₤7,665,000 b. ₤7,573,750 c. ₤6,483,750 d. ₤7,800,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (₤8,000,000 − ₤600,000 − ₤750,000)  40 = ₤166,250; ₤6,650,000 − ₤166,250 = ₤6,483,750

9-86 4.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

IFRS allows companies to revalue plant assets to fair value. Which of the following statements is correct 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 these answer choices are correct.

Ans: C, LO: 4, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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, LO: 4, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Nicholson Company purchased equipment on January 1, 2012, for €28,000 with an estimated residual value of €7,000 and estimated useful life of 8 years. On January 1, 2014, Nicholson decided the equipment will last 12 years from the date of purchase. The residual value is still estimated at €7,000. Using the straight-line method the new annual depreciation will be: a. €1,575. b. €1,750. c. €2,100. d. €2,333.

Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €28,000 − €7,000)  28 = €5,250; (€28,000 − €5,250 − €7,000)  10 = €1,575

An asset was purchased for ¥200,000. It had an estimated residual value of ¥40,000 and an estimated useful life of 10 years. After 5 years of use, the estimated residual value is revised to ¥32,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. ¥24,000. b. ¥17,600. c. ¥12,000. d. ¥16,800.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (¥200,000 − ¥40,000) × 5/10 = ¥80,000; (¥200,000 − ¥80,000 − ¥32,000) ÷ 5 = ¥17,600

Reporting and Analyzing Long-Lived Assets

9-87

Under U.S. GAAP a. property, plant, and equipment may not be revalued. b. component depreciation is not required. c. research and development costs are expensed as incurred. d. All of these answer choices are correct.

Ans: D, LO: 9, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Feedback: U.S. GAAP does not permit asset revaluation, component depreciation is not required, and research and development costs are expensed as incurred.

Which of the following statements concerning IFRS and U.S. GAAP is correct? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of these answer choices are correct.

Ans: B, LO: 9, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

CHAPTER 10 REPORTING AND ANALYZING LIABILITIES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

Item LO BT Item True-False Statements

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

1 1 1 1 2 2 2 2 2 2 2 2 3 3

K K K K K K K K K K K K K K

15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

3 3 3 3 3 3 3 4 4 4 4 4 4 4

5 5 5 5 5 5 6 6 7 7 7 8 8 8

C C C C K AP K AP K K K K K C

*57. *58. *59. *60. *61. *62. *63. *64. *65. *66.

8 8 9 9 9 9 10 10 10 10

C C K C K K C C 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. 96. 97. 98.

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 3 3 3 3 3 3 3

K K K K C C K K K K AP AP AP AP AP AP C AP AP AP AP AP AP AP C C K K AP AP AN AN

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. 125. 126. 127. 128. 129. 130.

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 3 3 4

K 29. 4 K 43. K 30. 4 K 44. C 31. 4 C 45. AN 32. 4 C 46. K 33. 4 C 47. K 34. 4 K 48. C 35. 5 C 49. K 36. 5 C 50. K 37. 5 C 51. K 38. 5 C 52. K 39. 5 K 53. K 40. 5 C *54. K 41. 5 C *55. K 42. 5 K *56. Multiple Choice Questions K 131. 4 AP 163. C 132. 4 K 164. C 133. 4 K 165. K 134. 4 C 166. K 135. 4 K 167. K 136. 4 K 168. AP 137. 4 K 169. AP 138. 4 K 170. AP 139. 4 K 171. AP 140. 4 K 172. AN 141. 4 K 173. AN 142. 4 K 174. AN 143. 4 K 175. AN 144. 4 K 176. AP 145. 4 AP 177. AP 146. 4 AP 178. AP 147. 4 AP 179. AP 148. 4 AP 180. AP 149. 4 K 181. AP 150. 4 K 182. AP 151. 4 K *183. AP 152. 4 K *184. AP 153. 5 K 185. AP 154. 5 C 186. AP 155. 5 AP *187. AP 156. 5 AP *188. AP 157. 5 C 189. AP 158. 5 AP 190. AP 159. 5 AP 191. AP 160. 5 K 192. AP 161. 5 K 193. K 162. 5 K 194.

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 8 8 6 5 8 8 6 6 6 6 6 6

K AP AP AP K K C C C C C K K K K AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP

195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221. *222. *223. *224. *225. *226.

6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8

K AP AP AP C C K K K AP K K AP AN AP AP AP AP AP AP AP AP AP AN C C AP AP K AP AP AP

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*227. *228. *229. *230. *231.

8 8 9 9 9

AP AP K AP AP

*232. *233. *234. *235. *236.

251. 252.

1 2

AP AP

253. 254.

261. 262. 263. 264.

1,7 2 2 2

AP AP AP AP

265. 266. 267. 268.

279. 280. 281. 282.

1 1 2 2

K K K K

283. 284. 285. 286.

295.

4, 5 7, 8

Multiple Choice Questions (Cont.) AP *237. 9 C *242. 10 AP *238. 9 C *243. 10 AP *239. 10 K *244. 10 AP *240. 10 AP *245. 10 C *241. 10 AP *246. 10 Brief Exercises 3 AP 255. 3 AP 257. 5 3 AN 256. 4 AP 258. 5 Exercises 3 AP 269. 7 AP *273. 5,8 3 AP 270. 7 AN *274. 5,6,8 6 AP *271. 5,8 AP *275. 5,6,8 7 AP *272. 5,8 AP *276. 3, 9 Completion Statements 3 K 287. 4 K 291. 5 3 K 288. 5 K 292. 7 4 K 289. 5 K 293. 7 4 K 290. 5 AP *294. 8 Matching 9 9 9 9 9

Short Answer Essay 296. 3 K 299. 5 K 302. 7 K 305. 297. 4 K 300. 5 C *303. 9 C 298. 4 K 301. 6 C 304. 1 E *This topic is dealt with in an Appendix to the chapter.

AP AP AP AP AP

*247. *248. *249. *250.

10 10 10 10

AP AP AP AP

AP AP

*259. *260.

8 9

AP AP

AP AP AP AP

*277. *278.

3,9 10

AP AP

K K K K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item 1. 2. 3.

Type Item Type TF 4. TF TF 67. MC TF 68. MC

5. 6. 7. 8. 9.

TF TF TF TF TF

10. 11. 12. 76. 77.

TF TF TF MC MC

Item Type Item Type 69. MC 72. MC 70. MC 73. MC 71. MC 74. MC Learning Objective 2 78. MC 83. MC 79. MC 84. MC 80. MC 85. MC 81. MC 86. MC 82. MC 87. MC

Item 75. 251. 261.

Type MC Be Ex

Item 279. 280. 304.

Type C C SA

88. 89. 90. 91. 252.

MC MC MC MC Be

262. 263. 264. 281. 282.

Ex Ex Ex C C

Reporting and Analyzing Liabilities

10-3

Learning Objective 3 Item 13. 14. 15. 16. 17. 18. 19. 20. 21. 92.

Type Item Type TF 93. MC TF 94. MC TF 95. MC TF 96. MC TF 97. MC TF 98. MC TF 99. MC TF 100. MC TF 101. MC MC 102. MC

22. 23. 24. 25. 26. 27. 28.

TF TF TF TF TF TF TF

29. 30. 31. 22. 33. 34. 132.

TF TF TF TF TF TF MC

35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

TF TF TF TF TF TF TF TF TF TF

45. 46. 47. 48. 153. 154. 155. 156. 157. 158.

TF TF TF TF MC MC MC MC MC MC

49. 50. 185.

TF TF MC

189. 190. 191.

MC MC MC

51. 52. 53. 200.

TF TF TF MC

201. 202. 203. 204.

MC MC MC MC

Item Type Item Type 103. MC 113. MC 104. MC 114. MC 105. MC 115. MC 106. MC 116. MC 107. MC 117. MC 108. MC 118. MC 109. MC 119. MC 110. MC 120. MC 111. MC 121. MC 112. MC 122. MC Learning Objective 4 133. MC 140. MC 134. MC 141. MC 135. MC 142. MC 136. MC 143. MC 137. MC 144. MC 138. MC 145. MC 139. MC 146. MC Learning Objective 5 159. MC 169. MC 160. MC 170. MC 161. MC 171. MC 162. 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 178. MC Learning Objective 6 192. MC 195. MC 193. MC 196. MC 194. MC 197. MC Learning Objective 7 205. MC 209. MC 206. MC 210. MC 207. MC 261. Ex 208. MC 268. Ex

Item 123. 124. 125. 126. 127. 128. 129. 253. 254. 255.

Type MC MC MC MC MC MC MC Be Be Be

Item 265. 266. 283. 284. 296.

Type Ex Ex C C SA

147. 148. 149. 150. 151. 152. 256.

MC MC MC MC MC MC Be

285. 286. 287. 295. 297. 298.

C C C Ma SA SA

179. 180. 181. 182. 186. 257. 258. 271. 272. 273.

MC MC MC MC MC Be Be Ex Ex Ex

274. 275. 288. 289. 290. 291. 295. 299. 300. 305.

Ex Ex C C C C Ma SA SA SA

198. 199. 267.

MC MC Ex

301.

269. 270. 292. 293.

Ex Ex C C

295. 302.

Ma SA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-4

Learning Objective 8 Item 54. 55. 56. 57. 58. 183.

Type Item Type TF 184. MC TF 187. MC TF 188. MC TF 211. MC TF 212. MC MC 213. MC

59. 60. 61.

TF TF TF

62. 229. 230.

TF MC MC

63. 64. 65.

TF TF TF

66. 239. 240.

TF MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching Be = Brief Exercise

Item Type Item Type 214. MC 220. MC 215. MC 221. MC 216. MC 222. MC 217. MC 223. MC 218. MC 224. MC 219. MC 225. MC Learning Objective 9 231. MC 234. MC 232. MC 235. MC 233. MC 236. MC Learning Objective 10 241. MC 244. MC 242. MC 245. MC 243. MC 246. MC

Item 226. 227. 228. 259. 271. 272.

Type MC MC MC Be Ex Ex

Item 273. 274. 275. 295.

Type Ex Ex Ex Ma

237. 238. 260.

MC MC Be

276. 277. 303.

Ex Ex SA

247. 248. 249.

MC MC MC

250. 278.

MC Ex

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LERANING 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 (a) from existing current assets or through the creation of other current liabilities, and (b) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. 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, and interest expense is accrued over the life of the note. At maturity, the amount paid is equal to the face value of the note plus accrued interest. 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 hold employee withholding taxes, and credit them to appropriate liability accounts, until they remit these taxes to the governmental taxing authorities. Unearned revenues are initially recorded in an unearned revenue account. As the company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet. 4. Identify the types of bonds. The following different types of bonds may be issued: secured and unsecured bonds, and convertible and callable bonds. .

Reporting and Analyzing Liabilities

10-5

5. 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. In addition, they use the accounts Premium on Bonds Payable and Discount on Bonds Payable to show the bond premium and bond discount, respectively. Bond discount and bond premium are amortized over the life of the bond, which increases or decreases interest expense, respectively. 6. Describe the entries when bonds are redeemed. When companies redeem bonds at maturity, they credit Cash and debit Bonds Payable for the face value of the bonds. When companies redeem bonds before maturity, they (a) eliminate the carrying value of the bonds at the redemption date, (b) record the cash paid, and (c) recognize the gain or loss on redemption. 7. Identify the requirements for the financial statement presentation and analysis of liabilities. Current liabilities appear first on the balance sheet, followed by long-term liabilities. Companies should report the nature and amount of each liability in the balance sheet or in schedules in the notes accompanying the statements. They report inflows and outflows of cash related to the principal portion of long-term debt in the financing section of the statement of cash flows. The liquidity of a company may be analyzed by computing the current ratio. The long-run solvency of a company may be analyzed by computing the debt to assets ratio and the times interest earned ratio. Other factors to consider are contingent liabilities and lease obligations. *8. 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. *9. 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 use of the effectiveinterest method. *10. 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 each period.

TRUE-FALSE STATEMENTS 1. A current liability must be paid out of current earnings. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

4. A company whose current liabilities exceed its current assets may have a liquidity problem. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

5. Interest expense is reported under Other Expenses and Losses in the income statement. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. Notes payable usually require the borrower to pay interest. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

7. Notes payable are often used instead of accounts payable. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

8. A note payable must always be paid before an account payable. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

9. A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity. Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10. Most notes are not interest bearing. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

11. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12. Interest expense on a note payable is only recorded at maturity. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

14. Unearned revenues should be classified as Other Revenues and Gains on the income statement. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. The higher the sales tax rate, the more profit a retailer can earn. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

16. When a business sells an item and collects a state sales tax on it, a current liability arises. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-7

17. If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount of the sales tax is $9.52. Ans: T, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

18. During the month, a company sells goods for a total of $106,000, which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense. Ans: F, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

19. Payroll taxes include the employer’s share of Social Security taxes as well as state and federal unemployment taxes. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

20. Unearned revenues are received before goods are delivered or services are rendered. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

21. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000. Ans: F, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

23. Each bondholder may vote for the board of directors in proportion to the number of bonds held. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

24. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

25. Generally, convertible bonds do not pay interest. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26. An unsecured bond is one that is issued against the general credit of the borrower. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

27. Bonds are a form of interest-bearing notes payable. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28. Neither corporate bond interest nor dividends are deductible for tax purposes. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

29. The face value is the amount of principal and interest due at the maturity date. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30. Convertible bonds are often called callable bonds. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

31. A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375. Ans: T, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

32. If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60. Ans: T, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

33. The current market value of a bond is equal to the present value of all future cash payments promised by the bond. Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34. The board of directors may authorize more bonds than are issued. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36. The carrying value of a bond is equal to the market price on the date of sale. Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

38. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium. Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39. The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

40. If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41. If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-9

42. If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium. Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

44. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

46. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date. Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47. If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48. If $180,000, 6%, bonds are issued on January 1, and pay interest annually, the amount of interest paid will be $10,800. Ans: T, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

49. Material gains or losses on bond redemption are reported as an extraordinary item on the income statement. Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded. Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

51. The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company’s liquidity. Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52. The debt to assets ratio measures the percentage of the total assets provided by creditors. Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

53. The times interest earned is computed by dividing net income by interest expense. Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10-10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*54. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*55. Discount on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*56. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will increase as the bonds approach maturity. Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*57. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. Ans: T, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*58. If the straight-line method of amortization is used, the amount of yearly interest expense will increase as the bonds approach maturity. Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*59. When the effective-interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the given period. Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*60. Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond’s life. Ans: F, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*61. The effective-interest method produces a constant dollar amount of interest expense to be reported each interest period. Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*62. When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used. Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*63. In a monthly mortgage payment, the same amount is recorded as interest expense as in the previous month’s payment. Ans: F, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Liabilities

10-11

*64. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance. Ans: T, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*65. An installment note calling for equal total payments each period will result in an interest portion that decreases in each successive period. Ans: T, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*66. An installment note calling for equal total payments each period will result in a principal portion that decreases in each successive period. Ans: F, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

F F T T T T T F T F F

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

F F F F T T F T T F F

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

F T F T T F F F T T T

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

T F T F T T F F F F F

45. 46. 47. 48. 49. 50. 51. 52. 53. *54. *55.

F T T T F T T T F T T

*56. *57. *58. *59. *60. *61. *62. *63. *64. *65. *66.

F T F F F F T F T T F

MULTIPLE CHOICE QUESTIONS 67.

Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68.

Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69.

A current liability is a debt that can reasonably be expected to be paid a. within one year, or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10-12

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

70.

Which of the following most likely would be classified as a current liability? a. Dividends payable b. Bonds payable in 5 years c. Three-year notes payable d. Mortgage payable as a single payment in 10 years

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

71.

Failure to record a liability will probably a. result in an overstated net income. b. result in overstated total liabilities and owner’s equity. c. have no effect on net income. d. result in understated total assets.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

72.

Very often, failure to record a liability means failure to record a(n) a. revenue. b. asset conversion. c. footnote. d. expense.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73.

Current liabilities are due a. but not receivable for more than one year. b. but not payable for more than one year. c. and receivable within one year. d. and payable within one year.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74.

Liabilities are classified as current or long-term based on their a. description. b. payment terms. c. due date. d. amount.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

75.

Which of the following is not a current liability on December 31, 2014? a. A Note Payable due December 31, 2015 b. An Accounts Payable due January 31, 2015 c. A lawsuit judgment to be decided on January 10, 2015 d. Accrued salaries payable from 2014

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76.

With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:

Reporting and Analyzing Liabilities

10-13

Reporting

77.

Moss County Bank agrees to lend the Sadowski Brick Company $300,000 on January 1. Sadowski Brick Company signs a $300,000, 6%, 9-month note. The entry made by Sadowski Brick Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense ............................................................ 13,500 Cash. ......................................................................... 286,500 Notes Payable ............................................................... 300,000 b. Cash ......................................................................... 300,000 Notes Payable ............................................................... 300,000 c. Cash ......................................................................... 300,000 Interest Expense ........................................................... 13,500 Notes Payable .............................................................. 313,500 d. Cash ......................................................................... 300,000 Interest Expense ............................................................ 13,500 Notes Payable ............................................................... 300,000 Interest Payable ............................................................ 13,500

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300,000 face value

78.

Moss County Bank agrees to lend the Sadowski Brick Company $300,000 on January 1. Sadowski Brick Company signs a $300,000, 6%, 9-month note. What is the adjusting entry required if Sadowski Brick Company prepares financial statements on June 30? a. Interest Expense .............................................................. 9,000 Interest Payable ............................................................ 9,000 b. Interest Expense .............................................................. 9,000 Cash ............................................................................. 9,000 c. Interest Payable ............................................................... 9,000 Cash ............................................................................. 9,000 d. Interest Payable ............................................................... 9,000 Interest Expense ........................................................... 9,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300,000  .06  6/12 = $9,000

79.

Moss County Bank agrees to lend the Sadowski Brick Company $300,000 on January 1. Sadowski Brick Company signs a $300,000, 6%, 9-month note. What entry will Sadowski Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable ............................................................. 313,500 Cash ............................................................................. 313,500 b. Notes Payable ............................................................. 300,000 Interest Payable ............................................................. 13,500 Cash ............................................................................. 313,500 c. Interest Expense ............................................................ 13,500 Notes Payable ............................................................. 300,000 Cash ............................................................................. 313,500 d. Interest Payable ............................................................... 9,000 Notes Payable ............................................................. 300,000 Interest Expense .............................................................. 4,500 Cash ............................................................................. 313,500

10-14 80.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

West County Bank agrees to lend Drake Builders Company $200,000 on January 1. Drake Builders Company signs a $200,000, 6%, 6-month note. The entry made by Drake Builders Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense .............................................................. 6,000 Cash. ......................................................................... 194,000 Notes Payable ............................................................... 200,000 b. Cash ......................................................................... 200,000 Notes Payable ............................................................... 200,000 c. Cash ......................................................................... 200,000 Interest Expense .............................................................. 6,000 Notes Payable ............................................................... 206,000 d. Cash ......................................................................... 200,000 Interest Expense .............................................................. 6,000 Notes Payable ............................................................... 200,000 Interest Payable ............................................................ 6,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $200,000 face value

81.

West County Bank agrees to lend Drake Builders Company $200,000 on January 1. Drake Builders Company signs a $200,000, 6%, 6-month note. What is the adjusting entry required if Drake Builders Company prepares financial statements on March 30? a. Interest Expense .............................................................. 6,000 Interest Payable ............................................................ 6,000 b. Interest Expense .............................................................. 6,000 Cash .............................................................................. 6,000 c. Interest Expense .............................................................. 3,000 Interest Payable ............................................................ 3,000 d. Interest Payable ............................................................... 3,000 Interest Expense ........................................................... 3,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $200,000  .06  3/12 = $3,000

82.

West County Bank agrees to lend Drake Builders Company $200,000 on January 1. Drake Builders Company signs a $200,000, 6%, 6-month note. What entry will Drake Builders Company make to pay off the note and interest at maturity assuming that interest has been accrued to June 30? a. Notes Payable.............................................................. 206,000 Cash .............................................................................. 206,000 b. Notes Payable.............................................................. 200,000 Interest Payable ............................................................... 6,000 Cash .............................................................................. 206,000 c. Interest Expense .............................................................. 6,000 Notes Payable.............................................................. 200,000 Cash .............................................................................. 206,000 d. Interest Payable ............................................................... 3,000 Notes Payable.............................................................. 200,000 Interest Expense .............................................................. 3,000 Cash .............................................................................. 206,000

Reporting and Analyzing Liabilities

83.

10-15

As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84.

On October 1, Sam's Painting Service borrows $100,000 from National Bank on a 3month, $100,000, 4% note. What entry must Sam's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable ............................................................... 1,000 Interest Expense ........................................................... 1,000 b. Interest Expense .............................................................. 4,000 Interest Payable ............................................................ 4,000 c. Interest Expense .............................................................. 1,000 Interest Payable ............................................................ 1,000 d. Interest Expense .............................................................. 1,000 Notes Payable ............................................................... 1,000

85.

On October 1, Sam's Painting Service borrows $100,000 from National Bank on a 3month, $100,000, 4% note. The entry by Sam's Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ............................................................. 101,000 Cash ............................................................................. 101,000 b. Notes Payable ............................................................. 100,000 Interest Payable ............................................................... 1,000 Cash ............................................................................. 101,000 c. Notes Payable ............................................................. 100,000 Interest Payable ............................................................... 4,000 Cash ............................................................................. 104,000 d. Notes Payable ............................................................. 100,000 Interest Expense .............................................................. 1,000 Cash ............................................................................. 101,000

86.

The interest charged on a $250,000 note payable, at the rate of 6%, on a 90-day note would be a. $15,000. b. $7,500. c. $3,750. d. $1,250.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $250,000  .06  90/360 = $3,750

10-16 87.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The interest charged on a $250,000 note payable, at the rate of 6%, on a 60-day note would be a. $15,000. b. $7,500. c. $3,750. d. $2,500.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $250,000  .06  60/360 = $2,500

88.

The interest charged on a $250,000 note payable, at the rate of 6%, for a year would be a. $15,000. b. $7,500. c. $3,750. d. $1,250.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $250,000  .06 = $15,000

89.

The interest charged on a $70,000 note payable, at the rate of 6%, on a 90-day note would be a. $4,200. b. $2,100. c. $1,050. d. $700.

90.

The interest charged on a $70,000 note payable, at the rate of 6%, on a 60-day note would be a. $4,200. b. $2,100. c. $1,050. d. $700.

91.

Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

92.

Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Liabilities

93.

10-17

Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

94.

The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

95.

A company receives $176, of which $16 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Taxes Expense for $16. b. credit to Sales Taxes Payable for $16. c. debit to Sales Revenue for $176. d. debit to Cash for $160.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

96.

A company receives $261, of which $21 is for sales tax. The journal entry to record the sale would include a a debit to Sales Taxes Expense for $21. b. debit to Sales Taxes Payable for $21. c. debit to Sales Revenue for $261. d. debit to Cash for $261.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

97.

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 $252,000, what is the amount of the sales taxes owed to the taxing agency? a. $240,000 b. $252,000 c. $12,600 d. $12,000

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($252,000  1.05)  .05 = $12,000

10-18 98.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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 $420,000, what is the amount of the sales taxes owed to the taxing agency? a. $400,000 b. $420,000 c. $21,000 d. $20,000

99.

The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a long-term liability. d. not be separated from the long-term portion of debt.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

100.

On January 1, 2014, Ermler Company, a calendar-year company, issued $1,000,000 of notes payable, of which $250,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2014, is a. Current liabilities, $1,000,000. b. Long-term debt , $1,000,000. c. Current liabilities, $500,000; Long-term Debt, $500,000. d. Current liabilities, $250,000; Long-term Debt, $750,000.

101.

On January 1, 2014, Keisler Company, a calendar-year company, issued $700,000 of notes payable, of which $175,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2014, is a. Current liabilities, $700,000. b. Long-term debt, $700,000. c. Current liabilities, $175,000; Long-term Debt, $525,000. d. Current liabilities, $525,000; Long-term Debt, $175,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

102.

Sales taxes collected by a retailer from a customer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

103.

10-19

A retailer that collects sales taxes is acting as an agent for the a. wholesaler. b. customer. c. taxing authority. d. chamber of commerce.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

104.

Sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105.

A cash register tape shows cash sales of $6,000 and sales taxes of $300. The journal entry to record this information is a. Cash ............................................................................. 6,000 Sales Revenue .............................................................. 6,000 b. Cash ............................................................................. 6,300 Sales Tax Revenue ....................................................... 300 Sales Revenue .............................................................. 6,000 c. Cash ............................................................................. 6,000 Sales Tax Expense ............................................................. 300 Sales Revenue .............................................................. 6,300 d. Cash ............................................................................. 6,300 Sales Revenue .............................................................. 6,000 Sales Taxes Payable .................................................... 300

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

106.

Don's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Don'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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10-20 107.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A cash register tape shows cash sales of $2,500 and sales taxes of $200. The journal entry to record this information is a. Cash ............................................................................. 2,700 Sales Revenue .............................................................. 2,700 b. Cash ............................................................................. 2,700 Sales Tax Payable......................................................... 200 Sales Revenue .............................................................. 2,500 c. Cash ............................................................................. 2,500 Sales Tax Expense ............................................................. 200 Sales Revenue .............................................................. 2,700 d. Cash ............................................................................. 2,700 Sales Revenue .............................................................. 2,500 Sales Tax Revenue ....................................................... 200

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

108.

Al’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Al's Bookstore make to show the April remittance? a. Sales Tax Expense ............................................................. 750 Cash .............................................................................. 750 b. Sales Taxes Payable .......................................................... 750 Cash .............................................................................. 750 c. Sales Tax Expense ............................................................. 750 Sales Taxes Payable ..................................................... 750 d. No entry required.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

109.

Morgan Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $25,440. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes? a. $1,527 b. $1,440 c. $1,435 d. It cannot be determined.

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($25,440  1.06)  .06 = $1,440

110.

Norlan Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $29,400. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $1,400 b. $1,470 c. $70 d. It cannot be determined.

Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($29,400  1.05)  .05 = $1,400

Reporting and Analyzing Liabilities

111.

10-21

Tina's Boutique has total receipts for the month of $24,255 including sales taxes. If the sales tax rate is 5%, what are Tina's sales for the month? a. $23,043 b. $23,100 c. $24,255 d. It cannot be determined.

112.

Dominic's Salon has total receipts for the month of $30,210 including sales taxes. If the sales tax rate is 6%, what are Dominic's sales for the month? a. $28,398.30 b. $32,023.20 c. $28,500.00 d. It cannot be determined.

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,210  1.06 = $28,500

113.

The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $60,000 FICA taxes withheld 4,590 Income taxes withheld 12,500 Medical insurance deductions 2,250 Federal unemployment taxes 160 State unemployment taxes 1,080 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $60,000. b. credit to Salaries and Wages Payable for $60,000. c. debit to Salaries and Wages Payable for $60,000. d. debit to Salaries and Wages Expense for $40,660.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

114.

The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $60,000 FICA taxes withheld 4,590 Income taxes withheld 12,500 Medical insurance deductions 2,250 Federal unemployment taxes 160 State unemployment taxes 1,080 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $39,580. b. debit to Salaries and Wages Payable for $40,660. c. debit to Salaries and Wages Payable for $36,070. d. credit to Cash for $45,250.

10-22 115.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $60,000 FICA taxes withheld 4,590 Income taxes withheld 12,500 Medical insurance deductions 2,250 Federal unemployment taxes 160 State unemployment taxes 1,080 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $1,240. b. debit to Payroll Tax Expense for $5,830. c. credit to FICA Taxes Payable for $9,180. d. credit to Payroll Tax Expense for $1,240.

116.

The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $60,000 FICA taxes withheld 4,590 Income taxes withheld 12,500 Medical insurance deductions 2,250 Federal unemployment taxes 160 State unemployment taxes 1,080 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $160. b. debit to Federal Unemployment Taxes Expense for $160. c. credit to Payroll Tax Expense for $160. d. debit to Federal Unemployment Taxes Payable for $160.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

117.

Keller Company issued a five-year interest-bearing note payable for $200,000 on January 1, 2013. Each January the company is required to pay $40,000 on the note. How will this note be reported on the December 31, 2014, balance sheet? a. Long-term debt, $200,000 b. Long-term debt, $160,000 c. Long-term debt, $120,000; Long-term Debt due within one year, $40,000 d. Long-term debt of $160,000; Long-term Debt due within one year, $40,000

Reporting and Analyzing Liabilities

118.

10-23

The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $30,000 FICA taxes withheld 2,295 Income taxes withheld 6,600 Medical insurance deductions 1,200 Federal unemployment taxes 240 State unemployment taxes 1,500 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $30,000. b. credit to Salaries and Wages Payable for $30,000. c. debit to Salaries and Wages Payable for $30,000. d. debit to Salaries and Wages Expense for $19,905.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

119.

The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $30,000 FICA taxes withheld 2,295 Income taxes withheld 6,600 Medical insurance deductions 1,200 Federal unemployment taxes 240 State unemployment taxes 1,500 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $18,165. b. debit to Salaries and Wages Payable for $19,905. c. debit to Salaries and Wages Payable for $18,405. d. credit to Cash for $18,405.

120.

The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $30,000 FICA taxes withheld 2,295 Income taxes withheld 6,600 Medical insurance deductions 1,200 Federal unemployment taxes 240 State unemployment taxes 1,500 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $4,035. b. credit to Payroll Tax Expense for $4,035. c. credit to FICA Taxes Payable for $1,740. d. credit to Payroll Tax Expense for $1,740.

10-24 121.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $30,000 FICA taxes withheld 2,295 Income taxes withheld 6,600 Medical insurance deductions 1,200 Federal unemployment taxes 240 State unemployment taxes 1,500 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $240. b. credit to Federal Unemployment Taxes Expense for $240. c. credit to Payroll Tax Expense for $240. d. debit to Federal Unemployment Taxes Payable for $240.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

122.

The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $54,000 FICA taxes withheld 4,131 Income taxes withheld 11,880 Medical insurance deductions 783 Federal unemployment taxes 432 State unemployment taxes 2,700 The journal entry to record the monthly payroll on March 30 would include a a. debit to Salaries and Wages Payable for $34,074. b. credit to Salaries and Wages Payable for $37,206. c. debit to Salaries and Wages Expense for $54,000. d. debit to Salaries and Wages Expense for $34,074.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

123.

The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $54,000 FICA taxes withheld 4,131 Income taxes withheld 11,880 Medical insurance deductions 783 Federal unemployment taxes 432 State unemployment taxes 2,700 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Expense for $34,074. b. debit to Salaries and Wages Payable for $37,206. c. debit to Salaries and Wages Payable for $34,074. d. credit to Cash for $34,074.

Reporting and Analyzing Liabilities

124.

10-25

The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $54,000 FICA taxes withheld 4,131 Income taxes withheld 11,880 Medical insurance deductions 783 Federal unemployment taxes 432 State unemployment taxes 2,700 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $7,263 b. debit to Payroll Tax Expense for $19,143 c. credit to FICA Taxes Payable for $4,131. d. credit to Payroll Tax Expense for $7,263.

125.

The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $54,000 FICA taxes withheld 4,131 Income taxes withheld 11,880 Medical insurance deductions 783 Federal unemployment taxes 432 State unemployment taxes 2,700 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $432. b. debit to Federal Unemployment Taxes Expense for $432. c. credit to Payroll Tax Expense for $432. d. debit to Federal Unemployment Taxes Payable for $432.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

126.

Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Unearned Service Revenue Service Revenue d. Cash Sales Revenue

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10-26 127.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Julie Lambert 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 Lambert account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Unearned Service Revenue Service Revenue c. Prepaid Service Revenue Service Revenue d. No entry is required when the engagement is concluded.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

128.

Madson Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 75,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ............................................. 750,000 Subscription Revenue ................................................... 750,000 b. Cash ......................................................................... 750,000 Unearned Subscription Revenue ................................... 750,000 c. Subscriptions Receivable ............................................. 125,000 Unearned Subscription Revenue ................................... 125,000 d. Prepaid Subscriptions .................................................. 750,000 Cash .............................................................................. 750,000

129.

Mohling Company typically sells subscriptions on an annual basis, and publishes eight times a year. The magazine sells 45,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ............................................. 450,000 Subscription Revenue ................................................... 450,000 b. Cash ......................................................................... 450,000 Unearned Subscription Revenue ................................... 450,000 c. Subscriptions Receivable .............................................. 56,250 Unearned Subscription Revenue ................................... 56,250 d. Prepaid Subscriptions .................................................. 450,000 Cash .............................................................................. 450,000

130.

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that a. bond interest is deductible for tax purposes. b. interest must be paid on a periodic basis regardless of earnings. c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Liabilities

131.

10-27

If a corporation issued $8,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a. $4,000,000 b. $120,000 c. $400,000 d. $280,000

Ans: D, LO: 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: ($8,000,000  .05)  (1 − .30)= $280,000

132.

Secured bonds are bonds that a. are in the possession of a bank. b. can be converted into common stock. c. have specific assets of the issuer pledged as collateral. d. mature in installments.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

133.

A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. a bond certificate. b. a bond debenture. c. trading on the equity. d. a convertible bond.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

134.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

135.

Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected b. Earnings per share on common stock may be lower c. Tax savings result d. Each of these answer choices is an advantage.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

136.

Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. convertible bonds.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10-28 137.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Bonds that may be exchanged for common stock at the option of the bondholders are called a. options. b. stock bonds. c. convertible bonds. d. callable bonds.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

138.

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

139.

Bonds that are issued against the general credit of the borrower are called a. callable bonds. b. debenture bonds. c. secured bonds. d. term bonds.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

140.

Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

141.

Bonds are not always categorized as a. callable or convertible. b. term or serial. c. secured or unsecured. d. secured or debenture.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

142.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

143.

The contractual rate of interest is usually stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Liabilities

144.

10-29

When authorizing bonds to be issued, the board of directors does not specify the a. total number of bonds authorized to be sold. b. contractual interest rate. c. selling price. d. total face value of the bonds.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

145.

Bonds with a face value of $300,000 and a quoted price of 102¼ have a selling price of a. $360,675. b. $306,075. c. $300,675. d. $306,750.

146.

Bonds with a face value of $300,000 and a quoted price of 97¼ have a selling price of a. $291,750. b. $291,075. c. $291,006. d. $292,500.

147.

Bonds with a face value of $400,000 and a quoted price of 104¼ have a selling price of a. $417,000. b. $416,100. c. $401,700. d. $416,000.

148.

Bonds with a face value of $400,000 and a quoted price of 98½ have a selling price of a. $393,000. b. $392,200. c. $392,020. d. $394,000.

149.

The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10-30 150.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

All of the following statements regarding convertible bonds are true except a. if the market price of common stock increases substantially, bondholders with convertible bonds benefit. b. convertible bonds can be converted into common stock at the option of the issuing company. c. bondholders with convertible bonds receive interest on the bonds until conversion. d. convertible bonds sell at a higher price and pay a low rate of interest than those without the conversion option.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

151.

The contractual interest rate on a bond is often referred to as the a. callable rate. b. the maturity rate. c. market rate. d. stated rate.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

152.

If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at a. a premium. b. a discount. c. par. d. either a discount or premium.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

153.

If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated rate of interest is increased.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

154.

The interest expense recorded on an interest payment date is increased a. by the amortization of premium on bonds payable. b. by the amortization of discount on bonds payable. c. only if the bonds were sold at face value. d. only if the market rate of interest is less than the stated rate of interest on that date.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

155.

On January 1, 2014, $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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($2,000,000 − $1,940,000)  10]  12 = $500

Reporting and Analyzing Liabilities

156.

10-31

A corporation issues $200,000, 10%, 5-year bonds on January 1, 2014, for $191,600. 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, 2014’s adjusting entry is a. $21,680. b. $20,000. c. $18,320. d. $1,680.

157.

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined.

Ans: C, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

158.

On January 1, 2014, $2,000,000, 5-year, 10% bonds, were issued for $2,120,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize premium on bonds payable, the monthly amortization amount is a. $17,666. b. $24,000. c. $2,400. d. $2,000.

159.

A corporation issues $200,000, 8%, 5-year bonds on January 1, 2014, for $208,400. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in December 31, 2014’s adjusting entry is a. $14,320. b. $16,000. c. $17,680. d. $1,680.

160.

If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a. face value. b. a premium. c. a discount. d. an unknown amount.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

10-32 161.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest. b. lower than the market rate of interest. c. too low to attract investors. d. adjusted to a higher rate of interest.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

162.

The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual rate of interest is less than the market rate of interest. b. contractual rate of interest is greater than the market rate of interest. c. bond is convertible. d. contractual rate of interest is equal to the market rate of interest.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

163.

The market value (present value) of a bond is a function of all of the following except the a. dollar amounts to be received. b. maturity date. c. market interest rate. d. type of bonds.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

164.

Gomez Corporation issues 600, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 96. The journal entry to record the issuance will show a a. debit to Cash of $600,000. b. credit to Discount on Bonds Payable for $24,000. c. credit to Bonds Payable for $576,000. d. debit to Cash for $576,000.

165.

Yanik Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 97. The journal entry to record the issuance will show a a. debit to Cash of $4,000,000. b. debit to Discount on Bonds Payable for $120,000. c. credit to Bonds Payable for $3,880,000. d. credit to Cash for $3,880,000.

166.

Molina Corporation issues 4,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 103. The journal entry to record the issuance will show a a. debit to Cash of $4,000,000. b. debit to Premium on Bonds Payable for $120,000. c. credit to Bonds Payable for $4,000,000. d. credit to Cash for $4,120,000.

Reporting and Analyzing Liabilities

167.

10-33

The market rate of interest is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

168.

If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual rate of interest.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

169.

Selling the bonds at a premium has the effect of a. causing the total cost of borrowing to be higher than the bond interest paid. b. causing the total cost of borrowing to be lower than the bond interest paid. c. raising the effective interest rate above the state interest rate. d. increasing the amount of cash paid for interest each 6 months.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

170.

When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of a. interest paid over the life of the bond. b. interest paid over the life of the bond plus the amount of premium at sale point. c. interest paid over the life of the bond minus the amount of premium at sale point. d. premium at sale point.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

171.

The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the a. market rate of interest increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market rate of interest decreases, then bond prices will go up. d. contractual interest rate increases, the market rate of interest will decrease.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

172.

The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173.

Over the term of the bonds, the balance in the Discount on Bonds Payable account will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10-34 174.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

175.

In the balance sheet, the account Premium on Bonds Payable is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176.

In the balance sheet, the account Discount on Bonds Payable is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177.

Bond discount should be amortized to comply with a. the historical cost principle. b. the expense recognition principle. c. the revenue recognition principle. d. conservatism.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178.

Four thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is a. Cash ...................................................................... 4,080,000 Bonds Payable .............................................................. 4,080,000 b. Cash ...................................................................... 4,000,000 Premium on Bonds Payable ........................................... 80,000 Bonds Payable .............................................................. 4,080,000 c. Cash ...................................................................... 4,080,000 Premium on Bonds Payable .......................................... 80,000 Bonds Payable .............................................................. 4,000,000 d. Cash ...................................................................... 4,080,000 Discount on Bonds Payable........................................... 80,000 Bonds Payable .............................................................. 4,000,000

Reporting and Analyzing Liabilities

179.

10-35

Four thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance is a. Cash ...................................................................... 3,880,000 Bonds Payable .............................................................. 3,880,000 b. Cash ...................................................................... 3,880,000 Discount on Bonds Payable ......................................... 120,000 Bonds Payable .............................................................. 4,000,000 c. Cash ...................................................................... 3,880,000 Premium on Bonds Payable .......................................... 120,000 Bonds Payable .............................................................. 4,000,000 d. Cash ...................................................................... 4,000,000 Discount on Bonds Payable .......................................... 120,000 Bonds Payable .............................................................. 3,880,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

180.

The journal entry to record the issuance of bonds at a discount will include a a. debit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds plus the amount of the discount. c. debit to Cash for the face amount of the bonds minus the amount of the discount. d. credit to Cash for the face amount of the bonds.

Ans: C, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Solution: (4,000  $1,000)  .97 = $3,880,000

181.

If bonds have been issued at a discount, then over the life of the bonds the a. carrying value of the bonds will decrease. b. carrying value of the bonds will increase. c. interest expense will increase, if the discount is being amortized on a straight-line basis. d. unamortized discount will increase.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

182.

Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the amount of interest Winrow must pay the bondholders in 2013? a. $45,240 b. $48,000 c. $51,450 d. $44,550

10-36

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*183. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the amount of interest expense Winrow will show with relation to these bonds for the year ended December 31, 2014? a. $48,000 b. $45,240 c. $51,450 d. $44,550 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($600,000 − $565,500)  10 = $3,450; ($600,000  .08) + $3,450 = $51,450

*184. Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2015? a. $600,000 b. $572,400 c. $593,100 d. $568,950 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($600,000 − $565,500)  10]  2 = $6,900; $565,500 + $6,900 = $572,400

185.

Winrow Company received proceeds of $565,500 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. Winrow Company decided to redeem the bonds on January 1, 2015. What amount of gain or loss would Winrow report on its 2015 income statement? a. $27,600 gain b. $33,600 gain c. $33,600 loss d. $27,600 loss

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($600,000 − $565,500)  10 = $3,450; ($600,000  1.01) − [$565,500 + ($3,450  2)] = $33,600

186.

Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest Sparks must pay the bondholders in 2013? a. $33,840 b. $32,000 c. $32,640 d. $3,384

Reporting and Analyzing Liabilities

10-37

*187. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest expense Sparks will show with relation to these bonds for the year ended December 31, 2014? a. $32,000 b. $33,840 c. $29,700 d. $25,100 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($423,000 − $400,000)  10 = $2,300; ($400,000  .08) − $2,300 = $29,700

*188. Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2015? a. $400,000 b. $418,400 c. $381,600 d. $420,700 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($423,000 − $400,000)  10 = $2,300;

189.

Sparks Company received proceeds of $423,000 on 10-year, 8% bonds issued on January 1, 2013. The bonds had a face value of $400,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. Sparks Company decided to redeem the bonds on January 1, 2015. What amount of gain or loss would Sparks report on their 2015 income statement? a. $18,400 gain b. $10,400 gain c. $10,400 loss d. $18,400 loss

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($423,000 − $400,000)  10 = $2,300; ($400,000  1.02) − [$423,000 − ($2,300  2)] = $10,400

190.

Hogan Company has $1,000,000 of bonds outstanding. The unamortized premium is $14,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $4,400 gain b. $4,400 loss c. $10,000 gain d. $10,000 loss

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($1,000,000 + $14,400) − ($1,000,000  1.01) = $4,400

10-38 191.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The current carrying value of Kennett’s $600,000 face value bonds is $597,750. If the bonds are retired at 102, what would be the amount Kennett would pay its bondholders? a. $597,750 b. $600,000 c. $603,000 d. $612,000

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000  1.02 = $612,000

192.

Ervay Company has $875,000 of bonds outstanding. The unamortized premium is $12,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $3,850 gain b. $3,850 loss c. $8,750 gain d. $8,750 loss

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($875,000  1.01) − ($875,000 + 12,600) = $3,850

193.

The current carrying value of Pierce’s $900,000 face value bonds is $896,600. If the bonds are retired at 102, what would be the amount Pierce would pay its bondholders? a. $896,600 b. $900,000 c. $902,000 d. $918,000

194.

Hulse Corporation retires its $600,000 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 $622,470. The entry to record the redemption will include a a. credit of $22,470 to Loss on Bond Redemption. b. debit of $22,470 to Premium on Bonds Payable. c. credit of $7,530 to Gain on Bond Redemption. d. debit of $30,000 to Premium on Bonds Payable.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $622,470 − $600,000 = $22,470

195.

When bonds are retired before maturity, a. only a loss on redemption can be recorded. b. only a gain on redemption can be recorded. c. either a gain or a loss on redemption can be recorded. d. neither a gain nor a loss on redemption can be recorded.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Liabilities

196.

10-39

A $900,000 bond was retired at 98 when the carrying value of the bond was $888,000. The entry to record the retirement would include a a. gain on bond redemption of $12,000. b. loss on bond redemption of $6,000. c. loss on bond redemption of $12,000. d. gain on bond redemption of $6,000.

197.

A $750,000 bond was retired at 103 when the carrying value of the bond was $777,500. The entry to record the retirement would include a a. gain on bond redemption of $22,500. b. loss on bond redemption of $5,000. c. loss on bond redemption of $22,500. d. gain on bond redemption of $5,000.

198.

A $600,000 bond was retired at 98 when the carrying value of the bond was $618,000. The entry to record the retirement would include a a. gain on bond redemption of $18,000. b. loss on bond redemption of $18,000. c. loss on bond redemption of $30,000. d. gain on bond redemption of $30,000.

199.

Restoration Company issued bonds that had the following data associated with them: Interest to be paid is $40,000. Interest expense to be recorded is $45,000. Which of the following characteristics is true? a. The bonds are sold at a premium. b. After recording the interest expense, the amortization will decrease the bond carrying value. c. The difference between the interest expense and the interest to be paid is the bond's par value. d. After recording the interest expense, the amortization will increase the bond carrying value.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

200.

All of the following are true regarding financial statement analysis ratios associated with liabilities except a. a high times interest earned ratio indicates that a company is more likely to meet interest payments as scheduled. b. high liquidity ratios mean that lines of credit should be high to compensate. c. if a company's current ratio is lower than the industry average, then it may lack liquidity. d. unrecorded obligations causing sizeable differences between liquidity and solvency ratios can be ignored.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10-40 201.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

From an accounting standpoint, all of the following are contingencies that must be evaluated for off-balance sheet purposes except a. product warranties. b. general business risks. c. money-back guarantees for products. d. environmental cleanup obligations.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

202.

A measure of a company’s solvency is the a. acid-test ratio. b. current ratio. c. times interest earned. d. asset turnover ratio.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

203.

The times interest earned is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before interest expense and income taxes by interest expense.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

204.

In a recent year Garvey Corporation had net income of $100,000, interest expense of $20,000, and tax expense of $30,000. What was Garvey Corporation’s times interest earned for the year? a. 5.00 b. 6.00 c. 6.50 d. 7.50

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($100,000 + $20,000 + $30,000)  $20,000 = 7.50

205.

Liquidity ratios measure a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

206.

The relationship between current assets and current liabilities is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Liabilities

207.

10-41

In a recent year Hart Corporation had net income of $125,000, interest expense of $30,000, and tax expense of $40,000. What was Hart Corporation’s times interest earned for the year? a. 6.50 b. 4.17 c. 5.17 d. 5.50

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($125,000 + $30,000 + $40,000)  $30,000 = 6.50

208.

In a recent year Ley Corporation had net income of $150,000, interest expense of $30,000, and a times interest earned ratio of 8. What was Ley Corporation’s income before taxes for the year? a. $270,000 b. $240,000 c. $210,000 d. None of these answer choices are correct.

Ans: C, LO: 7, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (x + $30,000)  $30,000 = 8; x + $30,000 = $240,000; x = $210,000

209.

The adjusted trial balance for Hamilton Corp. at the end of the current year, 2014, contained the following accounts. 5-year Bonds Payable 8% $1,200,000 Bond Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries and Wages Payable 18,000 Taxes Payable (due 3/15 of next yr) 25,000 The total long-term liabilities reported on the balance sheet are a. $1,565,000 b. $1,550,000 c. $1,665,000 d. $1,650,000

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $120,000 + $100,000 + $165,000 + ($200,000 − $15,000) = $1,650,000

10-42 210.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The 2014 financial statements of Harper Co. contain the following selected data (in millions). Current assets $ 90 Total assets 160 Current liabilities 40 Total liabilities 75 Cash 8 Interest expense 5 Income taxes 10 Net income 16 The debt to assets ratio is a. 46.9%. b. 44.4%. c. 2.13%. d. 6.2 times.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $75  $160 = 46.9%

*211. Oliver Company issued $800,000 of 6%, 5-year bonds at 98. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $48,000 b. $24,000 c. $49,600 d. $51,200 Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($800,000  .06) + [($800,000  .02)  5] = $51,200

*212. Foley Company issued $800,000 of 6%, 5-year bonds at 98, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $240,000 b. $256,000 c. $224,000 d. $232,000 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($800,000  .06  5) + ($800,000  .02) = $256,000

*213. Neufeld Company issued $800,000 of 6%, 5-year bonds at 98, which pays interest 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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($800,000  .98) + [($800,000  .02)  5] = $787,200

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*214. Scribner Company issued $400,000 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. $32,000 b. $36,800 c. $27,200 d. $4,800 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($400,000  .08) − [($400,000  .06)  5] = $27,200

*215. Downs Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $184,000 b. $136,000 c. $112,000 d. $160,000 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($400,000  .08  5) − ($400,000  .06) = $136,000

*216. Morales Company issued $400,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $424,000 b. $421,600 c. $419,200 d. $426,400 Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($400,000  1.06) − [($400,000  .06)  5] = $419,200

*217. Larson Company issued $750,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, what is the amount of the amortization at each interest payment point? a. $4,500 b. $9,000 c. $60,000 d. $51,000 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [$750,000  (1.06 − 1.00)]  5 = $9,000

*218. Parker Company issued ten-year, 9%, bonds payable in 2014 at a premium. During 2014, the company’s accountant failed to amortize any of the bond premium. The omission of the premium amortization will a. not affect net income for 2014. b. cause retained earnings at the end of 2014 to be overstated. c. cause net income for 2014 to be overstated. d. cause net income for 2014 to be understated. Ans: D, LO: 8, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*219. When the straight-line method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by a. adding the amount of premium amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of premium amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: B, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*220. When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by a. adding the amount of discount amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of discount amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: A, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*221. On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a a. debit to Interest Expense, $120,000. b. debit to Interest Expense, $240,000. c. credit to Discount on Bonds Payable, $16,000. d. credit to Discount on Bonds Payable, $8,000. Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [$2,000,000  (1.00 − .96)]  5 = $16,000

*222. On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period? a. $1,968,000 b. $1,952,000 c. $1,888,000 d. $1,856,000 Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($2,000,000  .96) + [($2,000,000  .04)  3/5] = 1,968,000

223.

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 that the interest to be paid. b. interest expense in the earlier years of the bond's life will be the same as interest to be paid. c. unamortized discount is subtracted from the face value of the bond to determine its carrying value. d. unamortized discount is added to the face value of the bond to determine its carrying value.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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10-45

224.

The following partial amortization schedule is available for Courtney Company who sold $500,000, five-year, 10% bonds on January 1, 2014 for $520,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2014 $20,000 $520,000 January 1, 2015 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (i)? a. $52,000 b. $54,000 c. $50,000 d. $10,000

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000  .10 = 50,000

225.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($500,000  .10) − ($20,000  5) = $46,000

226.

The following partial amortization schedule is available for Courtney Company who sold $500,000, five-year, 10% bonds on January 1, 2014 for $520,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2014 $20,000 $520,000 January 1, 2014 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (iii)? a. $10,000 b. $20,000 c. $4,000 d. $2,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

227.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $20,000 − ($20,000  5) = $16,000

228.

229.

Which of the following statements regarding the effective interest method of accounting for bonds characteristics is false? a. GAAP 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 bond, the carrying value increases for discounted bonds when using the effective interest method. d. The effective interest method applies a constant percentage to the bond carrying value to compute interest expense.

Ans: B, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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10-47

*230. On January 1, Weatherholt Inc. issued $4,000,000, 9% bonds for $3,756,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jean Loptein uses the effective-interest method of amortizing bond discount. At the end of the first year, Weatherholt should report unamortized bond discount of a. $219,600. b. $228,400. c. $206,440. d. $204,000. Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($3,756,000  .10) − ($4,000,000  .09) = $15,600; [($4,000,000 − $3,756,000) − $15,600] = $228,400

*231. On January 1, Thompson 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. $376,743. c. $385,955. d. $420,000. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $3,216,288  .12 = $385,955

*232. Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. What amount of discount (to the nearest dollar) should be amortized for the first interest period? a. $112,710 b. $54,520 c. $72,770 d. $36,384 Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($3,454,800  .08) − ($4,000,000  .06) = $36,384

*233. Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a a. debit to Bond Interest Expense for $240,000. b. credit to Cash for $276,385. c. credit to Discount on Bonds Payable for $36,384. d. debit to Bond Interest Expense for $320,000. Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($3,454,800  .08) − ($4,000,000  .06) = $36,384

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*234. Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 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. $277,110 b. $276,384 c. $275,655 d. $240,000 Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,454,800  .08 = $276,384

*235. Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry to be recorded at the end of the second year for the payment of interest and the amortization of discount will include a a. debit to Bond Interest Expense for $240,000. b. credit to Cash for $279,295. c. credit to Discount on Bonds Payable for $36,384. d. credit to Discount on Bonds Payable for $39,295. Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($3,454,800  .08) − ($4,000,000  .06) = $36,384; [($3,454,800  $36,384)  .08] − $240,000 = $39,295

*236. When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the a. face value of the bonds at the beginning of the period by the contractual interest rate. b. face value of the bonds at the beginning of the period by the effective interest rate. c. carrying value of the bonds at the beginning of the period by the contractual interest rate. d. carrying value of the bonds at the beginning of the period by the effective interest rate. Ans: D, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*237. The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that a. is less than the amount of cash to be paid for interest for the period. b. exceeds the amount of cash to be paid for interest for the period. c. equals the amount of cash to be paid for interest for the period. d. has no predictable relationship with the amount of cash to be paid for interest for the period. Ans: A, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*238. The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n) a. interest rate that is close to the market interest rate. b. uniform rate of interest. c. more variable interest rate. d. interest rate that increases or decreases slightly over time. Ans: B, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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10-49

*239. Which of the following statements best describes the behavior over time of the components of equal mortgage payments? a. The proportion of interest expense to payment of principal remains the same. b. Interest expense increases and payment of principal decreases. c. Payment of principal increases and interest expense decreases. d. Both payment of principal and interest expense decrease. Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*240. Thayer Company purchased a building on January 2 by signing a long-term $2,520,000 mortgage with monthly payments of $23,100. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Cash account for $2,520,000. b. credit to the Cash account for $2,520,000. c. debit to the Mortgage Payable account for $2,520,000. d. credit to the Mortgage Payable account for $2,520,000. Ans: D, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,520,000 face value

*241. Thayer Company purchased a building on January 2 by signing a long-term $2,520,000 mortgage with monthly payments of $23,100. 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 $23,100. b. credit to the Cash account for $21,000. c. debit to the Interest Expense account for $21,000. d. credit to the Mortgage Payable account for $23,100. Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $23,100 − [($2,520,000  .10)  12] = $21,000

*242. Thayer Company purchased a building on January 2 by signing a long-term $2,520,000 mortgage with monthly payments of $23,100. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. $2,520,000. b. $2,517,900. c. $2,499,000. d. $2,496,900. Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,520,000 − [$23,100 − ($2,520,000  .10  1/12)] = $2,517,900

*243. Collins Company borrowed $750,000 from BankTwo on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $195,327 and carried an annual interest rate of 9.5%. What is the amount of expense Collins must recognize on its 2014 income statement? a. $71,250. b. $59,463. c. $52,693. d. $46,555. Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000  .095 = $71,250; [$750,000 − ($195,327 − $71,250)]  .095 = $59,463

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*244. Collins Company borrowed $750,000 from BankTwo on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $195,327 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2014? a. $750,000 b. $490,059 c. $625,923 d. $607,500 Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000  .095 = $71,250; $750,000 − ($195,327 − $71,250) = $625,923; $625,923 − (195,327 − $59,463) = $490,059

*245. Fornelli Corporation borrowed $480,000 from Central Bank on May 31, 2013. The threeyear, 7% note required annual payments of $182,904 beginning May 31, 2014. Interest expense for the year ended December 31, 2013 was a. $19,600. b. $22,400. c. $33,600. d. $0. Ans: A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $480,000  .07  7/12 = $19,600

*246. Fornelli Corporation borrowed $480,000 from Central Bank on May 31, 2013. The threeyear, 7% note required annual payments of $182,904 beginning May 31, 2014. The total amount of interest to be paid over the life of the loan is a. $33,600. b. $68,712. c. $134,082. d. $100,800. Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($182,904  3) − $480,000 = $68,712

*247. Wolford Company borrowed $1,000,000 from U.S. Bank on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $260,436 and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must recognize on its 2014 income statement? a. $95,000 b. $79,284 c. $70,259 d. $62,073 Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000  .095 = $95,000; [$1,000,000 − ($260,436 − $95,000)]  .095 = $79,284

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*248. Wolford Company borrowed $1,000,000 from U.S. Bank on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $260,436 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2014? a. $1,000,000 b. $653,412 c. $834,564 d. $810,000 Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000  .095 = $95,000; $1,000,000 − ($260,436 − $95,000) = $834,564

*249. Sielert Corporation borrowed $900,000 from National Bank on May 31, 2013. The threeyear, 7% note required annual payments of $342,945 beginning May 31, 2014. Interest expense for the year ended December 31, 2013 was a. $36,750. b. $42,000. c. $63,000. d. $0. Ans: A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $900,000  .07  7/12 = $36,750

*250. Sielert Corporation borrowed $900,000 from National Bank on May 31, 2013. The threeyear, 7% note required annual payments of $342,945 beginning May 31, 2014. The total amount of interest to be paid over the life of the loan is a. $63,000. b. $128,835. c. $251,403. d. $189,000. Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($342,945  3) − $900,000 = $128,835

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-52

Answers to Multiple Choice Questions 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.

c a a a a d d c c a b a b b c b c c b c d a c d b c c

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.

b b d d d b d c b c d d b b b b a b c a b b a c a b a

121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138 139 140. 141. 142. 143. 144. 145. 146. 147.

a c b a a a b b b b d c a b b a c a b b a b d c d a a

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. 173. 174.

d b b d b c b d a c d a b a a d d b c b b b c c c b b

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.

a b b c b c b b c b c b c b b a d a d b c d d d d b b

202. 203. 204. 205. 206. 207. 208. 209. 210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221. *222. *223. *224. *225. *226. *227. *228.

c d d c b a c d a d b c c b c b d b a c a c c b c d c

*229. *230. *231. *232. *233. *234. *235. *236. *237. *238. *239. *240. *241. *242. *243. *244. *245. *246. *247. *248. *249. *250.

b b c d c b d d a b c d c b b b a b b b a b

Reporting and Analyzing Liabilities

10-53

BRIEF EXERCISES Be. 251 Steiner Sales Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 65,000 Notes Payable, 3-month 50,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 6% 80,000 Payroll Tax Expense 4,000 Interest Payable 3,000 Mortgage Payable 120,000 Sales Taxes Payable 38,000 Instructions Prepare the current liability section of Steiner Sales Company's balance sheet, assuming $15,000 of the mortgage is payable next year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 251

(5-8 min.) STEINER SALES COMPANY

Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Sales Taxes payable Interest payable Total current liabilities

$ 15,000 50,000 65,000 38,000 3,000 $171,000

Be. 252 On April 1, Holton Company borrows $100,000 from West Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Holton Company. (a) Prepare the entry on April 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10-54

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 252

(5-8 min.)

(a)

Cash .......................................................................... Notes Payable ...................................................

100,000

Interest Expense ........................................................ Interest Payable ................................................. ($100,000 × 6% × 3 ÷ 12)

1,500

(b)

April

June 30

100,000

1,500

Be. 253 Peterson Company billed its customers a total of $840,000 for the month of November. The total includes a 5% state sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 253

(5 min.)

(a)

$840,000 ÷ 1.05 = $800,000 is the total sales revenue.

(b)

$800,000  .05 = $40,000 is the state sales tax liability. Journal Entry: Accounts Receivable ................................................................... Sales Revenue.................................................................... Sales Taxes Payable ..........................................................

840,000 800,000 40,000

Be. 254 Manuel Company had cash sales of $86,800 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 254

(3 min.)

Cash ........................................................................................... Sales Revenue.................................................................... Sales Taxes Payable ..........................................................

86,600 80,000 6,800

Be. 255 Mantle Publications publishes a golf magazine for women. The magazine sells for $4.00 a copy on the newsstand. Yearly subscriptions to the magazine cost $36 per year (12 issues). During December 2013, Expert Publications sells 4,000 copies of the golf magazine at newsstands and receives payment for 6,000 subscriptions for 2014. Financial statements are prepared monthly.

Reporting and Analyzing Liabilities

10-55

Instructions (a) Prepare the December 2013 journal entries to record the newsstand sales and subscriptions received. (b)

Prepare the necessary adjusting entry on January 31, 2014. The January 2014 issue has been mailed to subscribers.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 255 (a)

(b)

(5 min.)

Cash ........................................................................................... Sales Revenue ...................................................................

16,000

Cash (6,000  $36)...................................................................... Unearned Subscription Revenue ........................................

216,000

16,000 216,000

$216,000 ÷ 12 months = $18,000 Unearned Subscription Revenue ................................................. Subscription Revenue.........................................................

18,000 18,000

Be. 256 The board of directors of Lauber Corporation are considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open market. Lauber Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased. Instructions Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 256

(10 min.) Plan #1 Issue Bonds $500,000 300,000 200,000 60,000 $140,000

Plan #2 Issue Stock $500,000 — 500,000 150,000 $350,000

Outstanding shares

100,000

300,000

Earnings per share

$1.40

$1.17

Income before interest taxes Interest expense ($5,000,000 × 6%) Income before taxes Income taxes (30%) Net income

10-56

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 257 On January 1, 2014, Hannigan Company issued bonds with a face value of $600,000. The bonds carry a stated interest of 7% payable each January 1. a. Prepare the journal entry for the issuance assuming the bonds are issued at 97. b. Prepare the journal entry for the issuance assuming the bonds are issued at 102. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 257 (a)

(b)

(5 min.)

Cash ........................................................................................... Discount on Bonds Payable ......................................................... Bonds Payable ....................................................................

582,000 18,000

Cash ........................................................................................... Bonds Payable .................................................................... Premium on Bonds Payable. ...............................................

612,000

600,000 600,000 12,000

Be. 258 On January 1, 2014, Hauke Corporation issued $900,000, 6%, 10-year bonds at face value. Interest is payable annually on January 1. Hauke Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2014. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 258 2014 Jan. 1

Dec. 31

(6-10 min.)

Cash ................................................................................... Bonds Payable ...........................................................

900,000

Interest Expense ................................................................. Interest Payable .........................................................

54,000

900,000

54,000

*Be. 259 Mintz Company issued $400,000, 10%, 10-year bonds on January 1, 2014, at 105. Interest is payable annually. Mintz uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2014 related to the bond issue. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Liabilities

*Solution 259 2014 Jan. 1

Dec. 31

10-57

(5-8 min.)

Cash .................................................................................. Bonds Payable ........................................................... Premium on Bonds Payable .......................................

420,000

Interest Expense ................................................................. Premium on Bonds Payable ............................................... Cash .......................................................................... ($400,000 × 10% = $40,000) ($20,000 × 1/10 = $2,000)

38,000 2,000

400,000 20,000

40,000

*Be. 260 Frye Company issued $700,000, 10%, 10-year bonds on January 1, 2014, at 105. Interest is payable annually. Frye uses the effective-interest method of amortization and has a calendar year end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2014 related to the bond issue. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 260 2014 Jan. 1

Dec. 31

(5-8 min.)

735,000

Interest Expense ................................................................. Premium on Bonds Payable ............................................... Cash .......................................................................... ($735,000 × 8% = $58,800) ($700,000 × 10% = $70,000) ($70,000 – $58,800 = $11,200)

58,800 11,200

700,000 35,000

70,000

10-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

EXERCISES Ex. 261 Brewer Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 55,000 Notes Payable, 3-month 90,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 8% 75,000 Payroll Taxes Expense 6,000 Interest Payable 5,000 Mortgage Payable 180,000 Sales Taxes Payable 23,000 Instructions (a) Prepare the current liability section of Brewer Company's balance sheet, assuming $12,000 of the mortgage is payable next year. (b) Comment on Brewer’s liquidity, assuming total current assets are $450,000. Ans: N/A, LO: 1,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 261 (a)

(10 min.) BREWER COMPANY

Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Sales taxes payable Interest payable Total current liabilities (b)

$ 12,000 90,000 55,000 23,000 5,000 $185,000

The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be $265,000 of current assets (working capital). The current ratio is 2.43 : 1 and it appears as though Brewer Company has sufficient current resources to meet current obligations when due.

Ex. 262 On March 1, Cooper Company borrows $80,000 from New National Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Cooper 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 semiannual financial statements. Assume no other interest accrual entries have been made.

(c)

Prepare the entry to record payment of the note at maturity.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Liabilities

Solution 262

(10 min.)

Cash .......................................................................... Notes Payable ...................................................

80,000

Interest Expense ........................................................ Interest Payable ................................................ ($80,000 × 6% × 4 ÷ 12)

1,600

Notes Payable............................................................ Interest Payable ......................................................... Interest Expense ........................................................ Cash..................................................................

80,000 1,600 800

(b)

(c)

March 1

June 30

Sept. 1

10-59

80,000

1,600

82,400

Ex. 263 On June 1, Huntley Company borrows $50,000 from the bank by signing a 60-day, 6%, interestbearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Huntley Company. (a)

Prepare the entry on June 1 when the note was issued.

(b)

Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.

(c)

Prepare the entry to record payment of the note at maturity.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 263

(10 min.)

(a)

Cash .......................................................................... Notes Payable ...................................................

50,000

Interest Expense ........................................................ Interest Payable ................................................ ($50,000 × 6% ÷ 12)

250

50,000 250 250

(b)

(c)

June 1

June 30

July 31

50,000

250

50,500

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-60 Ex. 264

On May 15, Holt's Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $1,200. Instructions (a) Determine the amount borrowed by Holt's. (b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of interest owed was $900? (c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a). Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 264

(8 min.)

(a)

Principal  .08  4/12 = $1,200 Principal = $1,200  (.08  4/12) Principal = $45,000

(b)

$54,000  Interest rate  4/12 = $900 Interest Rate = $900  ($54,000  4/12) Interest Rate = 5 percent

(c)

Initial Borrowing: May 15 Cash ………………………………… 45,000 Notes Payable…………..

Repayment: Sept. 15

Notes Payable …………………..… Interest Expense ………………….. Cash …………………….

45,000

45,000 1,200 46,200

Ex. 265 In providing accounting services to small business, you encounter the following situations pertaining to cash sales. (1) Kushner Company rings up sales and sales taxes separately on its cash register. On April 10 the register totals are sales $40,000 and sales taxes $2,800. (2) Grant Company does not segregate sales and sales taxes. Its register total for April 15 is $22,260, which includes a 6% sales tax. Instructions Prepare the entries to record the sales transactions and related taxes for (a) Kushner Company and (b) Grant Company. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Liabilities

Solution 265

(5 min.)

Apr. 10

Cash

KUSHNER COMPANY 42,800 Sales Revenue Sales Taxes Payable

10-61

40,000 2,800

GRANT COMPANY 15

Cash

22,260 Sales Revenue ($22,260  1.06) Sales Taxes Payable ($22,260 – $21,000)

21,000 1,260

Ex. 266 During the month of March, Preston Company's employees earned wages of $90,000. Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost related to these earnings for federal unemployment tax, but incurred $1,300, for state unemployment tax. Instructions (a) Prepare the necessary March 31 journal entry to record wages expense and wages payable. Assume that wages earned during March will be paid during April. (b) Prepare the entry to record the company's payroll tax expense. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 266 (a)

(b)

Mar. 31

(5 min.) Salaries and Wages Expense .............................. FICA Taxes Payable....................................... Federal Income Taxes Payable .................... State Income Taxes Payable .......................... Union Dues Payable ....................................... Salaries and Wages Payable .........................

90,000

Payroll Tax Expense ............................................ FICA Taxes Payable....................................... State Unemployment Taxes Payable ............

8,185

6,885 14,200 6,200 600 62,115 6,885 1,300

10-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 267 Presented below are two independent situations: (a)

Morten Corporation purchased $480,000 of its bonds on June 30, 2014, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $431,100. The bonds pay annual interest and the interest payment due on June 30, 2014, has been made and recorded.

(b) McEvoy, Inc., purchased $330,000 of its bonds at 96 on June 30, 2014, and immediately retired them. The carrying value of the bonds on the retirement date was $321,000. The bonds pay annual interest and the interest payment due on June 30, 2014, has been made and recorded. Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 267

(10-13 min.)

(a) June 30

Bonds Payable ............................................................ Loss on Bond Redemption .......................................... Discount on Bonds Payable .............................. Cash ................................................................. ($480,000 – $431,100 = $48,900) ($480,000 × 1.02 = $489,600)

480,000 58,500

Bonds Payable ............................................................ Discount on Bonds Payable .............................. Gain on Bond Redemption ................................ Cash ................................................................. ($330,000 – $321,000 = $9,000) ($330,000 × 96% = $316,800)

330,000

(b) June 30

48,900 489,600

9,000 4,200 316,800

Ex. 268 The adjusted trial balance for Helton Corporation at the end of 2014 contained the following accounts: Bonds payable, 10% ........................................................... $500,000 Interest payable .................................................................. 20,000 Discount on bonds payable ................................................. 30,000 Notes payable, 9%, due 2016 ............................................. 70,000 Accounts payable ............................................................... 120,000 Instructions (a)

Prepare the long-term liabilities section of the balance sheet.

(b)

Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Liabilities

Solution 268 (a)

(b)

10-63

(4-7 min.)

Long-term liabilities Bonds payable 10% Less: Unamortized bond discount Notes payable, 9% Total long-term liabilities

$500,000 30,000

$470,000 70,000 $540,000

Interest payable and accounts payable should be classified as current liabilities.

Ex. 269 Hensley, Inc. reports the following liabilities (in thousands) on its January 31, 2014, balance sheet and notes to the financial statements. Accounts payable Accrued pension liability Property taxes payable Bonds payable Current portion of long-term debt Income taxes payable Notes payable—long-term Operating leases Mortgage payable Federal income taxes payable Salaries and wages payable Unused operating line of credit Warranty liability— current

$3,463.9 1,215.2 1,158.1 1,961.2 1,992.2 235.2 9,246.7 1,641.7 435.6 558.1 2,563.6 3,337.6 1,617.3

Instructions Prepare the liabilities section of Hensley's balance sheet as at January 31, 2014. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 269

(8 min.) HENSLEY INC. (Partial) Balance Sheet January 31, 2014 (in thousands)

Current liabilities Accounts payable ............................................... Salaries and wages payable ............................... Current portion of long-term debt ........................ Warranty liability ................................................. Property taxes payable ....................................... Federal income taxes payable ............................ Income taxes payable......................................... Total current liabilities .................................

$3,463.9 2,563.6 1,992.2 1,617.3 1,158.1 558.1 235.2 $11,588.4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-64

Solution 269

(Cont.)

Long-term liabilities Notes payable, long-term ................................... Bonds payable ................................................... Accrued pension liability .................................... Mortgage payable .............................................. Total long-term liabilities.............................. Total liabilities .................................................................

$9,246.7 1,961.2 1,215.2 435.6 12,858.7 $24,447.1

Ex. 270 McDonald's financial statements contain the following selected data (in millions). Current assets Total assets Current liabilities Total liabilities

$ 3,881.9 29,391.7 4,498.5 13,611.9

Interest expense Income taxes Net Income

410.1 1,237.1 2,395.1

Instructions (a) Compute the following values and provide a brief interpretation of each. (1) Working capital. (3) Debt to assets ratio. (2) Current ratio. (4) Times interest earned. (b) The notes to McDonald's financial statements show that subsequent to this year the company will have future minimum lease payments under operating leases of $10,513.8 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $9,400 million. Recompute the debt to assets ratio after adjusting for this. Discuss your result. Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 270 (a) (1) (2) (3) (3)

(10 min.)

Working capital = $3,881.9 – $4,498.5 = - $616.6 Current ratio = $3,881.9  $4,498.5 = .86:1 Debt to assets ratio = $13,611.9  $29,391.7 = 46% Times interest earned = ($2,395.1 + $1,237.1 + $410.1)  $410.1 = 9.86 times

A current ratio that is less than 1.00 indicates lower liquidity. The debt to assets ratio indicates that $.46 of each dollar of asset have been financed by creditors. The times interest earned of almost 10 times indicated that McDonald's income is large enough to make required interest payments as they come due. (b) Debt to assets ratio, adjusted for off-balance-sheet lease obligations. $13,611.9 + $9,400 = 59% $29,391.7 + $9,400 By including these off-balance-sheet obligations the debt to assets ratio increases from 46% to 59%, suggesting that McDonald's is not as solvent as it first appears. .

Reporting and Analyzing Liabilities

10-65

*Ex. 271 Renfro Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the straight-line method is used for amortization. Assume that the market rate for similar investments is 7%. The bonds are issued on the date of the bonds. a. b. c. d. e.

What amount was received for the bonds? How much interest is paid each interest period? What is the premium amortization for the first interest period? How much interest expense is recorded on the first interest date? What is the carrying value of the bonds after the first interest date?

Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 271

(10-12 min.)

a. b. c. d. e.

($300,000 × 1.02) ($300,000 × .08) [($306,000 – $300,000)/10] ($24,000 – $600) ($306,000 – $600)

$306,000 $24,000 $600 $23,400 $305,400

*Ex. 272 On January 1, 2014, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2014, at 95. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Powell Corporation would make related to this bond issue through January 1, 2015. Be sure to indicate the date on which the entries would be made. Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 272

(5 min.)

January 1, 2014 Cash ........................................................................................ Discount on Bonds Payable ........................................................ Bonds Payable ................................................................... (To record sale of bonds at a discount)

570,000 30,000 600,000

December 31, 2014 Interest Expense ......................................................................... 36,000 Discount on Bonds Payable ................................................ Interest Payable .................................................................. (To record annual accrued bond interest and amortization of bond discount) January 1, 2015 Interest Payable ......................................................................... Cash .................................................................................. (To record payment of bond interest liability)

6,000 30,000

30,000 30,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-66 *Ex. 273

Grand Company issued $800,000, 10%, 20-year bonds on January 1, 2014, at 104. Interest is payable annually on January 1. Grand uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2014 related to the bond issue. Ans: N/A, LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 273 2014 Jan. 1

Dec. 31

(5 min.)

Cash ................................................................................... Bonds Payable ........................................................... Premium on Bonds Payable .......................................

832,000

Interest Expense ................................................................. Premium on Bonds Payable ................................................ Interest Payable ......................................................... ($800,000 × 10% = $80,000) ($32,000 × 1/20 = $1,600)

78,400 1,600

800,000 32,000

80,000

*Ex. 274 Garrison Company issued $2,000,000, 7%, 20-year bonds on January 1, 2014, at 105. Interest is payable annually on January 1. Garrison uses straight-line amortization for bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The accrual of interest and the premium amortization on December 31, 2014. (c) The payment of interest on January 1, 2015. (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 274 (a)

(b)

2014 Jan.

(7 min.) 1

Dec. 31

Cash ($2,000,000  105%) ........................ Bonds Payable .................................. Premium on Bonds Payable ...............

2,100,000

Interest Expense ......................................... Premium on Bonds Payable ($100,000  1/20) ...................................... Interest Payable ($2,000,000  7%)...........................

135,000

2,000,000 100,000

5,000 140,000

Reporting and Analyzing Liabilities

*Solution 274 (c)

(d)

2015 Jan.

2034 Jan.

10-67

(Cont.) 1

Interest Payable ........................................... Cash .....................................................

140,000

Bonds Payable ............................................. Cash .....................................................

2,000,000

140,000

2,000,000

*Ex. 275 Shannon Company issued $1,000,000, 8%, 10-year bonds on December 31, 2013, for $960,000. Interest is payable annually on December 31. Shannon uses the straight-line method to amortize bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The payment of interest and the discount amortization on December 31, 2014. (c) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 275 (a)

(b)

(c)

2013 Dec. 31

2014 Dec. 31

2023 Dec. 31

(5 min.) Cash............................................................. Discounts of Bonds Payable .......................... Bonds Payable ..................................

960,000 40,000

Interest Expense .......................................... Discount on Bonds Payable ($40,000  1/10) ................................ Cash ($1,000,000  8%) ........................

84,000

Bond Payable .............................................. Cash ....................................................

1,000,000

4,000 80,000

1,000,000

*Ex. 276 Wynne Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the effective interest method is used for amortization. Assume that the market rate for similar investments is 8%. The bonds are issued on the date of the bonds. a. b. c. d. e.

Ans: N/A, LO: 3, 9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

10-68

*Solution 276 a. b. c. d. e.

$972,000 $90,000 $12,240 $77,760 $959,760

(10-12 min.) ($900,000 × 1.08) ($900,000 ×.10) [$90,000 – ($972,000 × .08)] ($972,000 × .08) ($972,000 – $12,240)

*Ex. 277 Moon Company issued $500,000, 10%, 5-year bonds on January 1, 2014, at 106. Interest is payable annually on January 1. Moon uses the effective-interest method of amortization and has a calendar year end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2014 related to the bond issue. Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 277 2014 Jan. 1

Dec. 31

(12-17 min.)

530,000

Interest Expense ................................................................. Premium on Bonds Payable ................................................ Interest Payable ......................................................... ($530,000 × 8% = $42,400) ($500,000 × 10% = $50,000) ($50,000 – $42,400 = $7,600)

42,400 7,600

500,000 30,000

50,000

*Ex. 278 Perez Co. receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to finance the construction of a building at December 31, 2014. The terms provide for semiannual installment payments of $140,820 on June 30 and December 31. Instructions Prepare the journal entries to record the mortgage loan and the first two installment payments. Ans: N/A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 278 2014

2015

Dec.

June

(7 min.) 31

Issuance of Note Cash .................................................. Mortgage Payable ........................ First Installment Payment Interest Expense ($2,200,000  8%  6/12)................... Mortgage Payable.................................. Cash .............................................. .

2,200,000 2,200,000

88,000 52,820 140,820

Reporting and Analyzing Liabilities

*Solution 278 Dec.

10-69

(Cont.) 31

Second Installment Payment Interest Expense [($2,200,000 – $52,820)  8%  6/12)] Mortgage Payable ................................. Cash ...............................................

85,887 54,933 140,820

COMPLETION STATEMENTS 279. A current liability is a debt that can be expected to be paid within ____________ year(s) or the ______________, whichever is longer. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

280. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

281. Obligations in written form are called ______________ and usually require the borrower to pay interest. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

282. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

283. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

284. Payroll taxes include the employer’s share of ________________ taxes and both state and federal ________________ taxes. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

285. Bonds that mature at a single specified future date are called _________________ bonds, whereas bonds that mature in installments are called __________________ bonds. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

286. The terms of a bond issue are set forth in a formal legal document called a bond ________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

287. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

288. The market price of bonds is obtained by computing the present value of the ________________ paid at maturity, and all ________________ payments to be made over the term of the bond. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

289. If bonds are issued at face value (par), it indicates that the ________________ rate of interest must be equal to the ________________ rate of interest. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

290. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

291. If bonds were issued at a premium, then the contractual rate of interest was _______________ than the market rate of interest. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

292. Discount on Bonds Payable is ________________ (“deducted from” or “added to”) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (“deducted from” or “added to”) bonds payable on the balance sheet. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

293. The ________________ provides an indication of a company’s ability to meet interest payments as they come due. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*294. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method. Ans: N/A, LO: 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 279. 280. 281. 282. 283. 284. 285. 286.

one, operating cycle current, long-term notes payable face value, interest current liability FICA, unemployment term, serial indenture

287. 288. 289. 290. 291. 292. 293. *294.

debenture principal, interest stated (contractual), market (effective) 970,000 greater deducted from, added to times interest earned straight-line

Reporting and Analyzing Liabilities

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MATCHING 295. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Serial bonds Debenture bonds Bond indenture Market interest rate Discount on bonds payable

F. G. H. I. J.

Current ratio Straight-line method of amortization Times interest earned Callable bonds Maturity date

____

1. Bonds subject to retirement at a stated dollar amount prior to maturity.

____

2. A legal document that sets forth the terms of a bond issue.

____

3. Bonds that mature in installments.

____

4. A measure of a company’s short-term liquidity.

____

5. The time that the final payment on a bond is due from the bond issuer.

____

6. A measure of a company’s solvency.

____

7. The rate investors demand for loaning funds to a corporation.

____

8. Unsecured bonds issued against the general credit of the borrower.

____

9. Occurs when the contractual rate of interest is less than the market rate of interest.

____ 10. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A, LO: 4,5,7,8, 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.

I C A F J

6. 7. 8. 9. 10.

H D B E G

SHORT-ANSWER ESSAY QUESTIONS S-A E 296 (a) (b)

Identify three taxes commonly paid by employers on employees' salaries and wages. Where in the financial statements does the employer report taxes withheld from employees' pay?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 296 (a) (b)

Three taxes commonly paid by employers on employees' salaries and wages are (1) Social Security (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes. Taxes withheld from employees' gross pay and not yet remitted to the appropriate government agency are reported in the balance sheet as current liabilities.

S-A E 297 (a) (b)

What is a convertible bond? Discuss the advantages of a convertible bond from the standpoint of the bondholders and of the issuing corporation.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 297 (a) (b)

A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. For the issuer, convertible bonds usually have: (1) a lower rate of interest than other debt securities, (2) a higher selling price.

S-A E 298 When determining the value of a bond using present value, what are the two components used in the calculation? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 298 One component is the periodic interest payments over the life of the bonds discounted using the market interest rate to calculate its present value. The other component is the present value of the single payment at maturity also based on the market interest rate. S-A E 299 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 299 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 300 Bonds are frequently issued at amounts greater or less than face value. Describe how the market rate of interest, relative to the contractual rate of interest, affects the selling price of bonds. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Reporting and Analyzing Liabilities

10-73

Solution 300 The market rate of interest often is different from the contractual rate of interest and therefore bonds are frequently issued at amounts greater or less than face value. When the market rate of interest is higher than the contractual rate, investors can find better investments elsewhere 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 rate of interest is less than the contractual rate, there will be greater demand for the bonds because of the higher rate of interest. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. S-A E 301 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 301 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. S-A E 302 (a) (b)

In general, what are the requirements for the financial statement presentation of long-term liabilities? What ratios may be computed to evaluate a company's liquidity and solvency?

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 302 (a)

(b)

The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the financial statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral. To evaluate liquidity a company may compute the current ratio. To evaluate long-run solvency a company may compute a debt to total assets ratio, and a times interest earned ratio.

S-A E 303 Maria Gomez is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Maria is saying? Ans: N/A, LO: 9, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 303 Maria 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 304

(Ethics)

Wishbone 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, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls

Solution 304 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 305

(Communication)

Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was and the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Lifeline Books. Required: Draft a short note for Susan to send to Diane. Explain how such a result could occur. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Reporting and Analyzing Liabilities

10-75

Solution 305 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:

Diane — I can't believe that Lifeline can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Trend is a bad company just by the bond price. Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Lifeline got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't.) Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? Your treat. How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

IFRS QUESTIONS 1.

Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $3,112,350. The entry to record the redemption will include a. a credit of £37,650 to Gain on Bond Redemption. b. a debit of £37,650 to Loss on Bond Redemption. c. a credit of £15,000 to Bonds Payable. d. a credit of £37,650 to Bonds Payable.

Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying value of the bond was ¥59,780,000. The entry to record the retirement would include a a. gain on bond redemption of ¥980,000. b. loss on bond redemption of ¥980,000. c. loss on bond redemption of ¥1,200,000. d. gain on bond redemption of ¥1,420,000.

Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. Herman Company decided to redeem the bonds on January 1, 2014. What amount of gain or loss would Herman report on its 2014 income statement? a. ₤23,000 gain b. ₤28,000 gain c. ₤28,000 loss d. ₤23,000 loss

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Finney Company borrowed €1,600,000 from BankTwo on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of €416,698 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2014? a. €1,600,000 b. €1,045,458 c. €1,335,302 d. €1,296,000

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

On January 1, 2014, Michelin Company, a calendar-year company, is issued €9,000,000 of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next three years. The proper statement of financial position presentation on December 31, 2014, is a. Current liabilities, €9,000,000. b. Long-term Debt, €9,000,000. c. Current liabilities, €4,500,000; Long-term Debt, €4,500,000. d. Current liabilities, €3,000,000; Long-term Debt, €6,000,000.

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Liabilities

10-77

Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31, 2014. The terms call for semi-annual installment payments of £144,435.The entry to record the first installment payment will include a. a debit to Interest Payment of £144,435. b. a debit to Mortgage Notes Payable of £54,435. c. a debit to Interest Expense of £180,000. d. a credit to cash of £144,435.

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The adjusted trial balance for Beneteau Corporation at the end of the 2014 included the following accounts: 5-year Bonds Payable 8% €6,620,000 Bond Interest Payable 240,000 Notes Payable (3 mo.) 50,000 Notes Payable (5 yr.) 1,650,000 Mortgage Payable (€150,000 due currently) 2,000,000 Salaries and Wages Payable 68,000 Taxes Payable (due 3/15 of next year) 85,000 The total non-current liabilities reported on the statement of financial position at December 31, 2014 are a. €9,880,000 b. €10,030,000 c. €10,120,000 d. €10,360,000

Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Selected data from 2014 financial statements of Xi Corporation include the following (amount in millions): Current assets Total assets Current liabilities Total liabilities Cash Interest expense income taxes Net income

¥ 759 1,200 400 750 80 50 100 160

The debt to assets ratio is a. 62.5%. b. 52.7%. c. 1.60%. d. 6.2 times. Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

10-78 a

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

¥2 billion, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of a. ¥160,000,000 received for 10 periods must be calculated. b. ¥2 billion received in 10 periods must be calculated. c. ¥2 billion received in 20 periods must be calculated. d. ¥80,000,000 received for 10 periods must be calculated.

Ans: c, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a

10.

On January 1, 2014, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000 and a contract rate of 8% payable annually on January 1. The effective-interest rate on the bonds is 10%. Present value factors are as follows: At 8% At 10% PV of 1 for 10 periods 0.463 0.386 PV of an ordinary annuity if 1 for 10 periods 6.710 6.145 Total issue price of the bonds was a. ¥25,000,000. b. ¥24,500,000. c. ¥23,000,000. d. ¥21,940,000.

Ans: c, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

CHAPTER 11 REPORTING AND ANALYZING STOCKHOLDERS’ EQUITY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Ite m

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1 1 1 1 1 1 1 1 1 2

K K K K K K K K K K

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

2 2 2 2 2 2 3 3 3 3

K K K K K K K K K K

Item

5 5 5 6 6 6 6 6 6 7

K K K K K K K K K K

41. 42. 43. *44. *45. *46.

7 8 8 9 9 9

K K K K K C

149. 150. 151. 152. 153. 154. 155. 156. 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. 182.

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 7 7 7 7 5 7 7 7 5

AP AP AP AP AP K K K K K K K C C C K K C K K K K AP AP K AP AP AP AP AP AP AP AP AP

183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. *203. *204. *205. *206. *207. *208. 209. 210. *211. *212.

7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 5 6 9 9

AP AP K K K K K K K K AP AP AP AP AP AP AP AP AP C C AP AP AP AP AP K K K K

222. 223.

5 7

AP AP

True-False Statements 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

3 3 3 4 4 4 5 5 5 5

K C K K K K K K K C

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

Multiple Choice Questions 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. 73. 74. 75. 76. 77. 78. 79. 80.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 2 1 2 2 2 2 2 2 2 2 2

K K K K K K K K K C K K K K K K K K K K K K K K K K K K C K K AP AP AP

81. 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. 107. 108. 109. 110. 111. 112. 113. 114.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 5 5

AP AP K C K AP AP AP K AP C AP AP AP K AP AP AP AP K C C C K K K K K K AP C AP K K

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. 144. 145. 146. 147. 148.

213. 214.

1,3 1

K K

216. 217.

2,3 2,3

AP AP

219. 220.

5 5 5 5 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 5 5 5

K AP AP K AP C AP AP K K K K C AP AP AP C AP AP K K C K K K K K K K C K AP AP K

Brief Exercises 4 7 .

AP AP

11-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

215.

218.

2,3,4

221.

225. 226. 227. 228.

2,3 2,3 2,3,4 2,3,5

AP AP AP AP

229. 230. 231. 232.

2,3,7 2-4,7 2,4 2,4,5

AP AP AP AN

233. 234. 235. 236.

245. 246. 247.

1 1 1

K K K

248. 249. 250.

1 1 2

K K K

258.

1-8

259. 260.

1 1,4

K K

224.

237. 238. 239. 240.

5,7,9 6 7 7

AP AP AP AP

241. 242. 243. *244.

7 8 8 5,9

AP AN AN AP

5 5 6

K K K

257.

5 8

C C

267. 268.

3,5 7

E C

Exercises 2,7,9 5 5 5

AP AP AP AP

Completion Statements 251. 252. 253.

3 4 5

K K K

254. 255. 256.

Matching Short Answer Essay 261. 262.

3 4

C C

263. 264.

5 5

C C

265. 266.

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

1. 2. 3. 4. 5. 6. 7. 8. 9.

TF TF TF TF TF TF TF TF TF

47. 48. 49. 50. 51. 52. 53. 54. 55.

MC MC MC MC MC MC MC MC MC

56. 57. 58. 59. 60. 61. 62. 63. 64.

MC MC MC MC MC MC MC MC MC

65. 66. 68. 69. 71. 213. 214. 245. 246.

MC MC MC MC MC Be Be C C

247. 248. 249. 258. 259. 260.

C C C Ma SA SA

Item

Type

Learning Objective 2 10.

73.

83.

94.

230.

11.

74.

84.

215.

231.

12.

75.

85.

216.

232.

13.

76.

86.

217.

233.

14.

77.

87.

218.

250.

15.

78.

88.

225.

258.

16.

79.

89.

226.

67.

80.

90.

227.

70.

81.

91.

228.

72.

82.

92.

229.

Learning Objective 3 17.

23.

100.

106.

218.

230.

18.

95.

101.

107.

225.

251.

19.

96.

102.

108.

226.

258.

20.

97.

103.

213.

227.

261.

21.

98.

104.

216.

228.

267.

22.

99.

105.

217.

229.

Reporting and Analyzing Stockholders’ Equity

Item

Type

Item

Type

Learning Objective 4 Item Type Item Type

24.

111.

116.

178.

231.

25.

112.

117.

218.

232.

26.

113.

118.

219.

252.

109.

114.

119.

227.

258.

110.

115.

120.

230.

260.

11-3

Item

Type

Item

Type

262

Learning Objective 5 27.

122.

136.

150.

164.

244.

28.

123.

137.

151.

165.

253.

29.

124.

138.

152.

178.

254.

30.

125.

139.

153.

182.

255.

31.

126.

140.

154.

209.

258.

32.

127.

141.

155.

210.

263.

33.

128.

142.

156.

221.

264.

113.

TF MC

129.

143.

157.

222.

265.

114.

130.

144.

158.

228.

267.

115.

131.

145.

159.

232.

116.

132.

146.

160.

234.

117.

133.

147.

161.

235.

118.

134.

148.

162.

236.

121.

135.

149.

163.

237.

Learning Objective 6 34.

37.

166.

169.

172.

238.

35.

38.

167.

170.

173.

256.

36.

39.

168.

171.

210.

258.

Item

Type

Learning Objective 7 40.

177.

183.

220.

237.

41.

179.

184.

223.

239.

174.

180.

185.

229.

240.

175.

181.

186.

230.

241.

176.

182.

190.

233.

257.

Learning Objective 8 42.

193.

197.

201.

243.

43.

194.

198.

202.

258.

191.

195.

199.

224.

266.

192.

196.

200.

242.

Learning Objective 9 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

44.

204.

207.

212.

244.

45.

205.

208.

233.

46.

206.

211.

237.

11-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Note: TF = True-False MC = Multiple Choice Ma = Matching

C = Completion Ex = Exercise SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES 1. Identify and discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes. 2. Record the issuance of common stock. When a company records issuance of common stock for cash, it credits the par value of the shares to Common Stock. It records in a separate paid-in capital account the portion of the proceeds that is above par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par common stock does not have a stated value, the entire proceeds from the issue are credited to Common Stock. 3. Explain the accounting for the purchase of treasury stock. Companies generally use the cost method in accounting for treasury stock. Under this approach, a company debits Treasury Stock at the price paid to reacquire the shares. 4. 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 as to (1) dividends and (2) assets in the event of liquidation. However, they sometimes do not have voting rights. 5. Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Companies make entries for dividends at the declaration date and the payment date. At the declaration date, the entries for a cash dividend are debit Cash Dividends and credit Dividends Payable. The effects of stock dividends and splits are as follows. Small stock dividends transfer an amount equal to the fair value of the shares issued from retained earnings to the paid-in capital accounts. Stock splits reduce the par value per share of the common stock while increasing the number of shares so that the balance in the Common Stock account remains the same. 6. Identify the items that affect retained earnings. Additions to retained earnings consist of net income. Deductions consist of net loss and cash and stock dividends. In some instances, portions of retained earnings are restricted, making that portion unavailable for the payment of dividends. 7. Prepare a comprehensive stockholders’ equity section. In the stockholders’ equity section of the balance sheet, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, companies show two classifications: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to determine total stockholders’ equity. 8. Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective. A company’s dividend record can be evaluated by looking at what percentage of net income it chooses to pay out in dividends, as measured by the dividend payout ratio (dividends divided by net income). Earnings performance is measured with the return on common stockholders’ equity (income available to common stockholders divided by average common stockholders’ equity.)

Reporting and Analyzing Stockholders’ Equity

11-5

*9. Prepare entries for stock dividends. To record the declaration of a small stock dividend (less than 20%), debit Stock Dividends for an amount equal to the fair value of the shares issued. Record a credit to a temporary stockholders’ equity account—Common Stock Dividends Distributable—for the par value of the shares, and credit the balance to Paid-in Capital in Excess of Par Value. When the shares are issued, debit Common Stock Dividends Distributable and credit Common Stock.

TRUE-FALSE STATEMENTS 1.

A corporation is not an entity that is separate and distinct from its owners.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The liability of a stockholder is usually limited to the stockholder’s investment in the corporation.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The tax laws can be a significant disadvantage of the corporate form of business.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A corporation can be organized for the purpose of making a profit or it may be nonprofit.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A corporation acts under its own name rather than in the name of its stockholders.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A corporation must be incorporated in each state in which it does business.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A stockholder has the right to vote in the election of the board of directors.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

11-6 10.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock become legal capital.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11.

When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

The par value of common stock must always be equal to its market value on the date the stock is issued.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14.

For accounting purposes, stated value is treated the same way as par value.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

The issuance of common stock affects both paid-in capital and retained earnings.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17.

The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18.

Treasury stock should not be classified as a current asset.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19.

Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20.

Treasury stock is a contra stockholders’ equity account.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

22.

11-7

The journal entry to record the purchase of treasury stock will cause total stockholders’ equity to decrease by the amount of the cost of the treasury stock.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

23.

The number of common shares outstanding can never be greater than the number of shares issued.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Preferred stock has contractual preference over common stock in certain areas.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

25.

Preferred stockholders generally do not have the right to vote for the board of directors.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

26.

When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

Dividends may be declared and paid in cash or stock.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28.

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31.

A stock dividend does not affect the total amount of stockholders’ equity.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

A stock split results in a transfer at market value from retained earnings to paid-in capital.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

33.

A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

34.

Retained earnings represents the amount of cash available for dividends.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35.

Dividends in arrears are liabilities of the corporation.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36.

Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

37.

A debit balance in the Retained Earnings account is identified as a deficit.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38.

Retained earnings that are restricted are unavailable for dividends.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

39.

Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

40.

A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41.

The Common Stock Distributable account is classified as a current liability.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43.

The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*44.

A liability arises when the board of directors declares a stock dividend.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*45.

A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*46.

A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.

Ans: T, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

11-9

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.

F T F T T T F

8. 9. 10. 11. 12. 13. 14.

F T T F F F T

15. 16. 17. 18. 19. 20. 21.

T F F T F T T

22. 23. 24. 25. 26. 27. 28.

T T T T T T T

29. 30. 31. 32. 33. 34. 35.

F T T F F F F

36. 37. 38. 39. 40. 41. 42.

F T T F F F F

43. *44. *45. *46.

F F F T

MULTIPLE CHOICE QUESTIONS 47.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

48.

Stockholders of a corporation directly elect a. the president of the corporation. b. the board of directors. c. the treasurer of the corporation. d. all of the employees of the corporation.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

49.

Those most responsible for the major policy decisions of a corporation are the a. stockholders. b. board of directors. c. management. d. employees.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

50.

The chief accounting officer in a company is known as the a. controller. b. treasurer. c. vice-president. d. president.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

11-10 51.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of stockholders. b. Separate legal existence. c. Continuous life. d. Government regulation.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

52.

The two ways that a corporation can be classified by purpose are a. general and limited. b. profit and not-for-profit. c. state and federal. d. publicly held and privately held.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

53.

The two ways that a corporation can be classified by ownership are a. publicly held and privately held. b. stock and non-stock. c. inside and outside. d. majority and minority.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54.

Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation. b. Its shares are regularly traded on the New York Stock Exchange. c. It does not offer its shares for sale to the general public. d. It is usually smaller than a publicly held company.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

55.

Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may enter into binding legal contracts in its own name.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

56.

Jason Hansen has invested $600,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Hansen stand to lose? a. Up to his total investment of $600,000. b. Zero. c. The $600,000 plus any personal assets the creditors demand. d. $400,000.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

57.

11-11

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 of the board of directors before selling shares. d. A stockholder must obtain permission from at least three other stockholders before selling shares.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

58.

A corporate board of directors does not generally a. select officers. b. formulate operating policies. c. declare dividends. d. execute policy.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

59.

The officer that is generally responsible for maintaining the cash position of the corporation is the a. controller. b. treasurer. c. cashier. d. internal auditor.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

60.

The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

61.

Which of the following statements concerning taxation is accurate? a. Partnerships pay state income taxes but not federal income taxes. b. Corporations pay federal income taxes but not state income taxes. c. Corporations pay federal and state income taxes. d. Only the owners must pay taxes on corporate income.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

62.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

11-12 63.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A disadvantage of the corporate form of organization is a. professional management. b. tax treatment. c. ease of transfer of ownership. d. lack of mutual agency.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

64.

A disadvantage of the corporate form of business is a. its status as a separate legal entity. b. continuous existence. c. government regulation. d. ease of transfer of ownership.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

65.

Which of the following phrases is not descriptive of the corporate form of business? a. Professional management. b. Double taxation on distributed earnings. c. Unlimited liability. d. Continuous existence.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

66.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

67.

If no-par stock is issued without a stated value, then a. the par value is automatically $1 per share. b. the entire proceeds are considered to be legal capital. c. there is no legal capital. d. the corporation is automatically in violation of its state charter.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

68.

If a stockholder cannot attend a stockholders’ meeting, he may delegate his voting rights by means of a(n) a. absentee ballot. b. proxy. c. certified letter. d. telegram.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

69.

11-13

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

70.

Which of the following factors does not affect the initial market price of a stock? a. The company’s anticipated future earnings. b. The par value of the stock. c. The current state of the economy. d. The expected dividend rate per share.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

71.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

72.

The par value of a stock a. is legally significant. b. reflects the most recent market price. c. is selected by the SEC. d. is indicative of the worth of the stock.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

73.

Par value a. represents what a share of stock is worth. b. represents the original selling price for a share of stock. c. is established for a share of stock after it is issued. d. is the value assigned per share in the corporate charter.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

74.

The term legal capital is a descriptive term for a. stockholders’ equity. b. par value. c. residual equity. d. market value.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

11-14 75.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the a. legal capital is $2,780,000. b. number of shares issued is 80,000. c. number of shares outstanding is 2,780,000. d. average price per share issued is $3.48.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $80,000  $1 = 80,000

76.

The authorized stock of a corporation a. only reflects the initial capital needs of the company. b. is indicated in its by-laws. c. is indicated in its charter. d. must be recorded in a formal accounting entry.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

77.

The amount of stock that may be issued according to the corporation’s charter is referred to as the a. authorized stock. b. issued stock. c. unissued stock. d. outstanding stock.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

78.

If Norben Company issues 4,000 shares of $5 par value common stock for $140,000, the account a. Common Stock will be credited for $140,000. b. Paid-in Capital in Excess of Par Value will be credited for $20,000. c. Paid-in Capital in Excess of Par Value will be credited for $120,000. d. Cash will be debited for $120,000.

79.

Alt Corp. issues 3,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to: a. Common Stock $30,000 and Paid-in Capital in Excess of Stated Value $12,000. b. Common Stock $28,000. c. Common Stock $30,000 and Paid-in Capital in Excess of Par Value $12,000. d. Common Stock $30,000 and Retained Earnings $12,000.

Reporting and Analyzing Stockholders’ Equity

80.

11-15

If Lantz Company issues 5,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $25,000. b. Paid-in Capital in Excess of Par Value will be credited for $25,000. c. Paid-in Capital in Excess of Par Value will be credited for $210,000. d. Cash will be debited for $185,000.

81.

If Pratt Company issues 5,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $185,000. b. Paid-in Capital in Excess of Par Value will be credited for $210,000. c. Paid-in Capital in Excess of Par Value will be credited for $235,000. d. Cash will be debited for $210,000.

82.

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 Value. d. Legal Capital.

Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83.

Paid-in Capital in Excess of Par 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84.

The Paid-in Capital in Excess of Par Value is increased in the accounting records when a. the number of shares issued exceeds par value. b. the stated value of capital stock is greater than the par value. c. the market value of the stock rises above par value. d. capital stock is issued at an amount greater than par value.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

85.

Which of the following represents the largest number of common shares? a. Treasury shares. b. Issued shares. c. Outstanding shares. d. Authorized shares.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11-16 86.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Tomlinson Packaging Corporation began business in 2014 by issuing 30,000 shares of $5 par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2014 balance sheet, Tomlinson Packaging would report a. Common Stock of $300,000. b. Common Stock of $150,000. c. Common Stock of $240,000. d. Paid-in Capital of $200,000.

87.

Holden Packaging Corporation began business in 2014 by issuing 80,000 shares of $5 par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2014 balance sheet, Holden Packaging would report a. Common Stock of $800,000. b. Common Stock of $400,000. c. Common Stock of $640,000. d. Paid-In Capital of $600,000.

88.

Cey, Inc. issued 8,000 shares of stock at a stated value of $10/share. The total issue of stock sold for $15/share. The journal entry to record this transaction would include a a. debit to Cash for $80,000. b. credit to Common Stock for $80,000. c. credit to Paid-in Capital in Excess of Par Value for $40,000. d. credit to Common Stock for $120,000.

89.

When stock is issued in exchange for a noncash asset, the value recorded for the shares issued is best determined by a. the book value of the noncash asset. b. the market value of the shares. c. the par value of the shares. d. the contributed capital of the shares.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

90.

11-17

S. Lawyer performed legal services for E. Corp. Due to a cash shortage, an agreement was reached whereby E. Corp. would pay S. Lawyer a legal fee of approximately $15,000 by issuing 8,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $1.80 per share. Given this information, the best journal entry for E. Corp. to record for this transaction is a. Legal Expense 14,400 Common Stock 14,400 b. Legal Expense 15,000 Common Stock 15,000 c. Legal Expense 15,000 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 7,000 d. Legal Expense 14,400 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 6,400

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 8,000  ($1.80 − 1.00) = $6,400

91.

If the market value of the assets received and the market value of the stock issued are both available, then what amount should be used to value the assets? a. Market value of the stock. b. Market value of the assets. c. Par value of the stock. d. The more clearly determinable market value.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

92.

Johnson Company issued 900 shares of no-par common stock for $15,300. Which of the following journal entries would be made if the stock has no stated value? a. Cash 15,300 Common Stock – No-Par Value 15,300 b. Cash 15,300 Common Stock – No-Par Value 900 Paid-in Capital in Excess of Par 14,400 c. Cash 15,300 Common Stock – No-Par Value 900 Paid-in Capital in Excess of Stated Value 14,400 d. Common Stock – No-Par Value 15,300 Cash 15,300

11-18 93.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Dawson Company issued 600 shares of no-par common stock for $5,400. Which of the following journal entries would be made if the stock has stated value of $2 per share? a. Cash 5,400 Common Stock 5,400 b. Cash 5,400 Common Stock 1,200 Paid-in Capital in Excess of Par 4,200 c. Cash 5,400 Common Stock 1,200 Paid-in Capital in Excess of Stated Value 4,200 d. Common Stock 5,400 Cash 5,400

94.

Retro 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 Retro issues 5,000 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 best journal entry for Retro to record? a. Legal Expense 5,000 Common Stock 5,000 b. Legal Expense 25,000 Common Stock 25,000 c. Legal Expense 25,000 Common Stock 5,000 Paid-in Capital in Excess of Stated Value - Common 20,000 d. Legal Expense 25,000 Common Stock 5,000 Paid-in Capital in Excess of Par value - Common 20,000

95.

Which of the following statements about treasury stock is true? a. Few corporations have treasury stock. b. Purchasing treasury stock is done to eliminate hostile shareholder buyouts. c. Companies acquire treasury stock to increase the number of shares outstanding. d. Companies acquire treasury stock to decrease earnings per share.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

96.

The following data is available for BOX Corporation at December 31, 2014: Common stock, par $10 (authorized 30,000 shares) $250,000 Treasury stock (at cost $15 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding? a. 30,000. b. 25,000. c. 29,920. d. 24,920.

Reporting and Analyzing Stockholders’ Equity

97.

11-19

The following data is available for BOX Corporation at December 31, 2014: Common stock, par $10 (authorized 30,000 shares) $250,000 Treasury stock (at cost $15 per share) $ 1,200 Based on the data, how many shares of common stock are issued? a. 30,000. b. 25,000. c. 29,920. d. 24,920.

98.

Kaplan Manufacturing Corporation purchased 2,500 shares of its own previously issued $10 par common stock for $57,500. As a result of this event, a. Kaplan’s Common Stock account decreased $25,000. b. Kaplan’s total stockholders’ equity decreased $57,500. c. Kaplan’s Paid-in Capital in Excess of Par Value account decreased $32,500. d. All of these answer choices are correct.

99.

Leary Manufacturing Corporation purchased 5,000 shares of its own previously issued $10 par common stock for $115,000. As a result of this event, a. Leary’s Common Stock account decreased $50,000. b. Leary’s total stockholders’ equity decreased $115,000. c. Leary’s Paid-in Capital in Excess of Par Value account decreased $65,000. d. All of these answer choices are correct.

100.

Treasury stock is a. stock issued by the U.S. Treasury Department. b. stock purchased by a corporation and held as an investment in its treasury. c. corporate stock issued by the treasurer of a company. d. a corporation’s own stock, which has been reacquired and held for future use.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

101.

The acquisition of treasury stock by a corporation a. increases its total assets and total stockholders’ equity. b. decreases its total assets and total stockholders’ equity. c. has no effect on total assets and total stockholders’ equity. d. requires that a gain or loss be recognized on the income statement.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11-20 102.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

A corporation purchases 15,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $525,000. b. Decrease by $300,000. c. Decrease by $525,000. d. Decrease by $225,000.

103.

A corporation purchases 20,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $200,000. b. Decrease by $500,000. c. Increase by $500,000. d. Decrease by $200,000.

104.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105.

A company would not acquire treasury stock a. in order to reissue shares to officers. b. as an asset investment. c. in order to increase trading of the company’s stock. d. to have additional shares available to use in acquisitions of other companies.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

106.

Treasury Stock is a(n) a. contra asset account. b. retained earnings account. c. asset account. d. contra stockholders’ equity account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107.

The number of shares of issued stock equals a. unissued shares minus authorized shares. b. outstanding shares plus treasury shares. c. authorized shares minus treasury shares. d. outstanding shares plus authorized shares.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

108.

11-21

Treasury shares plus outstanding shares equal a. authorized stock. b. issued stock. c. unissued stock. d. distributable stock.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109.

Which of the following is not a right or preference associated with preferred stock? a. The right to vote. b. First claim to dividends. c. Preference to corporate assets in case of liquidation. d. To receive dividends in arrears before common stockholders receive dividends.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

110.

Logan Corporation issues 50,000 shares of $50 par value preferred stock for cash at $60 per share. The entry to record the transaction will consist of a debit to Cash for $3,000,000 and a credit or credits to a. Preferred Stock for $3,000,000. b. Preferred Stock for $2,500,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $500,000. c. Preferred Stock for $2,500,000 and Retained Earnings for $500,000. d. Paid-in Capital from Preferred Stock for $3,000,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Solution: 50,000  $50 = $2,500,000; ($60 − $50)  50,000 = $500,000

111.

Logan Corporation issues 40,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders’ equity section, the effects of the transaction above will be reported a. entirely within the capital stock section. b. entirely within the additional paid-in capital section. c. under both the capital stock and additional paid-in capital sections. d. entirely under the retained earnings section.

Ans: C, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

112.

Nice Corporation issues 30,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will consist of a debit to Cash for $3,300,000 and a credit or credits to a. Preferred Stock for $3,300,000. b. Preferred Stock for $3,000,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $300,000. c. Preferred Stock for $3,000,000 and Retained Earnings for $300,000. d. Paid-in Capital from Preferred Stock for $3,300,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 30,000  $100 = $3,000,000; ($110 − $100)  30,000 = $300,000

11-22 113.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Dividends in arrears on cumulative preferred stock a. never have to be paid, even if common dividends are paid. b. must be paid before common stockholders can receive a dividend. c. should be recorded as a current liability until they are paid. d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

114.

Dividends in arrears on cumulative preferred stock a. are considered to be a non-current liability. b. are considered to be a current liability. c. only occur when preferred dividends have been declared. d. should be disclosed in the notes to the financial statements.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

115.

Dividends in arrears are dividends on a. cumulative preferred stock that have been declared but have not been paid. b. non-cumulative preferred stock that have not been declared for a given period of time. c. cumulative preferred stock that have not been declared for a given period of time. d. common dividends that have been declared but have not yet been paid.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

116.

Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par non-cumulative preferred stock. In 2013, West declared and paid dividends of $4,000. In 2014, West declared and paid dividends of $12,000. How much of the 2014 dividend was distributed to preferred shareholders? a. $8,000. b. $14,000. c. $6,000. d. None of these answer choices are correct.

117.

Outstanding stock of the Hall Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 6%, $10 par non-cumulative preferred stock. In 2013, Hall declared and paid dividends of $8,000. In 2014, Hall declared and paid dividends of $24,000. How much of the 2014 dividend was distributed to preferred shareholders? a. $16,000. b. $28,000. c. $12,000. d. None of these answer choices are correct.

Reporting and Analyzing Stockholders’ Equity

118.

11-23

All of the following statements about preferred stock are true except a. preferred stock will have a paid-in capital account that is separate from other stock. b. preferred stock is presented first on the stockholder's equity section. c. preferred stock can be either par value or no-par value. d. there can be only one class of preferred stock.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

119.

Retro 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 Retro issues 5,000 shares of preferred stock for land with an asking price of $625,000 and a market value of $550,000, which of the following would be the best journal entry for Retro to record? a. Land 500,000 Preferred Stock 500,000 b. Land 550,000 Preferred Stock 550,000 c. Land 625,000 Preferred Stock 500,000 Paid-in Capital in Excess of Par - Preferred 125,000 d. Land 550,000 Preferred Stock 500,000 Paid-in Capital in Excess of Par - Preferred 50,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 5,000  $100 = $500,000; $550,000 − $500,000 = $50,000

120.

XYZ Company has $20,000 of dividends in arrears. Based on this information, which of the following statements is false? a. Dividends in arrears are not considered to be liabilities. b. An obligation for dividends in arrears exists only after the board of directors declares payment. c. The investment community looks favorably on companies with dividends in arrears, since the money is redirected toward more important growth opportunities. d. The amount of dividends in arrears should be disclosed in the notes to the financial statements.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

121.

On January 1, McCarver Corporation had 600,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event, a. McCarver’s Paid-in Capital in Excess of Par Value account increased $300,000. b. McCarver’s total stockholders’ equity was unaffected. c. McCarver’s Stock Dividends account increased $900,000. d. All of these answer choices are correct.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

11-24 122.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, Edmiston Corporation had 1,600,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event, a. Edmiston’s Paid-in Capital in Excess of Par Value account increased $800,000. b. Edmiston’s total stockholders’ equity was unaffected. c. Edmiston’s Stock Dividends account increased $2,400,000. d. All of these answer choices are correct.

123.

Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash. b. Approval of stockholders. c. Declared dividends. d. Retained earnings.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

124.

The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date. b. date of record. c. payment date. d. last day of the fiscal year end.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

125.

The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders’ equity. b. increase total expenses and total liabilities. c. increase total assets and stockholders’ equity. d. decrease total assets and stockholders’ equity.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

126.

The board of directors of Bosco Company declared a cash dividend on November 15, 2014, to be paid on December 15, 2014, to stockholders owning the stock on November 30, 2014. Given these facts, the date of November 30, 2014, is referred to as the a. declaration date. b. record date. c. payment date. d. ex-dividend date.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127.

The effect of the declaration of a cash dividend by the board of directors is to Increase Decrease a. Stockholders’ equity Assets b. Assets Liabilities c. Liabilities Stockholders’ equity d. Liabilities Assets

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Stockholders’ Equity

128.

11-25

Which of the following is the appropriate general journal entry to record the declaration of cash dividends? a. Cash Dividends Cash b. Dividends Payable Cash c. Paid-in Capital Dividends Payable d. Cash Dividends Dividends Payable

Ans: D, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

129.

The board of directors of Yancey Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The correct entry to be recorded on July 15, 2014, will include a a. debit to Dividends Payable. b. debit to Cash Dividends. c. credit to Cash. d. credit to Cash Dividends.

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

130.

The board of directors of Yancey Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The effects of the journal entry to record the declaration of the dividend on July 15, 2014, are to a. decrease stockholders’ equity and increase liabilities. b. decrease stockholders’ equity and decrease assets. c. increase stockholders’ equity and increase liabilities. d. increase stockholders’ equity and decrease assets.

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131.

The net effects on the corporation of the declaration and payment of a cash dividend are to a. decrease liabilities and decrease stockholders’ equity. b. increase stockholders’ equity and decrease liabilities. c. decrease assets and decrease stockholders’ equity. d. increase assets and increase stockholders’ equity.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132.

The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The correct entry to be recorded on August 15, 2014, will include a a. debit to Cash Dividends. b. credit to Cash Dividends. c. credit to Dividends Payable. d. debit to Dividends Payable.

Ans: D, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11-26 133.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2014. The dividend is to be paid on August 15, 2014, to stockholders of record on July 31, 2014. The effects of the journal entry to record the payment of the dividend on August 15, 2014, are to a. decrease stockholders’ equity and decrease liabilities. b. decrease liabilities and decrease assets. c. increase stockholders’ equity and increase liabilities. d. increase stockholders’ equity and decrease assets.

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

134.

A corporation records a dividend-related liability a. on the record date. b. on the payment date. c. when dividends are in arrears. d. on the declaration date.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

135.

Common Stock Dividends Distributable is classified as a(n) a. asset account. b. stockholders’ equity account. c. expense account. d. liability account.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

The effect of a stock dividend is to a. decrease total assets and stockholders’ equity. b. change the composition of stockholders’ equity. c. decrease total assets and total liabilities. d. increase the book value per share of common stock.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a. Increase No change b. No change Decrease c. Decrease Decrease d. No change No change

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138.

Dividends are predominantly paid in a. scrip. b. property. c. cash. d. stock.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

139.

11-27

Of the four dividends types, the two most common types in practice are a. cash and scrip. b. cash and property. c. cash and stock. d. property and stock.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

140.

Regular dividends are declared out of a. paid-in capital in excess of par value. b. treasury stock. c. common stock. d. retained earnings.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

141.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143.

Which of the following statements regarding the date of a cash dividend declaration is not accurate? a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation. c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

144.

Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets Total Liabilities Total Stockholders’ Equity a. Increase Decrease No change b. No change Increase Decrease c. Decrease Increase Decrease d. Decrease No change Increase

Ans: B, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

11-28 145.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following statements about dividends is not accurate? a. Dividends are generally reported quarterly as a dollar amount per share. b. Low dividends may mean high stock returns. c. The board of directors is obligated to declare dividends. d. Payment of dividends from legal capital is illegal in many states.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

146.

Ace Inc. has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2014. What is the annual dividend on the preferred stock? a. $50 per share b. $50,000 in total c. $5,000 in total d. $0.50 per share

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 10,000  $100  .05 = $50,000

147.

CAB Inc. has 1,000 shares of 6%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2014. What is the annual dividend on the preferred stock? a. $60 per share. b. $6,000 in total. c. $600 in total. d. $0.60 per share.

148.

Which of the following statements is not true about a 2-for-1 split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price probably will decrease. d. A stockholder with ten shares before the split owns twenty shares after the split.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

149.

Sizemore, Inc. has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2014. If the board of directors declares a $30,000 dividend, the a. preferred stockholders will receive 1/10th of what the common stockholders will receive. b. preferred stockholders will receive the entire $30,000. c. $30,000 will be held as restricted retained earnings and paid out at some future date. d. preferred stockholders will receive $15,000 and the common stockholders will receive $15,000.

Reporting and Analyzing Stockholders’ Equity

150.

11-29

Denson, Inc. has 10,000 shares of 7%, $100 par value, non-cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2013. The board of directors declares and pays a $120,000 dividend in 2014. What is the amount of dividends received by the common stockholders in 2014? a. $0. b. $70,000. c. $120,000. d. $50,000.

151.

Brewer Inc. has 5,000 shares of 8%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2014, and December 31, 2013. The board of directors declared and paid a $15,000 dividend in 2013. In 2014, $60,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2014? a. $35,000. b. $30,000. c. $25,000. d. $20,000.

152.

Watson, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2014. There were no dividends declared in 2012. The board of directors declares and pays a $100,000 dividend in 2013 and in 2014. What is the amount of dividends received by the common stockholders in 2014? a. $20,000. b. $60,000. c. $100,000. d. $0.

153.

Berman Inc. has 6,000 shares of 8%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2013, and December 31, 2014. The board of directors declared and paid an $18,000 dividend in 2013. In 2014, $72,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2014? a. $42,000. b. $36,000. c. $30,000. d. $24,000.

11-30 154.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The board of directors must assign a per share value to a stock dividend declared that is a. greater than the par or stated value. b. less than the par or stated value. c. equal to the par or stated value. d. at least equal to the par or stated value.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

155.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

156.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

157.

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 Value is debited if it is a small stock dividend. d. no entry is necessary if it is a large stock dividend.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

158.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

159.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

160.

11-31

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

161.

Identify the effect the declaration of a stock dividend has on the par value per share and book value per share. Par Value per Share Book Value per Share a. Increase Decrease b. No effect Increase c. Decrease Decrease d. No effect Decrease

Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

162.

Which of the following show the proper effect of a stock split and a stock dividend? Item Stock Split Stock Dividend a. Total paid-in capital Increase Increase b. Total retained earnings Decrease Decrease c. Total par value (common) Decrease Increase d. Par value per share Decrease No change

Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

163.

A stock split will a. have no effect on retained earnings. b. increase total paid-in capital. c. increase the total par value of the stock. d. have no effect on the par value per share of stock.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

164.

Which of the following statements is not true about a 2-for-1 stock split? a. The market value of the stock will probably decrease. b. A stockholder with 5 shares before the split owns 10 shares after the split. c. Par value per share is reduced to half of what it was before the split. d. Total paid-in capital increases.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

165.

Green, Inc. had 200,000 shares of common stock outstanding before a stock split occurred and 800,000 shares outstanding after the stock split. The stock split was a. 2-for-8. b. 8-for-1. c. 1-for-8. d. 4-for-1.

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 800,000  200,000 = $4:1

11-32 166.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to a. decrease total assets and total stockholders’ equity. b. increase stockholders’ equity and to decrease total liabilities. c. decrease total retained earnings and increase total liabilities. d. reduce the amount of retained earnings available for dividend declarations.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

167.

A net loss a. occurs if operating expenses exceed cost of goods sold. b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance. d. is closed to the Paid-in Capital account of the stockholders’ equity section of the balance sheet.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

168.

Retained earnings are occasionally restricted a. to set aside cash for dividends. b. to keep the legal capital associated with paid-in capital intact. c. due to contractual loan restrictions. d. if preferred dividends are in arrears.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

169.

When retained earnings are restricted, total retained earnings a. are unaffected. b. increase. c. decrease. d. may increase or decrease.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

170.

Placing a restriction on retained earnings will a. assure that a company has sufficient cash for a specific purpose. b. increase total stockholders’ equity. c. communicate to readers a portion of retained earnings is unavailable for dividends. d. decrease total stockholders’ equity.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

171.

The following selected amounts are available for Thomas Company. Retained earnings (beginning) $2,500 Net loss 200 Cash dividends declared 200 Stock dividends declared 200 What is its ending Retained Earnings balance? a. $2,200. b. $2,300. c. $1,900. d. $2,100.

Reporting and Analyzing Stockholders’ Equity

172.

11-33

Hutchinson Company had retained earnings of $15,000 on the balance sheet but disclosed in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends? a. $12,000. b. $13,000. c. $15,000. d. $10,000.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $15,000 − $2000 − $1,000 = $12,000

173.

All of the following statements regarding retained earnings are true except a. retained earnings represents a claim on cash. b. a debit balance in Retained Earnings indicates a deficit. c. some companies may restrict availability of retained earnings for dividends. d. retained earnings is net income that a company retains in a business.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174.

What is the total stockholders’ equity based on the following account balances? Common Stock $1,800,000 Paid-In Capital in Excess of Par 120,000 Retained Earnings 570,000 Treasury Stock 60,000 a. $2,190,000. b. $2,430,000. c. $2,550,000. d. $1,680,000.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,800,000 + $120,000 + $570,000 − $60,000 = $2,430,000

175.

What is the total stockholders’ equity based on the following account balances? Common Stock $750,000 Paid-In Capital in Excess of Par 50,000 Retained Earnings 175,000 Treasury Stock 25,000 a. $1,000,000. b. $975,000. c. $950,000. d. $800,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000 + $50,000 + $175,000 − $25,000 = $950,000

11-34 176.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

What is the total stockholders’ equity based on the following account balances? Common Stock $1,300,000 Paid-In Capital in Excess of Par 100,000 Retained Earnings 360,000 Treasury Stock 60,000 a. $1,400,000. b. $1,820,000. c. $1,760,000. d. $1,700,000.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,300,000 + $100,000 + $360,000 − $60,000 = $1,700,000

177.

Nance Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 Nance’s total paid-in capital was a. $46,860,000. b. $47,490,000. c. $46,230,000. d. $27,060,000.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 + $19,500,000 + $60,000 + $27,000,000 = $46,860,000

178.

Nance Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 Nance declared and paid a $75,000 cash dividend on December 15, 2014. If the company’s dividends in arrears prior to that date were $18,000, Nance’s common stockholders received a. $57,000. b. $27,000. c. $33,000. d. no dividend.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $75,000 − $18,000 − ($300,000  .08) = $33,000

Reporting and Analyzing Stockholders’ Equity

179.

11-35

Nance Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 Nance’s total stockholders’ equity was a. $55,140,000. b. $46,860,000. c. $54,510,000. d. $53,880,000.

180.

Danley Corporation began business by issuing 200,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end balance sheet would show a. Common Stock of $1,000,000. b. Common Stock of $4,800,000. c. total paid-in capital of $4,760,000. d. total paid-in capital of $3,800,000.

181.

Racer Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (40,000 shares) 840,000 Racer’s total paid-in capital was a. $62,480,000. b. $63,320,000. c. $61,640,000. d. $36,080,000.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 + $26,000,000 + $80,000 + $36,000 = $62,480

11-36 182.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Racer Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 Racer declared and paid a $100,000 cash dividend on December 15, 2014. If the company’s dividends in arrears prior to that date were $24,000, Racer’s common stockholders received a. $76,000. b. $36,000. c. $44,000. d. no dividend.

183.

Racer Corporation’s December 31, 2014 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 Racer’s total stockholders’ equity was a. $73,520,000. b. $62,480,000. c. $72,680,000. d. $71,840,000.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 + $26,000,000 + $80,000 + $36,000,000 + $10,200,000 − $840,000 = $71,840,000

184.

Cerner Corporation began business by issuing 250,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $50,000. The year-end balance sheet would show a. Common Stock of $1,250,000. b. Common Stock of $6,000,000. c. total paid-in capital of $5,950,000. d. total paid-in capital of $4,750,000.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 250,000  $5 = $1,250,000

Reporting and Analyzing Stockholders’ Equity

185.

11-37

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 sub-section paid-in capital. d. Dividends in Arrears will appear as a restriction of retained earnings.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186.

Paid-in capital in excess of stated value would appear on a balance sheet under the category a. capital stock. b. retained earnings. c. additional paid-in capital. d. contra to stockholders’ equity.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187.

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

188.

All of the following are normally found in a corporation’s stockholders’ equity section except a. dividends in arrears. b. common stock. c. paid-in capital. d. retained earnings.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

189.

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

190.

In published annual reports a. subclassifications within the stockholders’ equity section are routinely reported in detail. b. capital surplus is used in place of retained earnings. c. the individual sources of additional paid-in capital are often combined. d. retained earnings is often not shown separately.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11-38 191.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The payout ratio is computed by dividing a. total cash dividends paid by retained earnings. b. dividends paid per share by net income. c. total cash dividends paid by net income. d. dividends paid per share by year-end stock price.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

192.

The return on common stockholders’ equity is computed by dividing net income a. by ending common stockholders’ equity. b. by average common stockholders’ equity. c. less preferred dividends by ending common stockholders’ equity. d. less preferred dividends by average common stockholders’ equity.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

193.

Ferman Corporation had net income of $160,000 and paid dividends of $50,000 to common stockholders and $20,000 to preferred stockholders in 2014. Ferman Corporation’s common stockholders’ equity at the beginning and end of 2014 was $870,000 and $1,130,000, respectively. Ferman Corporation’s return on common stockholders’ equity was a. 16%. b. 14%. c. 11%. d. 9%.

Ans: B, LO: 8, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($160,000 − $20,000)  [($870,000 + $1,130,000)  2] = 14%

194.

Ferman Corporation had net income of $160,000 and paid dividends of $50,000 to common stockholders and $20,000 to preferred stockholders in 2014. Ferman Corporation’s common stockholders’ equity at the beginning and end of 2014 was $870,000 and $1,130,000, respectively. Ferman Corporation’s payout ratio for 2014 was a. 5.0%. b. 43.8%. c. 31.3%. d. 12.5%.

Ans: C, LO: 8, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $50,000  $160,000 = 31.3%

195.

Herman Corporation had net income of $120,000 and paid dividends of $24,000 to common stockholders and $20,000 to preferred stockholders in 2014. Herman Corporation’s common stockholders’ equity at the beginning and end of 2014s was $450,000 and $550,000, respectively. Herman Corporation’s return on common stockholders’ equity is a. 24.0%. b. 20.0%. c. 19.2%. d. 15.2%.

Ans: B, LO: 8, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($120,000 − $20,000)  [($450,000 + $550,000)  2] = 20.0%

Reporting and Analyzing Stockholders’ Equity

196.

11-39

Herman Corporation had net income of $120,000 and paid dividends of $24,000 to common stockholders and $20,000 to preferred stockholders in 2014. Herman Corporation’s common stockholders’ equity at the beginning and end of 2014 was $450,000 and $550,000, respectively. Herman Corporation’s payout ratio for 2014 is a. 5%. b. 20%. c. 17%. d. 10%.

197.

From the information below, compute the payout ratio for Kevin’s Trailers. Net Income $200 Cash Dividends (common) 40 Retained Earnings 500 Stock Dividends (common) 10 a. 25%. b. 20%. c. 8%. d. 2%.

198.

The following information pertains to Benedict Company. Assume that all balance sheet amounts represent average balance figures. Total assets $300,000 Stockholders’ equity—common 150,000 Total stockholders’ equity 200,000 Sales revenue 100,000 Net income 25,000 Number of shares of common stock 6,000 Common dividends 6,000 Preferred dividends 4,000 What is the payout ratio for Benedict? a. 40% b. 24% c. 16% d. 6%

199.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-40 MC: 199

(count) Preferred dividends 4,000 What is the return on common stockholders’ equity ratio for Benedict? a. 16.7% b. 14.0% c. 12.7% d. 10.5%

200.

The following information pertains to Marsh Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales revenue 120,000 Net income 25,000 Number of shares of common stock 8,000 Common dividends 9,000 Preferred dividends 6,000 What is Marsh’s payout ratio? a. 60%. b. 36%. c. 24%. d. 7.5%.

201.

The following information pertains to Marsh Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales 120,000 Net income 24,000 Number of shares of common stock 8,000 Common dividends 9,000 Preferred dividends 6,000 What is Marsh’s return on common stockholders’ equity? a. 12%. b. 9%. c. 7.5%. d. 6.4%.

Reporting and Analyzing Stockholders’ Equity

202.

11-41

Which of the following statements is true regarding corporate performance ratios? a. A high payout ratio may indicate that a company is retaining earnings for future growth investments. b. As a company grows larger, it is easy to sustain a high return on common stockholder's equity. c. Return on common stockholder's equity is often higher under bond financing rather than common stock financing. d. Companies low growth rates are characterized by low payout ratios.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*203. John Jones Company has 20,000 shares of $100 par value common stock. Assuming that the proper journal entry was made to record a 5% common stock dividend on the declaration date when the market value of the stock was $135, which of the following accounts would be debited when the stock dividend is distributed? a. Retained Earnings. b. Dividends Payable. c. Common Stock Dividends Distributable. d. Paid-in Capital in Excess of Par Value. Ans: C, LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*204. On January 1, Hamblin Corporation had 90,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. 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, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (90,000  .10)  $10 = $90,000

*205. On January 1, Hamblin Corporation had 90,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. 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 $90,000. b. debit to Common Stock Dividends Distributable for $90,000. c. credit to Paid-in Capital in Excess of Par Value for $27,000. d. debit to Stock Dividends for $27,000. Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 90,000  .10  $10 = $90,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*206. On January 1, Ripken Corporation had 40,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a a. debit to Stock Dividends for $52,000. b. credit to Cash for $52,000. c. credit to Common Stock Dividends Distributable for $52,000. d. credit to Common Stock Dividends Distributable for $12,000. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 40,000  .10  $13 = $52,000

*207. On January 1, Ripken Corporation had 40,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. 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 Common Stock for $40,000. b. debit to Common Stock Dividends Distributable for $52,000. c. credit to Paid-in Capital in Excess of Par Value for $12,000. d. debit to Stock Dividends for $12,000. Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 40,000  .10  $10 = $40,000

*208. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is a. Common Stock Dividends Distributable. b. Common Stock. c. Paid-in Capital in Excess of Par. d. Stock Dividends. Ans: D, LO: 9, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

209.

Which one of the following events would not require a journal entry on a corporation’s books? a. 2-for-1 stock split. b. 100% stock dividend. c. 2% stock dividend. d. $1 per share cash dividend.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

210.

Which of the following would not affect the balance of the Retained Earnings account? a. Net income. b. Stock dividend. c. Stock split. d. Gains and losses of a company.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Stockholders’ Equity

11-43

*211. The declaration and distribution of a stock dividend will a. increase total stockholders’ equity. b. increase total assets. c. decrease total assets. d. have no effect on total assets. Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*212. The declaration of a small stock dividend will a. increase paid-in capital. b. change the total of stockholders’ equity. c. increase total liabilities. d. increase total assets. Ans: A, LO: 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 47. c 48. b 49. b 50. a 51. d 52. b 53. a 54. b 55. c 56. a 57. b 58. d 59. b 60. a 61. c 62. c 63. b 64. c 65. c 66. b 67. b 68. b 69. b 70. b 71. b

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.

a d b b c a c c a d c b d d b b b b d d a c c b d

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.

b b b d b c b d b d b b a b c b b d c c c d d c d

122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146.

d b a d b c d b a c d b d b b b c c d b b a b c b

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.

b b b d c a a d c b a d c a d d a d d d c c a c c

172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.

a a b c d a c d a a c d a c c c a a c c d b c b b

197. 198. 199. 200. 201. 202. *203. *204. *205. *206. *207. *208. 209. 210. *211. *212.

b b b b b c c c b a a d a c d a

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BRIEF EXERCISES Be. 213 1. Name at least three advantages of a corporation. 2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why a corporation may acquire treasury stock. Ans: N/A, LO: 1,3, Bloom: K, Difficulty: Easy, Min: 9, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics

Solution 213

(9–12 min.)

1. Advantages of a corporation: (a) Separate legal existence (b) Limited liability of stockholders (c) Transferable ownership rights (d) Continuous life (e) Ability to acquire capital 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) To increase trading of the company’s stock in the securities market in the hopes of enhancing its market value (c) To have additional shares available for use in the acquisition of other companies (d) To reduce the number of shares outstanding and, thereby, increase earnings per share (e) To prevent a hostile takeover.

Reporting and Analyzing Stockholders’ Equity

11-45

Be. 214 Identify (by letter) each of the following characteristics as being an advantage or a disadvantage of the corporate form of business or not applicable to the corporate form of business organization. A = Advantage D = Disadvantage N = Not Applicable Characteristics _____ 1. Separate legal entity _____ 2. Taxable entity resulting in additional taxes _____ 3. Continuous life _____ 4. Unlimited liability of owners _____ 5. Government regulation _____ 6. Separation of ownership and management _____ 7. Ability to acquire capital _____ 8. Ease of transfer of ownership Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Solution 214 1. 2. 3. 4.

A D A N

(3–5 min.) 5. 6. 7. 8.

D A and D A A

Be. 215 Patrick Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2014, the company has the following stock transactions. Jan. 15

Issued 700,000 shares of stock at $7 per share.

Sept. 5

Purchased 20,000 shares of common stock for the treasury at $8 per share.

Dec.

Declared a $0.50 per share dividend to stockholders of record on December 20, payable January 3, 2015.

Instructions Journalize the transactions for Patrick Corporation. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-46

Solution 215 Jan. 15

Sept. 5 Dec.

(5–7 min.)

Cash ................................................................................... 4,900,000 Common Stock ........................................................... Paid-in Capital in Excess of Par Value—Common Stock Treasury Stock .................................................................... Cash...........................................................................

160,000

Cash Dividends ................................................................... Dividends Payable...................................................... (700,000 – 20,000) × $.50

340,000

700,000 4,200,000 160,000 340,000

Be. 216 An inexperienced accountant for Teahan Corporation made the following entries. July 1

Sept. 1

Cash ................................................................................... Common Stock ........................................................... (Issued 20,000 shares of no-par common stock, stated value $5 per share)

170,000

Common Stock ................................................................... Retained Earnings .............................................................. Cash........................................................................... (Purchased 4,000 shares issued on July 1 for the treasury at $15 per share)

36,000 24,000

170,000

60,000

Instructions On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.) Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216 July 1

Sept. 1

(5–7 min.)

Cash ................................................................................... 170,000 Common Stock ........................................................... Paid-in Capital in Excess of Stated Value—Common Stock

100,000 70,000

Treasury Stock ..................................................................... Cash...........................................................................

60,000

Be. 217 On January 1, 2014, Wooden Company issued 16,000 shares of $2 par value common stock for $120,000. On March 1, 2014, the company purchased 2,000 shares of its common stock for $15 per share for the treasury. Instructions Journalize the stock transactions of Wooden Company in 2014. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Stockholders’ Equity

Solution 217 Jan.

March 1

11-47

(5 min.)

Cash .................................................................................. 120,000 Common Stock .......................................................... Paid-in Capital in Excess of Par Value—Common Stock

32,000 88,000

Treasury Stock ................................................................... Cash ..........................................................................

30,000

Be. 218 Samson Company had the following transactions. 1. Issued 5,000 shares of $100 par preferred stock at $107 for cash. 2. Issued 8,000 share of common stock with a par value of $10 for $120,000. 3. Purchased 500 shares of treasury common stock for $12,000. Instructions Prepare the journal entries to record the above stock transactions. Ans: N/A, LO: 2,3,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218

(5 min.)

1. Cash .............................................................................................. Preferred Stock...................................................................... Paid-in Capital in Excess of Par Value—Preferred Stock.......

535,000

2. Cash .............................................................................................. Common Stock ...................................................................... Paid-in Capital in Excess of Par Value—Common Stock .......

120,000

3. Treasury Stock ............................................................................... Cash ......................................................................................

12,000

500,000 35,000

80,000 40,000

12,000

Be. 219 In its first year of operations, Martinez Corporation had the following transactions pertaining to its $10 par value preferred stock. Feb. 1 July 1

Issued 8,000 shares for cash at $24 per share. Issued 6,000 shares for cash at $25 per share.

Instructions (a)

Journalize the transactions.

(b)

Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par value—preferred stock at the end of the year.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-48

Solution 219 (a) Feb. 1

July 1

(b) (1) (2)

(6–10 min.) Cash ............................................................................. Preferred Stock .................................................... Paid-in Capital in Excess of Par Value—Preferred Stock ................................................................ (Issued 8,000 shares at $24 per share) Cash ............................................................................. Preferred Stock .................................................... Paid-in Capital in Excess of Par Value—Preferred Stock ................................................................ (Issued 6,000 shares at $25 per share)

192,000 80,000 112,000 150,000 60,000 90,000

Preferred stock—$80,000 + $60,000 = $140,000. Paid-in Capital in Excess of Par Value—Preferred Stock—$112,000 + $90,000 = $202,000.

Be. 220 The Huntsman Corporation has the following stockholders’ equity accounts: Preferred Stock Paid-in Capital in Excess of Par Value—Preferred Stock Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Retained Earnings Treasury Stock—Common Instructions Classify each account using the following tabular alignment. Paid-in Capital Capital Stock Additional

Account

Retained Earnings

Other

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 220

(5–9 min.)

Account Preferred Stock

Paid-in Capital Capital Stock Additional X

Paid-in Capital in Excess of Par Value—Preferred Stock Common Stock

Retained Earnings

Other

X X

Paid-in Capital in Excess of Stated Value—Common Stock

Retained Earnings

Treasury Stock—Common

Reporting and Analyzing Stockholders’ Equity

11-49

Be. 221 Lindy Corporation has 1,000,000 authorized shares of $20 par value common stock. As of June 30, 2014, there were 600,000 shares issued and outstanding. On June 30, 2014, the board of directors declared a $0.50 per share cash dividend to be paid on August 1, 2014. Instructions Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 221 (a)

(7–10 min.)

Cash Dividends ........................................................................... Dividends Payable .............................................................. 600,000 × $.50 = $300,000

(b)

No entry

(c)

Dividends Payable....................................................................... Cash ...................................................................................

300,000 300,000

Be. 222 On November 1, 2014, Kalen Corporation’s stockholders’ equity section is as follows: Common stock, $10 par value $600,000 Paid-in capital in excess of par value—Common Stock 180,000 Retained earnings 200,000 Total stockholders’ equity $980,000 On November 1, Kalen declares and distributes a 15% stock dividend when the market value of the stock is $16 per share. Instructions Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 222

(5 min.)

Common Stock Paid-in Capital in Excess of Par Value—Common Stock Retained Earnings Total Stockholders’ Equity *$600,000 + (60,000 × .15 × $10) **$180,000 + (60,000 × .15 × $6) ***$200,000 – (60,000 × .15 × $16)

$690,000* 234,000** 56,000*** $980,000

11-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 223 Listed below are items typically found in the stockholders' equity section of the balance sheet. Common stock, $10 stated value Retained earnings 8% Preferred stock, $100 par value Paid-in capital in excess of par value—Preferred Stock Paid-in capital in excess of stated value—Common Stock 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 Instructions Place each of the items listed below in the appropriate subdivision of the stockholders’ equity section of a balance sheet. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 223

(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 Paid-in capital in excess of par value—preferred stock Paid-in capital in excess of stated value—common stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common Total stockholders’ equity

Reporting and Analyzing Stockholders’ Equity

11-51

Be. 224 The following information is available for Epstein Corporation 2014 $1,500,000 2,000,000 72,000 30,000 180,000

Average common stockholders’ equity Average total stockholders’ equity Common dividends declared and paid Preferred dividends declared and paid Net income

2013 $1,000,000 1,500,000 50,000 30,000 150,000

Instructions Compute the payout ratio and return on common stockholders’ equity for both years. Briefly comment on your findings. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 224

(10–14 min.)

Payout ratio:

Return on common stockholders’ equity :

2013

2014

$50,000 ———— = 33% $150,000

$72,000 ———— = 40% $180,000

$150,000 – $30,000 ————————— = 12% $1,000,000

$180,000 – $30,000 ————————— = 10% $1,500,000

Epstein’s payout ratio increased 21% (40 – 33)/33 during 2014 while its return on common stockholders’ equity decreased approximately 17%. Epstein’s earnings performance declined during 2014 which should have resulted in less dividends being paid out to common stockholders instead of 20% more being paid to them.

EXERCISES Ex. 225 The corporate charter of Torres Corporation allows the issuance of a maximum of 4,000,000 shares of $1 par value common stock. During its first three years of operation, Torres issued 2,080,000 shares at $15 per share. It later acquired 80,000 of these shares as treasury stock for $25 per share. Instructions Based on the above information, answer the following questions: (a) How many shares were authorized? (b) How many shares were issued? (c) How many shares are outstanding? (d) What is the balance of the Common Stock account? (e) What is the balance of the Treasury Stock account? Ans: N/A, LO: 1,2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-52

Solution 225

(8–11 min.)

(a) 4,000,000 shares were authorized. (b) 2,080,000 shares were issued. (c) 2,000,000 shares are outstanding (2,080,000 issued less 80,000 in treasury). (d) The balance of the Common Stock account is $2,080,000; ($1 × 2,080,000 shares = $2,080,000). (e) The balance of the Treasury Stock account is $2,000,000; ($25 × 80,000 shares = $2,000,000). Ex. 226 The following items were shown on the balance sheet of Martin Corporation on December 31, 2014: Stockholders’ Equity Paid-In Capital Capital Stock Common stock, $5 par value, 750,000 shares authorized; ______ shares issued and ______ outstanding ....................... $3,000,000 Additional paid-in capital In excess of par value ........................................................................... Total paid in capital .........................................................................

180,000 3,180,000

Retained Earnings ............................................................................................ 500,000 Total paid-in capital and retained earnings ............................................ 3,680,000 Less: Treasury stock (20,000 shares) .............................................................. 280,000 Total stockholders’ equity ...................................................................... $3,400,000 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 total sales price of the common stock when issued was $____________. (d) How much did the treasury stock cost per share? $_______________ (e) What was the average issue price of the common stock? $______________ Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

Solution 226

11-53

(10–15 min.)

(a)

The number of shares of common stock issued was 600,000. $3,000,000 ÷ $5 par value = 600,000 shares issued.

(b)

The number of shares of common stock outstanding was 580,000. 600,000 issued less 20,000 in treasury = 580,000 shares outstanding

(c)

The total sales price of the common stock when issued was $3,180,000. Common stock $3,000,000 Plus: In excess of par value 180,000 Total $3,180,000

(d)

How much did the treasury stock cost per share? $14 $280,000 ÷ 20,000 = $14 per share.

(e)

What was the average issue price of the common stock? $5.30 $3,180,000 ÷ 600,000 shares = $5.30 per share.

Ex. 227 Miles Co. had these transactions during the current period. June July Nov.

12 11 28

Issued 50,000 shares of $3 stated value common stock for cash of $250,000. Issued 2,000 shares of $100 par value preferred stock for cash at $108 per share. Purchased 2,000 shares of treasury stock for $10,000.

Instructions Prepare the journal entries for the preceding transactions. Ans: N/A, LO: 2,3,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 227 June 12

July

Nov. 28

(5 min.) Cash ............................................................................. Common Stock (50,000  $3) ............................... Paid-in Capital in Excess of Stated Value—Common Stock .....................................

250,000

Cash (2,000  $108) ..................................................... Preferred Stock (2,000  $100) ............................ Paid-in Capital in Excess of Par Value—Preferred Stock ..................................... (2,000  $8)

216,000

Treasury Stock .............................................................. Cash ....................................................................

10,000

150,000 100,000

200,000 16,000

10,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-54 Ex. 228

On January 1, 2014, Browning Corporation had 75,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred: Mar.

Issued 90,000 shares of common stock for $675,000

June

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 $18 per share

Dec. 15

Declared a cash dividend on outstanding shares of $2.50 per share to stockholders of record on December 31

Net income for 2014 amounted to $951,000. Instructions Prepare journal entries to record the above transactions. Ans: N/A, LO: 2,3,5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 228 Mar.

June

June 30 Dec.

Dec. 15

(12–17 min.) Cash .......................................................................... 675,000 Common Stock .................................................. Paid-in Capital in Excess of Par Value—Common Stock Cash Dividends .......................................................... Dividends Payable ............................................. (165,000 × $2 = $330,000)

330,000

Dividends Payable ..................................................... Cash .................................................................

330,000

Treasury Stock .......................................................... Cash .................................................................

90,000

Cash Dividends (160,000 × $2.50) ............................ Dividends Payable ............................................

400,000

90,000 585,000 330,000

330,000 90,000 400,000

Ex. 229 The stockholders’ equity section of Piper Corporation’s balance sheet at December 31, 2013, appears below: Stockholders’ equity Paid-in capital Common stock, $10 par value, 400,000 shares authorized; 300,000 issued and outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity

$3,000,000 1,200,000 4,200,000 900,000 $5,100,000

Reporting and Analyzing Stockholders’ Equity

Ex. 229

11-55

(Cont.)

During 2014, the following stock transactions occurred: Jan. 18 Issued 80,000 shares of common stock at $23 per share. Aug. 20 Purchased 20,000 shares of Piper Corporation’s common stock at $25 per share to be held in the treasury. Instructions (a) Prepare the journal entries to record the above stock transactions. (b) Prepare the stockholders’ equity section of the balance sheet for Piper Corporation at December 31, 2014. Assume that net income for the year was $150,000 and that no dividends were declared. Ans: N/A, LO: 2,3,7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 229 (a) Jan. 18

Aug. 20

(12–18 min.) Cash ............................................................................. 1,840,000 Common Stock..................................................... Paid-in Capital in Excess of Par Value—Common Stock (To record issuance of 80,000 shares of common stock) Treasury Stock .............................................................. Cash .................................................................... (To record purchase of 20,000 shares of treasury stock at cost)

(b) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 400,000 shares authorized, 380,000 shares issued, and 360,000 shares outstanding Additional paid-in capital In excess of par value Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (20,000 shares) Total stockholders’ equity

800,000 1,040,000

500,000 500,000

$3,800,000 2,240,000 6,040,000 1,050,000 7,090,000 500,000 $6,590,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-56 Ex. 230

The stockholders' equity section of Patrick Corporation's balance sheet at December 31 is presented here: PATRICK CORPORATION Balance Sheet (partial) Stockholders' equity Paid-in capital Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding $ 600,000 Common stock, no par, 750,000 shares authorized, 600,000 shares issued 6,000,000 Total paid-in capital 6,600,000 Retained earnings 1,358,000 Total paid-in capital and retained earnings 7,958,000 Less: Treasury stock (4,000 common shares) (32,000) Total stockholders' equity $7,926,000 Instructions From a review of the stockholders' equity section, answer the following questions. (a) How many shares of common stock are outstanding? (b) Assuming there is a stated value, what is the stated value of the common stock? (c) What is the par value of the preferred stock? (d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock? (e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance reported for retained earnings? Ans: N/A, LO: 2-4,7, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 230

(7 min.)

(a) Common stock outstanding is 596,000 shares. (Issued shares 600,000 less treasury shares 4,000) (b) The stated value of the common stock is $10 per share. (Common stock issued $6,000,000  600,000 shares.) (c)

The par value of the preferred stock is $100 per share. (Preferred stock $600,000  6,000 shares.)

(d) The dividend rate is 5% ($30,000  $600,000). (e) The Retained Earnings balance is still $1,358,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements.

Reporting and Analyzing Stockholders’ Equity

11-57

Ex. 231 Ritchey Corporation has the following capital stock outstanding at December 31, 2014: 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding ...................................................

$1,200,000

Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding .................................................

3,000,000

The preferred stock was issued at $125 per share. The common stock was issued at an average per share price of $14. Instructions Prepare the paid-in capital section of the balance sheet at December 31, 2014. Ans: N/A, LO: 2,4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 231

(10–15 min.)

Stockholders’ equity Paid-in capital Capital stock 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding Total capital stock Additional paid-in capital Paid-in capital in excess of par value—preferred stock Paid-in capital in excess of stated value—common stock Total additional paid-in capital Total paid-in capital *12,000 shares × $25 = $300,000. **300,000 shares × $4 = $1,200,000.

$1,200,000

3,000,000 4,200,000 $

300,000* 1,200,000** 1,500,000 $5,700,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

11-58 Ex. 232

During 2014 Kenton 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. Issued the shares of common stock required by the stock dividend declaration in 4. above 7. Issued par value common stock for cash at par value 8. Paid the cash dividend Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.

Item

Capital Stock

Paid-in Capital Additional Paid-in Capital

Retained Earnings

Ans: N/A, LO: 2,4,5, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 232

(8–12 min.) Paid-in Capital Additional Paid-in Capital

Item

Capital Stock

Retained Earnings

*4. 5.

I NE

D D

*6.

FOR INSTRUCTOR USE ONLY

Reporting and Analyzing Stockholders’ Equity

11-59

*Ex. 233 On January 1, 2014, the Black Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and Retained Earnings of $1,000,000. The company issued 140,000 shares of common stock at $15 per share on July 1. On December 15, the board of directors declared a 10% stock dividend to stockholders of record on December 31, 2014, payable on January 15, 2015. The market value of Black Corporation stock was $17 per share on December 15 and $16 per share on December 31. Net income for 2014 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 Black Corporation at December 31, 2014.

Ans: N/A, LO: 2,7,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 233 (1) July

(10–15 min.)

1 Cash

.......................................................................... 2,100,000 Common Stock ................................................. Paid-in Capital in Excess of Par Value—Common Stock

Dec. 15 Stock Dividends (34,000 × $17/sh) .............................. Common Stock Dividends Distributable ............. Paid-in Capital in Excess of Par Value ..............

1,400,000 700,000

578,000 340,000 238,000

($2,000,000 ÷ $10 = 200,000 + 140,000 = 340,000 shares × .10 = 34,000 shares) (2) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 340,000 shares issued and outstanding Common stock dividends distributable Total capital stock Additional paid-in capital in excess of par value Total paid-in capital Retained earnings Total stockholders’ equity

$3,400,000 340,000 3,740,000 938,000 4,678,000 922,000 $5,600,000

11-60

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 234 The stockholders’ equity section of Fleming Corporation at December 31, 2013, included the following: 4% preferred stock, $100 par value, cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding .....

$1,000,000

Common stock, $10 par value, 250,000 shares authorized, 200,000 shares issued and outstanding ............................................

$2,000,000

Dividends were not declared on the preferred stock in 2013 and are in arrears. On September 15, 2014, the board of directors of Fleming Corporation declared dividends on the preferred stock to stockholders of record on October 1, 2014, payable on October 15, 2014. On November 1, 2014, the board of directors declared a $1 per share dividend on the common stock, payable November 30, 2014, to stockholders of record on November 15, 2014. Instructions Prepare the journal entries that should be made by Fleming Corporation on the dates indicated below: September 15, 2014 November 1, 2014 October 1, 2014 November 15, 2014 October 15, 2014 November 30, 2014 Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 234 9/15/14

10/1/14

(12–15 min.)

Cash Dividends .................................................................. Dividends Payable...................................................... (To record declaration of dividends in arrears and the current year’s preferred dividend)

80,000 80,000

(No entry required)

10/15/14 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of cash preferred dividend)

80,000

11/1/14

200,000

Cash Dividends ................................................................... Dividends Payable...................................................... (To record declaration of cash dividend on common stock)

80,000

200,000

11/15/14 (No entry required) 11/30/14 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of common cash dividends)

200,000 200,000

Reporting and Analyzing Stockholders’ Equity

11-61

Ex. 235 On January 1 Weiss Corporation had 60,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following transactions occurred: Apr.

Issued 10,000 additional shares of common stock for $10 per share.

June 15

Declared a cash dividend of $1.00 per share to stockholders of record on June 30.

July

Paid the $1.00 cash dividend.

Dec.

Issued 4,000 additional shares of common stock for $12 per share.

Declared a cash dividend on outstanding shares of $1.00 per share to stockholders of record on December 31.

Instructions (a) Prepare the entries, if any, on each of the three dates that involved dividends. (b) How are dividends and dividends payable reported in the financial statements prepared at December 31? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 235 (a) June 15

July 10

Dec. 15

(7 min.) Cash Dividends ............................................................. (70,000*  $1.00) Dividends Payable................................................ *60,000 shares + 10,000 shares

70,000

Dividends Payable ........................................................ Cash ....................................................................

70,000

Cash Dividends ............................................................. (74,000**  $1.00) Dividends Payable................................................ **70,000 shares + 4,000 shares

74,000

70,000

74,000

(b) In the retained earnings statement, dividends of $144,000 will be deducted. In the balance sheet, Dividends Payable of $74,000 will be reported as a current liability.

11-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 236 On October 31 the stockholders' equity section of Eaton Company's balance sheet consists of common stock $600,000 and retained earnings $400,000. Eaton is considering the following two courses of action: (1) declaring a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share. Instructions Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column headings: Before Action, After Stock Dividend, and After Stock Split. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 236

(10 min.) Before Action

After Stock Dividend

After Stock Split

$600,000 0 600,000 400,000

$660,000 30,000 690,000 310,000

$600,000 0 600,000 400,000

$1,000,000

Outstanding shares

60,000

66,000

120,000

Book value per share

$16.67

$15.15

$8.33

Stockholders' equity Paid-in capital Common stock In excess of par value Total paid-in capital Retained earnings Total stockholders' equity

Ex. 237 Giraldi Corporation’s stockholders’ equity section at December 31, 2013, appears below: Stockholders’ equity Paid-in capital Common stock, $10 par, 60,000 outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity

$600,000 162,500 $762,500 150,000 $912,500

On June 30, 2014, the board of directors of Giraldi Corporation declared a 15% stock dividend, payable on July 31, 2014, to stockholders of record on July 15, 2014. The fair value of Giraldi Corporation’s stock on June 30, 2014, was $16. On December 1, 2013, the board of directors declared a 2 for 1 stock split effective December 15, 2014. Giraldi Corporation’s stock was selling for $18 on December 1, 2014, before the stock split was declared. Par value of the stock was adjusted. Net income for 2014 was $230,000 and there were no cash dividends declared.

Reporting and Analyzing Stockholders’ Equity

Ex. 237

11-63

(Cont.)

Instructions (a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. (b) Fill in the amount that would appear in the stockholders’ equity section for Giraldi Corporation at December 31, 2014, for the following items: 1. Common stock

$____________

2. Number of shares outstanding

_____________

3. Par value per share

$____________

4. Paid-in capital in excess of par

$____________

5. Retained earnings

$____________

6. Total stockholders’ equity

$____________

Ans: N/A, LO: 5,7,9, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 237 (a) 6/30/14

(12–16 min.) Stock Dividends ........................................................... Common Stock Dividends Distributable ............... Paid-in Capital in Excess of Par Common Stock . (To record declaration of 15% stock dividend, 60,000 × 15% = 9,000 × $16 = $144,000)

7/15/14

(No entry required)

7/31/14

Common Stock Dividends Distributable ....................... Common Stock .................................................... (To record issuance of 9,000 shares in a stock dividend)

12/1/14

144,000 90,000 54,000

90,000 90,000

(No entry required)

12/15/14 Memo: 138,000 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 value—Common Stock Retained earnings Total stockholders’ equity

$ 690,000 138,000 $ 5 $ 216,500 $ 236,000 $1,142,500

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 238 On January 1, 2014, Mather Corporation had Retained Earnings of $625,000. During the year, Mather had the following selected transactions: 1. Declared stock dividends of $40,000 2. Declared cash dividends of $50,000 3. A 2 for 1 stock split involving the issue of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock 4. Suffered a net loss of $80,000 Instructions Prepare a Retained Earnings Statement for the year. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 238

(15 min.) MATHER CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014

Balance, January 1............................................................................. Less: Net loss ................................................................................. Cash dividends Stock dividends ...................................................................... Balance, December 31 ......................................................................

$625,000 $80,000 50,000 40,000

(170,000) $455,000

Ex. 239 The following accounts appear in the ledger of Bradley, Inc., after the books are closed at December 31, 2014. Common Stock, $1 par value, 800,000 shares authorized, 550,000 shares issued Common Stock Dividends Distributable Paid-in Capital in Excess of Par Value—Common Stock Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 4,000 shares issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par Value—Preferred Stock

$550,000 80,000 950,000 400,000 680,000 40,000 75,000

Instructions Prepare the stockholders’ equity section at December 31, 2014, assuming that part of retained earnings is restricted for plant expansion in the amount of $200,000. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

Solution 239

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(15–20 min.) BRADLEY, INC. Balance Sheet (Partial) December 31, 2014

Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 10,000 shares authorized, 4,000 shares issued Common stock, $1 par value, 800,000 shares authorized, 550,000 shares issued, 540,000 shares outstanding Common stock dividends distributable Total capital stock Additional paid-in capital In excess of par value—preferred In excess of par value—common Total additional paid-in capital Total paid-in capital Retained earnings (See note) Total paid-in capital and retained earnings Less: Treasury stock Total stockholders’ equity

$ 400,000

$550,000 80,000

630,000 1,030,000

75,000 950,000 1,025,000 2,055,000 680,000 2,735,000 40,000 $2,695,000

Note: Retained earnings is restricted in the amount of $200,000 for plant expansion. Ex. 240 The following are selected accounts and balances from the records of Doran Corporation on June 30, 2014. Common Stock, $10 par value, 75,000 shares authorized, 54,000 shares issued Paid-in Capital in Excess of Par Value—Common Stock Preferred Stock, $100 par value, 8%, 3,000 shares authorized and issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par Value—Preferred Stock

$540,000 150,000 300,000 280,000 150,000 30,000

Instructions Prepare in proper form the stockholders’ equity section of the balance sheet. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 240

(8 min.) DORAN CORPORATION Balance Sheet (Partial) June 30, 2014

Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 3,000 shares authorized and issued Common stock, $10 par value, 75,000 shares authorized, 54,000 shares issued, 44,000 shares outstanding Total capital stock Additional paid-in capital In excess of par value—preferred $ 30,000 In excess of par value—common 150,000 Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (10,000 shares) Total stockholders’ equity

300,000 540,000 840,000

180,000 1,020,000 280,000 1,300,000 150,000 $1,150,000

Ex. 241 The following stockholders' equity accounts, arranged alphabetically, are in the ledger of Marvel Corporation at December 31, 2014. Common Stock ($5 stated value) Paid-in Capital in Excess of Par Value—Preferred Stock Paid-in Capital in Excess of Stated Value—Common Stock Preferred Stock (8%, $100 par, noncumulative) Retained Earnings Treasury Stock (10,000 shares)

$2,800,000 45,000 1,050,000 1,000,000 1,684,000 98,000

Instructions Prepare the stockholders’ equity section of the balance sheet at December 31, 2014. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

Solution 241

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(8 min.) MARVEL CORPORATION Partial Balance Sheet December 31, 2014

Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 10,000 shares issued ....................................................... $ 1,000,000 Common stock, no par, $5 stated value, 560,000 shares issued, and 550,000 shares outstanding ............................................................... 2,800,000 Total capital stock.......................................... Additional paid-in capital In excess of par value— preferred stock ..................................................... $ 45,000 In excess of stated value— common stock ...................................................... 1,050,000 Total additional paid-in capital ...................... Total paid-in capital ....................................... Retained earnings........................................................... Total paid-in capital and retained earnings......................................... Less: Treasury stock (10,000 common shares) ...................................... Total stockholders’ equity ..............................

$3,800,000

1,095,000 4,895,000 1,684,000 6,579,000 98,000 $6,481,000

Ex. 242 Mann Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2014. The following information is available for the company for 2013 and 2014. 2014 $ 120,000 1,000,000 1,200,000 100,000 360,000

Net income Average stockholders' equity Total assets Current liabilities Total liabilities

2013 $ 100,000 800,000 1,200,000 100,000 480,000

Instructions (a) Compute the return on common stockholders' equity for both years. (b) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased. (c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 242 (a) 2014:

2013:

(10 min.)

$120,000 = 12.0% $1,000,000

$100,000 = 12.5% $800,000

(b) Mann Corporation's net income increased in part because it retired bonds and eliminated the interest expense associated with the bonds. Such an increase in income would produce an increase in return on equity if equity had remained constant. In this example, equity increased by 25% [($1,000,000 – $800,000)  $800,000] while income increased by only 20%. (c)

2014:

$360,000 = 30% $1,200,000

2013:

$480,000 = 40% $1,200,000

Mann Corporation retired all its long term debt on January 1, 2014. This decreased its debt to assets ratio from .40 to .30. Mann Corporation would be considered to be very solvent. Ex. 243 Manning Company has $1,000,000 in assets and $1,000,000 in stockholders' equity, with 50,000 shares outstanding the entire year. It has a return on assets ratio of 9%. In the past year it had net income of $75,000. On January 1, 2014, it issued $300,000 in debt at 5% and immediately repurchased 25,000 shares for $300,000. Management expected that, had it not issued the debt, it would have again had net income of $75,000. Instructions (a) Determine the Company's net income and earnings per share for 2013 and 2014. (Ignore taxes in your computations.) (b) Compute the Company's return on common stockholders' equity for 2013 and 2014. (c) Compute the company's debt to assets ratio for 2013 and 2014. Ans: N/A, LO: 8, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 243

(10 min.)

(a) Pre-debt net income ...................................... Adjustment for interest expense ($300,000  .05) ............................................ Net income .................................................... Outstanding shares ....................................... Earnings per share ........................................

2013 $75,000

2014 $75,000

0 $75,000 50,000 $1.50

15,000 60,000 25,000 $2.40

Reporting and Analyzing Stockholders’ Equity

Solution 243

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(Cont.)

(b) Net income Average common stockholder's equity

2013 $ 75,000 = 7.5% $1,000,000

2014 $ 60,000 = 10% $600,000

0 $1,000,000

$300,000 $1,000,000

= 30%

Ex. 244 On January 1, 2014, Holt Corporation had $1,000,000 of common stock outstanding that was issued at par and retained earnings of $750,000. The company issued 60,000 shares of common stock at par on July 1 and earned net income of $400,000 for the year. Instructions Journalize the declaration of a 15% stock dividend on December 10, 2014, for the following two independent assumptions. (a) Par value is $10 and market value is $16. (b) Par value is $5 and market value is $8. Ans: N/A, LO: 5,9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 244

(5 min.)

(a) Stock Dividends (24,000*  $16)........................................ Common Stock Dividends Distributable (24,000  $10) .......................................................... Paid-in Capital in Excess of Par Value—Common Stock (24,000  $6) ............................................................

384,000 240,000 144,000

*[($1,000,000  $10) + 60,000]  15% (b) Stock Dividends (39,000*  $8).......................................... Common Stock Dividends Distributable (39,000  $5) ............................................................ Paid-in Capital in Excess of Par Value—Common Stock (39,000  $3) ............................................................ *[($1,000,000  $5) + 60,000]  15%

312,000 195,000 117,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

COMPLETION STATEMENTS 245. A corporation has a separate __________________________ distinct from its owners. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

246. The major advantages of the corporate form of organization include (1) limited _________________ of stockholders, (2) continuous ____________________ and (3) ease of transferring ___________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

247. The _______________ is the chief executive officer with direct responsibility for managing the business. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

248. Most publicly held corporations are required to make extensive disclosure of their financial affairs to the _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

249. Stockholders generally have the right to share in corporate _______________ and in ______________ upon liquidation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

250. Par value of stock represents the __________________ per share that must be retained in the business for the protection of corporate ___________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

251. A corporation’s own stock that has been reacquired by the corporation and held for future use is called __________________ and is deducted from total _____________________ on the balance sheet. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

252. The _______________ feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

253. Three important dates associated with dividends are the: (1)___________________, (2)__________________, and (3)__________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

254. The entry to record the declaration of a stock dividend increases _________________, and decreases ________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Stockholders’ Equity

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255. Both a stock split and a stock dividend will _________________ the number of shares outstanding and have _________________ on total stockholders’ equity. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

256. A debit balance in retained earnings is identified as a ________________. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

257. The paid-in capital section of the balance sheet consists of two classifications: ______________________ and ______________________. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 245. legal existence 246. liability, life, ownership rights 247. president 248. Securities and Exchange Commission 249. earnings, assets 250. legal capital, creditors 251. treasury stock, paid-in capital and retained earnings

252. cumulative 253. declaration date, record date, payment date 254. Paid-in Capital, Retained Earnings 255. increase, no effect 256. deficit 257. capital stock, additional paid-in capital

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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MATCHING 258. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Controller Deficit Payout ratio Stock dividend Declaration date

F. G. H. I. J.

Preemptive right Par value Legal capital Treasury stock Cumulative feature

____ 1. The date the board of directors formally declares a dividend. ____ 2. The amount that must be retained in the business for the protection of creditors. ____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends before common stockholders receive any dividends. ____ 4. The chief accounting officer. ____ 5. Measures the percentage of earnings distributed in the form of dividends to common stockholders. ____ 6. The amount assigned to each share of stock in the corporate charter. ____ 7. A debit balance in retained earnings. ____ 8. Enables stockholders to maintain their same percentage ownership when new shares are issued. ____ 9. Corporation’s own stock that has been reacquired by the corporation but not retired. ____ 10. A pro rata distribution of the corporation’s own stock to stockholders. Ans: N/A, LO: 1-8, 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. 3. 4. 5.

E H J A C

6. 7. 8. 9. 10.

G B F I D

SHORT-ANSWER ESSAY QUESTIONS S-A E 259 Define par value, and discuss its significance in accounting. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

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Solution 259 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 260 Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock? Ans: N/A, LO: 1,4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 260 Common stockholders have the right to vote on corporate actions that require stockholders’ approval while preferred stockholders generally do not have voting rights. However, preferred stockholders will receive (1) dividends and (2) assets in the event of liquidation prior to common stockholders. Preferred stockholders may also have a cumulative dividend feature that increases the amount of dividends paid to the preferred stockholders. S-A E 261 For what reasons might a company like IBM repurchase some of its stock (treasury stock)? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics

Solution 261 A corporation may acquire treasury stock (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company's stock in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that are hostile to management. S-A E 262 (a) (b)

Preferred stock may be cumulative. Discuss this feature. How are dividends in arrears presented in the financial statements?

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 262 (a) Some preferred stocks possess the additional features of being either cumulative or participating, or both. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends and unpaid prior year dividends before common stockholders receive any dividends. (b) Dividends in arrears are disclosed in the notes to the financial statements.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 263 A large stock dividend and stock split can frequently have the same effect on the market price of a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a corporation’s stock. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 263 Stock dividends and stock splits both involve the issuance of additional shares of stock to the stockholders. The market price of a corporation’s stock is affected because of an increase in the supply of the stock which tends to lower the market price of the stock. The reduced price then makes the stock more marketable. A small stock dividend does not result in a large increase in the number of shares outstanding and therefore will not increase the stock’s marketability. Thus, a small stock dividend will have little effect on the market price per share. However, both a large stock dividend and a stock split will cause a large increase in the number of shares outstanding. This increase in the number of shares outstanding makes the stock marketable to a larger number of individuals. Consequently, the market price per share will decrease. S-A E 264 Why must a corporation have sufficient retained earnings before it may declare cash dividends? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 264 By definition, a dividend is the distribution of profits to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the stockholders’ investment and in many states illegal. In addition, companies are frequently constrained by agreements with their lenders to pay dividends only from retained earnings. S-A E 265 Linda Merton asks, "Since stock dividends don't change anything, why declare them?" What is your answer to Linda? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 265 A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders' dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes it easier for small investors to purchase shares. (3) To emphasize that a portion of stockholders' equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. S-A E 266 What is the formula for the payout ratio? What does it indicate? Ans: N/A, LO: 8, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Reporting and Analyzing Stockholders’ Equity

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Solution 266 The payout ratio is computed by dividing cash dividends declared on common stock by net income. The payout ratio indicates the percentage of earnings distributed as cash dividends to common stockholders. S-A E 267

(Ethics)

Mark Remington, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Remington had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Terry Jackson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Jackson’s suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, LO: 3,5, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 267 1. There is no definite answer as to whether Mr. Jackson’s suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO, and made entirely to boost 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 stockholders should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no express or implied contract to pay a dividend to common stockholders, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury stock.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 268

(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 short response explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear. Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 268 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.

Reporting and Analyzing Stockholders’ Equity

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IFRS QUESTIONS 1.

Jahnke Corporation issued 8,000 shares of €2 par value ordinary shares for €11 per share. The journal entry to record the sale will include a. a debit to Cash for €16,000. b. a credit to Share Premium–Ordinary for €72,000. c. a credit to Share Capital–Ordinary for €88,000. d. a debit to Retained Earnings for €72,000.

Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (€11 − €2)  8,000 = €72,000

La Vida Corporation issued 24,000 shares of no-par value ordinary shares for €29.50 per share. Which of the following statements is true? a. Share Premium–Ordinary account will increase by €276,000. b. The Cash account will increase by €24,000. c. Retained Earnings account will increase by €684,000. d. Share Capital–Ordinary account will increase by €708,000.

Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: 24,000  €29.50 = €708,000

Freidrichs Company has issued and outstanding 11,000 shares of cumulative, 6%, €50 par value preference shares which it sold for €54 per share at the beginning of 2012. The company has never paid preference dividends. As of December 31, 2014, dividends in arrears are a. €66,000. b. €99,000. c. €121,500. d. €106,920.

Ans: b, SO:4, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (11,000  €50  .06)  3 = €99,000

Looper, Inc. has 30,000 shares of 6%, ₤100 par value, noncumulative preference shares and 50,000 ordinary shares with a ₤1 par value outstanding at December 31, 2014. There were no dividends declared in 2013. The board of directors declares and pays a ₤250,000 dividend in 2014. What is the amount of dividends received by the common shareholders in 2014? a. ₤0 b. ₤180,000 c. ₤250,000 d. ₤70,000

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ₤250,000 − (30,000  ₤100  .06) = ₤70,000

11-78 5.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Manner, Inc. has 10,000 shares of 5%, ₤100 par value, noncumulative preference shares and 20,000 ordinary shares with a ₤1 par value outstanding at December 31, 2014. There were no dividends declared in 2013. The board of directors declares and pays a ₤90,000 dividend in 2014. What is the amount of dividends received by the ordinary share holders in 2014? a. ₤0 b. ₤50,000 c. ₤90,000 d. ₤40,000

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ₤90,000 − (10,000  ₤100  .05) = ₤40,000

Anders, Inc has 10,000 shares of 5%, €100 par value, cumulative preference shares and 20,000 ordinary shares with a $1 par value outstanding at December 31, 2014. There were no dividends declared in 2012. The board of directors declares and pays a €90,000 dividend in 2013 and in 2014. What is the amount of dividends received by the ordinary shareholders in 2014? a. €30,000 b. €50,000 c. €90,000 d. €0

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 10,000  €100  .05 = €50,000; (€90,000  2) − (€50,000  3) = €30,000

On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Cash Dividends for €36,000. b. credit to Cash for €156,000. c. credit to Ordinary Share Dividends Distributable for €120,000. d. debit to Ordinary Share Dividends Distributable for €120,000.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 80,000  €10  .15 = €120,000

On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The shares were distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for €120,000. b. debit to Ordinary Share Dividends Distributable for €120,000. c. credit to Share Premium–Ordinary for €36,000. d. debit to Cash Dividends for €36,000.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 80,000  €10  .15 = €120,000

Reporting and Analyzing Stockholders’ Equity

11-79

Oxford Inc. was authorized to issue 100,000 £10 par value ordinary shares. As of December 31, 2014, the company had issued 44,000 shares at an average price of £22 per share. During 2014, the company felt that the shares were undervalued so it purchased 10,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 4,000 of the treasury for £25. Retained earnings was £1,658,000 at December 31, 2014. Total equity at December 31, 2014 is a. £2,446,000. b. £2,518,000. c. £2,546,000. d. £2,762,000.

Ans: c, LO: 7, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (44,000  ₤22) − (10,000  ₤18) + (4,000  ₤25) + ₤1,658,000 = ₤2,546,000

CHAPTER 12 STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

Item LO BT Item True-False Statements

Item

1. 2. 3. 4. 5. 6. 7. 8. 9.

1 1 1 1 1 2 2 2 2

K K K K K K K C K

10. 11. 12. 13. 14. 15. 16. 17. 18.

2 2 2 2 2 2 2 2 2

4 5 5 5 5 5 6 6 6

C K K C K C C AP K

*37. *38. *39. *40. *41.

6 6 6 7 7

C C K K K

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. 67. 68. 69. 70.

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 2 2 2 2

K K K K K K C K K K K K K K C C C C C C C C C C C C C K C

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. 97. 98. 99.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4,6 4 4 4 4 4 4 5 5 5 5 5

AP AP AP K AP AP C K K K K K K AP AP AP AP AP C C AP C C C K AP AP K K

158. 159. 160. 161. 162. 163. 164. 165. 166. 167. *168. *169. *170. *171. *172. *173. *174. *175. *176. *177. *178. *179. *180. *181. *182. *183.

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 6

K AN AN AN AN AN K K AN AN AP AP AP AP AP AP AP C AP K AP AP K K AP AP

184. 185. 186.

2 2 2

AP AP K

187. 188. 189.

4 4 4

6 6 6

AP AP AP

196. 197. 198. 199.

4 4 4 4

AP AP AP AP

200. 201. 202. 203.

4 4 4 4

C 19. 2 C 28. K 20. 3 K 29. K 21. 3 K 30. K 22. 4 C 31. C 23. 4 C 32. C 24. 4 K 33. C 25. 4 C *34. C 26. 4 C *35. K 27. 4 C *36. Multiple Choice Questions C 100. 4 K 129. C 101. 4 C 130. C 102. 4 AP 131. K 103. 4 AP 132. K 104. 4 AP 133. K 105. 4 C 134. K 106. 4 C 135. K 107. 4 C 136. AP 108. 4 C 137. AP 109. 4 AP 138. AP 110. 4 AP 139. AP 111. 4 AP 140. AP 112. 4 AP 141. K 113. 4 K 142. AP 114. 4 C 143. AP 115. 4 K 144. AP 116. 4 K 145. K 117. 4 K 146. K 118. 4 K 147. K 119. 4 K 148. K 120. 4 C 149. K 121. 4 C 150. K 122. 4 C 151. K 123. 4 C 152. C 124. 4 C 153. C 125. 4 C 154. K 126. 4 AP 155. K 127. 4 AP 156. AN 128. 4 AP 157. Brief Exercises AP 190. 4 AP *193. K *191. 6 AP *194. K *192. 6 AP *195. Exercises AP 204. 4,5 AP *208. AP 205. 4,5 AP *209. AP 206. 5 AN *210. AN *207. 5,6 AP *211.

6 6 6 6

AP AP AP AP

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12-2

Completion Statements Item SO BT Item 218. 4 K 221. 219. 4,6 K *222. 220. 5 K *223. Matching

SO 5 6 6

BT K K K

Item *224. *225.

SO 6 6

BT K K

Short Answer Essay 228. 1 K 230. 3 K 232. 4 C 234. 229. 2 C 231. 3,4 C 233. 4,6 C *235. *This topic is dealt with in an Appendix to the chapter.

4,6 6

C C

236. 237.

4,6 1

E C

Item 212. 213. 214.

SO 1 2 3

BT K K K

Item 215. 216. 217.

SO 3 3 4

BT K K K

226.

*227.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

43.

46.

212.

44.

47.

228.

42.

45.

48.

237.

Item

Type

Learning Objective 2 6.

16.

55.

65.

75.

85.

17.

56.

66.

76.

86.

18.

57.

67.

77.

87.

19.

58.

68.

78.

184.

10.

49.

59.

69.

79.

185.

11.

50.

60.

70.

80.

186.

12.

51.

61.

71.

81.

213.

13.

52.

62.

72.

82.

226.

14.

53.

63.

73.

83.

229.

15.

54.

64.

74.

84.

MC 231.

Learning Objective 3 20.

89.

92.

95.

98.

21.

90.

93.

96.

99.

88.

91.

94.

97.

230.

Statement of Cash Flows

12-3

Learning Objective 4 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

22.

107.

121.

135.

149.

202.

23.

108.

122.

136.

150.

203.

24.

109.

123.

137.

151.

204.

25.

110.

124.

138.

152.

205.

26.

111.

125.

139.

187.

217.

27.

112.

126.

140.

188.

218.

28.

113.

127.

141.

189.

219.

100.

114.

128.

142.

190.

231.

101.

115.

129.

143.

196.

232.

102.

116.

130.

144.

197.

233.

103.

117.

131.

145.

198.

234.

104.

118.

132.

146.

199.

236.

105.

119.

133.

147.

200.

106.

120.

134.

148.

201.

Ex 221.

Learning Objective 5 29.

153.

158.

163.

204.

30.

154.

159.

164.

205.

31.

155.

160.

165.

206.

32.

156.

161.

166.

207.

33.

157.

162.

167.

220.

Learning Objective 6 34.

137.

168.

178.

195.

227.

35.

138.

169.

179.

207.

233.

36.

139.

170.

180.

208.

234.

37.

140.

171.

181.

209.

235.

38.

141.

172.

182.

210.

236.

39.

142.

173.

183.

211.

133.

143.

174.

191.

222.

134.

144.

175.

192.

223.

135.

145.

176.

193.

224.

136.

146.

177.

194.

225.

Learning Objective 7 40. Note:

41.

TF = True-False MC = Multiple Choice Ma = Matching

TF C = Completion Ex = Exercise SA = Short Answer Essay

12-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING 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. Explain the impact of the product life cycle on a company’s cash flows. During the introductory stage, cash provided by operating activities and cash from investing are negative, and cash from financing is positive. During the growth stage, cash provided by operating activities becomes positive but is still not sufficient to meet investing needs. During the maturity stage, cash provided by operating activities exceeds investing needs, so the company begins to retire debt. During the decline stage, cash provided by operating activities is reduced, cash from investing becomes positive (from selling off assets), and cash from financing becomes more negative. 4. Prepare a statement of cash flows using the indirect method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset 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. 5. Use the statement of cash flows to evaluate a company. A number of measures can be derived by using information from the statement of cash flows as well as the other required financial statements. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of dividends or for expansion. Liquidity can be measured with the current cash debt coverage (cash provided by operating activities divided by average current liabilities). Solvency can be measured by the cash debt coverage (cash provided by operating activities divided by average total liabilities). *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. *7.Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) follow the steps in Illustration 12-4 (page 633), enter debit and credit amounts as needed.

Statement of Cash Flows

12-5

TRUE-FALSE STATEMENTS 1.

The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A statement of cash flows indicates the sources and uses of cash during a period.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The statement of cash flows shows the effects on net income of a company’s operating, investing, and financing activities for an accounting period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Operating activities include the cash effects of transactions that create revenues and expenses.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders’ equity only.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The statement of cash flows explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

Noncash investing and financing activities must be reported in the body of a statement of cash flows.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-6 12.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are reflected either in a schedule separate from the statement of cash flows or in a separate note to the financial statements.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13.

The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14.

The sale of land for cash would be classified as a cash inflow from an investing activity.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15.

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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17.

The payment of interest on bonds payable is classified as a cash outflow from operating activities.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18.

Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19.

The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20.

The growth phase of the product life cycle occurs when the company is purchasing fixed assets and beginning to produce and sell.

Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: Project Management, IMA: Business Economics

21.

During the maturity phase, cash from operations and net income are approximately the same.

Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: Project Management, IMA: Business Economics

22.

A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Statement of Cash Flows

23.

12-7

Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Cash provided by operations is generally equal to operating income.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26.

A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

Free cash flow is cash from operations less dividends.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

30.

The current cash debt coverage ratio is computed by dividing net cash provided by operations by average total liabilities.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

31.

The cash debt coverage ratio indicates a company’s ability to repay its liabilities from cash generated from operations.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

32.

The cash basis measure of liquidity is the cash debt coverage ratio.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

33.

The current cash debt coverage ratio is considered a better representative of liquidity than the current ratio because it involves the entire year rather than a balance at one point in time.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12-8 *34.

During a period, cost of goods sold plus an increase in inventory plus an increase in accounts payable equals cash paid to suppliers.

Ans: F, LO: 6, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

*35.

During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable increased by $1,500; therefore, the cash paid for income taxes was $11,000.

Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*36.

In computing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*37.

An increase in inventory would be added to cost of goods sold to determine net purchases for the period.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*38.

As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*39.

Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*40.

The change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*41.

Analysis of the changes in all of the noncash balance sheet accounts will explain the change in the Cash account.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.

T F F T T F T

8. 9. 10. 11. 12. 13. 14.

F T T F T F T

15. 16. 17. 18. 19. 20. 21.

F F T F T F T

22. 23. 24. 25. 26. 27. 28.

T T F T F F F

29. 30. 31. 32. 33. *34. *35.

F F T F T F T

*36. *37. *38. *39. *40. *41.

T T F F F T

Statement of Cash Flows

12-9

MULTIPLE CHOICE QUESTIONS 42.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

44.

The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45.

If a company reports a net loss, it a. may still have a net increase in cash. b. will not be able to pay cash dividends. c. will not be able to get a loan. d. will not be able to make capital expenditures.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46.

In addition to the three basic financial statements, which of the following is also a required financial statement? a. The Cash Budget. b. Statement of Cash Flows. c. Statement of Cash Inflows and Outflows. d. The Cash Reconciliation.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-10 48.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

All of the following statements are true regarding cash flow presentations except a. the balance sheet provides only limited information about a company's cash flows. b. the balance sheet provides information about how property, plant, and equipment were financed. c. the income statement does not show how much cash was generated by operating activities. d. if cash from operations is compared to net income, information about the quality of reported net income is revealed.

Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49.

The acquisition of land by issuing common stock is a. a noncash transaction that is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a noncash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50.

The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

51.

Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52.

Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

54.

12-11

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55.

Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. operating activities. d. either financing or investing activities.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56.

Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, a stock dividend declared and issued would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57.

Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, accounts receivable collected would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, inventory purchased with cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-12 59.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, long-term debt retired with cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, interest paid on note would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61.

Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, stock issued for equipment would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62.

Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, dividends received on securities held would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, income taxes paid would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

64.

12-13

Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, common stock issued for cash would be classified. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65.

Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, land purchased for cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66.

Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, land and building purchased with a mortgage would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67.

Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, treasury stock purchased with cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68.

If a company has both an inflow and outflow of cash related to property, plant, and equipment, the ______________ in the investing activities section. a. two cash effects must be netted and presented as one item b. cash inflow and cash outflow must be reported separately c. cash outflow is only is presented d. cash inflow and cash outflow can either be reported separately or presented as one item

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-14 69.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Of the items below, the one that appears first on the statement of cash flows is a. noncash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

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. Redeeming bonds before maturity.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

71.

Significant noncash transactions would not include a. conversion of bonds into common stock. b. asset acquisition through bond issuance. c. treasury stock acquisition. d. exchange of plant assets.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

72.

Preferred stock issued in exchange for land would be reported in the statement of cash flows in a. the cash flows from financing activities section. b. the cash flows from investing activities section. c. a separate schedule or note to the financial statements. d. the cash flows from operating section.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73.

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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74.

On the statement of cash flows, the cash flows from operating activities section would include a. receipts from the issuance of capital stock. b. receipts from the sale of investments. c. payments for the acquisition of investments. d. cash receipts from sales activities.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

75.

12-15

Cash flows from operating activities, as reported on the statement of cash flows under the indirect method, would include a. receipts from the sale of investments. b. net income. c. payments for dividends. d. receipts from the issuance of capital stock.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76.

The issuance of debt to purchase assets would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. none of these answers are correct.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77.

The payment of a cash dividend would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. significant noncash activity.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

Which of the following activities would be classified as an investing activity? a. Cash received from interest revenue. b. Cash paid (loaned) to a borrower as a loan. c. Cash received from dividend revenue. d. Cash paid to reacquire capital stock.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79.

Zoum Corporation had the following transactions during 2014: 1. Issued $125,000 of par value common stock for cash. 2. Recorded and paid wages expense of $60,000. 3. Acquired land by issuing common stock of par value $50,000. 4. Declared and paid a cash dividend of $10,000. 5. Sold a long-term investment (cost $3,000) for cash of $3,000. 6. Recorded cash sales of $400,000. 7. Bought inventory for cash of $160,000. 8. Acquired an investment in Zynga stock for cash of $21,000. 9. Converted bonds payable to common stock in the amount of $500,000. 10. Repaid a 6 year note payable in the amount of $220,000. What is the net cash provided by operating activities? a. $305,000. b. $290,000. c. $240,000. d. $180,000.

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 − $160,000 − $60,000 = $180,000

12-16 80.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Zoum Corporation had the following transactions during 2014: 1. Issued $125,000 of par value common stock for cash. 2. Recorded and paid wages expense of $60,000. 3. Acquired land by issuing common stock of par value $50,000. 4. Declared and paid a cash dividend of $10,000. 5. Sold a long-term investment (cost $3,000) for cash of $3,000. 6. Recorded cash sales of $400,000. 7. Bought inventory for cash of $160,000. 8. Acquired an investment in Zynga stock for cash of $21,000. 9. Converted bonds payable to common stock in the amount of $500,000. 10. Repaid a 6 year note payable in the amount of $220,000. What is the net cash provided by financing activities? a. $<105,000>. b. $395,000. c. $<605,000>. d. $115,000.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $125,000 − $10,000 − $220,000 = ($105,000)

81.

Zoum Corporation had the following transactions during 2014: 1. Issued $125,000 of par value common stock for cash. 2. Recorded and paid wages expense of $60,000. 3. Acquired land by issuing common stock of par value $50,000. 4. Declared and paid a cash dividend of $10,000. 5. Sold a long-term investment (cost $3,000) for cash of $3,000. 6. Recorded cash sales of $400,000. 7. Bought inventory for cash of $160,000. 8. Acquired an investment in Zynga stock for cash of $21,000. 9. Converted bonds payable to common stock in the amount of $500,000. 10. Repaid a 6 year note payable in the amount of $220,000. What is the net cash provided by investing activities? a. $432,000. b. $212,000 c. ($18,000). d. ($68,000).

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000 − $21,000 = ($18,000)

82.

APS Company issued 15,000 shares of $1 par common stock for $40 per share during 2014. The company paid dividends of $36,000 and issued long-term notes payable of $330,000 during the year. What amount of cash flows from financing activities will be reported on the statement of cash flows? a. $9,000 net cash inflow. b. $264,000 net cash inflow. c. $705,000 net cash outflow. d. $894,000 net cash inflow.

Statement of Cash Flows

83.

12-17

Vangaurd Company purchased treasury stock with a cost of $55,000 during 2014. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $836,000. Cash flows from financing activities for 2014 total a. $816,000 net cash inflow. b. $831,000 net cash inflow. c. $75,000 net cash outflow. d. $761,000 net cash inflow.

84.

Which of the following is the first step in preparing the statement of cash flows? a. Determine the net cash provided by operating activities. b. Determine the net income. c. Determine net cash provided by investing and financing activities. d. Determine the net increase (decrease) in cash.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

85.

McLaughlin Company issued common stock for proceeds of $372,000 during 2014. The company paid dividends of $66,000 and issued a long-term note payable for $250,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $54,000. The financing section of the statement of cash flows will report net cash inflows of a. $252,000. b. $556,000. c. $306,000. d. $502,000.

86.

During 2014, Lowes Company sold equipment with a book value of $90,000 for proceeds of $109,000. The company purchased new equipment for $240,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2014. The investing section of the statement of cash flows will report a. net cash outflows of $226,000. b. net cash outflows of $131,000. c. net cash inflows of $109,000. d. net cash inflows of $14,000.

12-18 87.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In Jackson Jones Company, land decreased $180,000 because of a cash sale for $180,000, the equipment account increased $60,000 as a result of a cash purchase, and Bonds Payable increased $200,000 from issuance for cash at face value. The net cash provided by investing activities is a. $180,000. b. $320,000. c. $120,000. d. $140,000.

88.

In order to determine net cash provided by operating activities, a company must convert net income from an accrual basis to a cash basis under a. the direct method only. b. the indirect method only. c. both the direct method and the indirect method. d. neither the direct nor the indirect method.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

89.

Cash from investing becomes positive and cash from financing becomes more negative during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

90.

Cash generated from operations exceeds investing needs, and the company can begin retiring debt during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

91.

Collections on accounts receivable will lag behind sales, and accrual sales during a period will exceed cash collections during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Statement of Cash Flows

92.

12-19

A company would be expected to generate small amounts of cash from operations during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

93.

The phase in the product life cycle when a company is purchasing fixed assets and beginning to produce and sell is the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

94.

Cash from operations and net income are approximately the same during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

95.

Which of the following is not typically a characteristic experienced by a company during the introductory phase of the corporate life cycle? a. Cash used in operations will exceed cash generated by operations. b. Considerable cash will be used to purchase productive assets. c. Cash from investing is positive. d. Cash from financing is positive.

Ans: d, LO: 3, Bloom: C, 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 is not typically a characteristic experienced by a company during the growth phase of the corporate life cycle? a. Cash from operations on the statements of cash flows will be less than net income on the income statement. b. Collections on accounts receivable will lag behind sales. c. Cash from investing is positive. d. Cash from financing is positive.

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

97.

Which of the following would not create a cash flow? a. Sale of equipment at book value. b. Purchase of a delivery truck. c. Payment of a cash dividend. d. The company converts bonds into common stock.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

12-20 98.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The information to prepare the statement of cash flows comes from all of the following sources except a. comparative balance sheets. b. additional transaction data about cash provided or used during the period. c. adjusted trial balance. d. current income statement.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

99.

The information in the following table is from the statement of cash flows for a company at four different points in time (Period 1, Period 2, Period 3, and Period 4). Negative values are presented in parentheses.

Cash provided by operations Cash provided by investing Cash provided by financing Net income

Period 1 $ (180,000) (300,000) 290,000 (120,000)

Period 2 $ 90,000 75,000 (220,000) 30,000

Period 3 $ 360,000 90,000 ($170,000) 300,000

Period 4 $ 50,000 (120,000) $420,000 (15,000)

Based on this information, which of the following answers most likely corresponds with the introductory phase, growth phase, maturity phase, or decline phase? a. Period 2, Period 1, Period 3, Period 4. b. Period 1, Period 4, Period 3, Period 2. c. Period 3, Period 4, Period 1, Period 2. d. Period 4, Period 3, Period 2, Period 1. Ans: b, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

100.

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 each of the bank accounts.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

101.

If accounts receivable have increased during the period a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Statement of Cash Flows

102.

12-21

Accounts receivable arising from sales to customers amounted to $120,000 and $105,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $407,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $407,000. b. $422,000. c. $512,000. d. $392,000.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $407,000 + ($120,000 − $105,000) = $422,000

103.

Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $203,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $203,000. b. $208,000. c. $238,000. d. $198,000.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $203,000 + ($35,000 − $40,000) = $198,000

104.

Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $212,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $212,000. b. $202,000. c. $222,000. d. $292,000.

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $212,000 + ($80,000 − $70,000) = $222,000

105.

If accounts payable have increased during a period a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis.

Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

106.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12-22 107.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

108.

In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.

Ans: a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

109.

Peninsula Company reported net income of $260,000 for the year. During the year, accounts receivable increased by $21,000, accounts payable decreased by $9,000 and depreciation expense of $45,000 was recorded. Net cash provided by operating activities for the year is a. $275,000. b. $245,000. c. $227,000. d. $260,000.

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $260,000 − $21,000 − $9,000 + $45,000 = $275,000

110.

LKN Company reported net income of $80,000 for the year. During the year, accounts receivable increased by $6,000, accounts payable decreased by $4,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for the year is a. $90,000. b. $70,000. c. $72,000. d. $80,000.

111.

Catalina Company reported a net loss of $10,000 for the year ended December 31, 2014. During the year, accounts receivable decreased $5,000, inventory increased $8,000, accounts payable increased by $10,000, and depreciation expense of $6,000 was recorded. During 2014, operating activities a. used net cash of $3,000. b. used net cash of $7,000. c. provided net cash of $3,000. d. provided net cash of $7,000.

Statement of Cash Flows

112.

12-23

Hunter Company reported a net loss of $6,000 for the year ended December 31, 2014. During the year, accounts receivable decreased $14,000, inventory increased $10,000, accounts payable increased by $15,000, and depreciation expense of $12,000 was recorded. During 2014, operating activities a. used net cash of $7,000. b. used net cash of $25,000. c. provided net cash of $25,000. d. provided net cash of $37,000.

113.

Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

114.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

115.

Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

116.

In developing the cash flows from operating activities, most companies in the United States a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

117.

Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense. b. An increase in accounts receivable. c. An increase in accounts payable. d. A decrease in prepaid expenses.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

118.

Which of the following would be added to net income using the indirect method? .

12-24

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

a. b. c. d.

An increase in accounts receivable. An increase in prepaid expenses. Depreciation expense. A decrease in accounts payable.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

119.

Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense. b. An increase in Prepaid Insurance. c. Amortization Expense. d. An increase in Land.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

120.

In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

121.

Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is correct? Add to Net Income Deduct from Net Income a. Accounts Receivable increase decrease b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Taxes Payable decrease increase

Ans: c, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

122.

Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? Add to Net Income Deduct from Net Income a. Accounts Receivable decrease increase b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Accounts Payable increase decrease

Ans: b, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

123.

Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Disposal of Equipment. b. Depreciation Expense. c. Patent Amortization Expense. d. Depletion Expense.

Ans:a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

124.

Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. .

Statement of Cash Flows

12-25

b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section. Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

125.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

126.

A company had net income of $990,000. Depreciation expense is $110,000. During the year, accounts receivable and inventory increased $60,000 and $160,000, respectively. Prepaid expenses and accounts payable decreased $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities? a. $860,000. b. $884,000. c. $1,180,000. d. $1,228,000.

127.

A company had net income of $242,000. 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 $14,000, respectively. There was also a loss on the sale of equipment of $17,000. How much cash was provided by operating activities? a. $218,000. b. $201,000. c. $278,000. d. $299,000.

128.

The net income reported on the income statement for the current year was $1,260,000. Depreciation recorded on plant assets was $257,000. Accounts receivable and inventories increased by $72,000 and $48,000, respectively. Prepaid expenses and accounts payable decreased by $6,000 and $66,000, respectively. How much cash was provided by operating activities? a. $1,280,000. b. $1,400,000. c. $1,337,000. d. $1,697,000.

12-26 129.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The net income reported on the income statement for the current year was $410,000. Depreciation recorded on plant assets was $76,000. Accounts receivable and inventories increased by $40,000 and $16,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $32,000, respectively. How much cash was provided by operating activities? a. $380,000. b. $400,000. c. $364,000. d. $572,000.

130.

The net income reported on the income statement for the current year was $440,000. Depreciation was $62,000. Accounts receivable and inventories decreased by $20,000 and $32,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $2,000 and $16,000. How much cash was provided by operating activities? a. $496,000. b. $568,000. c. $536,000. d. $436,000.

131.

The net income reported on the income statement for the current year was $210,000. Depreciation was $52,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $14,000. How much cash was provided by operating activities? a. $277,500. b. $287,500. c. $295,500. d. $228,500.

132.

The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

133.

12-27

If $2,500,000 of bonds are issued during the year but $4,000,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $1,500,000. b. net decrease in cash of $1,500,000. c. increase in cash of $2,500,000 and a decrease in cash of $4,000,000. d. net loss on retirement of bonds of $1,500,000.

Ans: c, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

134.

If $1,200,000 of bonds are issued during the year but $2,500,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $1,300,000. b. net decrease in cash of $1,200,000. c. increase in cash of $1,200,000 and a decrease in cash of $2,500,000. d. net loss on retirement of bonds of $1,300,000.

Ans: c, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

135.

Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? 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, LO: 4, 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

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, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

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 retained earnings statement. c. a comparative balance sheet. d. a comparative income statement.

Ans: c, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12-28 138.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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 answer choices are correct.

Ans: d, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

139.

Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense. b. Change in accounts receivable. c. Payment of cash dividends. d. Change in prepaid expenses.

Ans: c, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

140.

When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section.

Ans: c, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141.

The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. d. how the retirement of debt was accomplished.

Ans: c, LO: 4, 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

142.

If a gain of $45,000 is incurred in selling (for cash) office equipment having a book value of $180,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $135,000. b. $180,000. c. $225,000. d. $45,000.

Ans: c, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 + $180,000 = $225,000

143.

If a loss of $27,000 is incurred in selling (for cash) office equipment having a book value of $200,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $173,000. b. $200,000. c. $227,000. d. $27,000.

Ans: a, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 − $27,000 = $173,000

Statement of Cash Flows

144.

12-29

If a gain of $13,500 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. $86,500. b. $113,500. c. $100,000. d. $13,500.

Ans: b, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $100,000 + $13,500 = $113,500

145.

If a loss of $9,000 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. $71,000. b. $80,000. c. $89,000. d. $9,000.

146.

Land costing $125,000 was sold for $325,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $125,000. b. $325,000. c. $280,000. d. $200,000.

Ans: b, LO: 4, 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $325,000

147.

When using the indirect method to compute cash provided by operating activities a. income taxes paid may be ignored. b. amortization expense is added to net income. c. decreases in inventory are subtracted from net income. d. increases in accounts receivable are added to net income.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

148.

A transaction involving a gain on the sale of equipment affects cash provided (used) by a. financing and investing activities. b. operating and financing activities. c. operating and investing activities. d. operating, financing, and investing activities.

Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-30 149.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Minette Company reported net income of $120,000 for the year ended December 31, 2014. During the year, inventories decreased by $24,000, accounts payable decreased by $36,000, depreciation expense was $27,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2014 using the indirect method was a. $168,000. b. $126,000. c. $147,000. d. $144.000.

150.

All of the following adjustments are added to net income in computing net cash provided by operating activities except a. amortization expense. b. a decrease in accounts receivable. c. an increase in accounts payable. d. an increase in prepaid expenses.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

151.

All of the following adjustments would be deducted in determining net cash provided by operating activities except a(n) a. increase in inventories. b. depreciation expense. c. gain on disposal of plant assets. d. decrease in accrued expenses payable.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

152.

Each of the following is an adjustment to convert net income to net cash provided by operating activities except a. adding back noncash expenses. b. adding gains and deducting losses. c. analyzing changes to noncash current asset and current liability accounts. d. All of these answer choices are adjustments.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

153.

The current cash debt coverage is computed by dividing a. average current liabilities by cash provided by operating activities. b. cash provided by operating activities by average current liabilities. c. ending current liabilities by cash provided by operating activities. d. cash provided by operating activities by ending current liabilities.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Statement of Cash Flows

154.

12-31

Laser Performance Inc. has the following information available (amount in thousands). Net Income $30,000 Average Total Liabilities 80,000 Average Current Liabilities 36,000 Cash Provided by Operations 48,000 Cash Sales 130,000 Capital Expenditures 22,000 Dividends Paid 6,000 What is the current cash debt coverage? a. 1.333 times. b. .600 times . c. .833 times . d. .369 times.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $48,000 / $36,000 = 1.333

155.

Laser Performance Inc. has the following information available (amount in thousands). Net Income $30,000 Average Total Liabilities 80,000 Average Current Liabilities 36,000 Cash Provided by Operations 48,000 Cash Sales 130,000 Capital Expenditures 22,000 Dividends Paid 6,000 What is the cash debt coverage? a. .375 times. b. 1.33 times. c. .600 times. d. 1.625 times.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $48,000 / $80,000 = .600

156.

The current cash debt coverage is used to evaluate a. solvency. b. profitability. c. liquidity. d. earning power.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

157.

The cash debt coverage is computed by dividing net cash provided by operating activities by a. average current liabilities. b. net sales. c. average long-term liabilities. d. average total liabilities.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12-32 158.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

159.

During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000, cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In addition, cash spent for fixed assets during the period was $138,000,000. Average current liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends were paid. Based on this information, what was Ecuyer's free cash flow? a. ($72,000,000). b. $54,000,000. c. $259,000,000. d. ($302,000,000).

Ans: c, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $397,000,000 − $138,000,000 = $259,000,000

160.

During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000, cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In addition, cash spent for fixed assets during the period was $138,000,000. Average current liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends were paid. Based on this information, what was Ecuyer's current cash debt coverage? a. 1.16 times. b. 2.88 times. c. 0.82 times. d. 1.22 times.

Ans: d, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $397,000,000 / $325,000,000 = 1.22

161.

During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000, cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In addition, cash spent for fixed assets during the period was $138,000,000. Average current liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends were paid. Based on this information, what was Ecuyer's cash debt coverage? a. 0.38 times. b. 0.46 times. c. 1.22 times. d. 0.40 times.

Ans: b, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $397,000,000 / $858,000,000 = 0.46

Statement of Cash Flows

162.

12-33

Authentic Exposure Company had the following transactions that took place during the year: I. Recorded credit sales of $2,500 II. Collected $1,500 owning from customers III. Recorded sales returns of $500 and credited the customer's account. What is the total effect of these transactions on Free Cash Flow, Current Cash Debt Coverage, and Cash Debt Coverage, respectively? Free Current Cash Debt Cash Debt Cash Flow Coverage Coverage a. Increase Increase Increase b. Decrease Decrease Decrease c. No Effect No Effect No Effect d. Decrease No Effect No Effect

Ans: a, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

163.

Authentic Exposure Company had the following transactions that took place during the year: I. Paid amount owing to suppliers $2,750. II. Purchased new equipment for $5,000 by signing a long-term note payable. III. Purchased a patent and paid $15,000 cash for the asset. How what is the total effect of these transactions on Free Cash Flow, Current Cash Debt Coverage, and Cash Debt Coverage respectively? Free Current Cash Debt Cash Debt Cash Flow Coverage Coverage a. Increase Increase Increase b. Decrease Decrease Decrease c. No Effect No Effect No Effect d. Increase No Effect No Effect

Ans: b, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

164.

All of the following statements about free cash flow are false except a. significant free cash flow indicates less potential to finance new investment. b. free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends. c. free cash flow is not reported on the statement of cash flows. d. significant free cash flow indicates less potential to pay additional dividends.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

165.

Typically a value below what amount for the current cash debt coverage ratio should be further investigated? a. 2.0. b. 1.4. c. 0.6. d. 0.4.

Ans: d, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12-34

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

166.

Using the following information, which company appears to be most liquid? Jones Parksh Brady (in $ Millions) Company Company Company Cash provided by operating activities for 2014 140 295 110 Current liabilities for 2013 230 335 205 Current liabilities for 2014 280 375 240 Total liabilities for 2013 600 440 275 Total liabilities for 2014 720 530 325 a. b. c. d.

Chambers Company 200 300 360 500 540

Jones Company Parksh Company Brady Company Chambers Company

Ans: b, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

167.

Using the following information, which company appears to be least solvent? Jones Parles Brady (in $ Millions) Company Company Company Cash provided by operating activities for 2014 140 295 110 Current liabilities for 2013 230 335 205 Current liabilities for 2014 280 375 240 Total liabilities for 2013 600 440 275 Total liabilities for 2014 720 530 325 a. b. c. d.

Chambers Company 200 300 360 500 540

Jones Company Parles Company Brady Company Chambers Company

Ans: a, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

*168. Brad Ford Company reports a $32,000 increase in inventory and a $8,000 increase in accounts payable during the year. Cost of goods sold for the year was $190,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $190,000. b. $214,000. c. $166,000. d. $180,000. Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $190,000 + ($32,000 − $8,000) = $214,000

Statement of Cash Flows

12-35

*169. The cost of goods sold during the year was $275,000. Inventory decreased by $10,000 during the year and accounts payable decreased by $12,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $287,000. b. $277,000. c. $253,000. d. $297,000. Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $275,000 − $10,000 + $12,000 = $277,000

*170. Tito Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $182,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $182,000. b. $162,000. c. $207,000. d. $157,000. Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $182,000 + $20,000 + $5,000 = $207,000

*171. The cost of goods sold during the year was $330,000. Inventory increased by $12,000 during the year and accounts payable decreased by $19,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $349,000. b. $311,000. c. $337,000. d. $361,000. Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $330,000 + $12,000 + $19,000 = $361,000

*172. Anjili Company had credit sales of $1,400,000. The beginning accounts receivable balance was $165,000 and the ending accounts receivable balance was $280,000. Using the direct method of reporting cash flows from operating activities, what were the cash collections from customers during the period? a. $1,615,000. b. $1,400,000. c. $1,285,000. d. $1,565,000. Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,400,000 + ($165,000 − $280,000) = $1,285,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*173. During 2014, Bronze Company had $130,000 in cash sales and $970,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2013 and 2014, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2014? a. $1,368,000. b. $1,592,000. c. $1,132,000. d. $1,068,000. Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $970,000 + $130,000 + ($180,000 − $212,000) = $1,068,000

*174. The following information relates to Layline Company: Prepaid Insurance, December 31, 2013 $302,000 Prepaid Insurance, December 31, 2014 280,000 Insurance expense for 2014 1,400,000 Using the direct method of reporting cash flows from operating activities, what was the amount of cash paid for insurance premiums by Layline during 2014? a. $1,378,000. b. $1,422,000. c. $1,680,000. d. $1,476,000. Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,400,000 + ($280,000 − $302,000) = $1,378,000

*175. Cash receipts from customers are greater than sales revenues when there is a(n) a. increase in accounts receivable. b. decrease in accounts receivable. c. increase in cost of goods sold. d. decrease in cost of goods sold. Ans: b, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*176. Colie Company had an increase in inventory of $120,000. The cost of goods sold was $490,000. There was a $30,000 decrease in accounts payable from the prior period. Using the direct method of reporting cash flows from operating activities, what were Colie's cash payments to suppliers? a. $640,000. b. $580,000. c. $370,000. d. $310,000. Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $490,000 + $120,000 + $30,000 = $640,000

*177. Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers. b. Cash collections from customers. c. Depreciation Expense. d. Cash from the sale of equipment. Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*178. North Company has other operating expenses of $330,000. There has been a decrease in .

Statement of Cash Flows

12-37

prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger than in the prior period. Using the direct method of reporting cash flows from operating activities, what were North's cash payments for operating expenses? a. $338,000. b. $322,000. c. $290,000. d. $370,000. Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $330,000 − $16,000 − $24,000 = $290,000

*179. Westwind Corporation shows income tax expense of $180,000. There has been a $20,000 decrease in federal income taxes payable and a $28,000 increase in state income taxes payable during the year. Using the direct method of reporting cash flows from operating activities, what was Westwind 's cash payment for income taxes? a. $180,000. b. $172,000. c. $132,000. d. $228,000. Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $180,000 + ($20,000 − $28,000) = $172,000

*180. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers. b. Cash paid for income taxes. c. Gain on sale of equipment. d. Cash paid to employees. Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*181. Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes. Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12-38

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*182. Seachest Company reports the following: End of Year Beginning of Year Inventory $25,000 $40,000 Accounts Payable 30,000 10,000 If cost of goods sold for the year is $190,000, the amount of cash paid to suppliers using the direct method is a. $195,000. b. $185,000. c. $155,000. d. $230,000. Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $190,000 + ($25,000 − $40,000) − ($30,000 − $10,000) = $155,000

*183. During the year, Salaries Payable decreased by $12,000. Using the direct method of reporting cash flows from operating activities, if Salary Expense amounted to $400,000 for the year, the cash paid to employees (including deductions from gross pay) is a. $412,000. b. $388,000. c. $400,000. d. $404,000. Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 + $12,000 = $412,000

Answers to Multiple Choice Questions 42. b 43. a 44. c 45. a 46. b 47. a 48. b 49. a 50. a 51. c 52. a 53. a 54. a 55. c 56. d 57. a 58. a 59. c 60. a 61. d 62. a

63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.

a c b d c b b a c c c d b d c b d a c d d

84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

a a c c c d c b b a c d c d c b d b b d c

105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125.

c d b a a d c c b a d b b c d b c b a d a

126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146.

b a c b b c b c c a b c d c c c c a b a b

147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167.

b c b d b b b a c c d d c d b a b c d b a

*168. *169. *170. *171. *172. *173. *174. *175. *176. *177. *178. *179. *180. *181. *182. *183.

b b c d c d a b a c c b c b c a

Statement of Cash Flows

12-39

BRIEF EXERCISES Be. 184 Selected transactions of the Carolina Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Common stock is sold for cash above par value. Bonds payable are issued for cash at a discount. Interest on a short-term note receivable is collected. Merchandise is sold to customers for cash. Cash is paid to purchase inventory. Equipment is purchased by signing a 3-year, 10% note payable. Cash dividends on common stock are declared and paid. One hundred shares of Amazon.com common stock are purchased for cash. Land is sold for cash at book value. Bonds payable are converted into common stock.

Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 184 1. 2. 3. 4. 5.

(8-11 min.) Financing activity Financing activity Operating activity Operating activity Operating activity

6. (d) 7. (c) 8. (b) 9. (b) 10. (d)

Noncash actitity Financing activity Investing activity Investing activity Noncash actitity

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12-40 Be. 185

Selected transactions for the Hamiltion 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.

Solution 185 1. 2. 3. 4. 5.

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

(8-11 min.) Operating activity Financing activity Investing activity Noncash activity Financing activity

6. (a) 7. (d) 8. (b) 9. (b) 10. (a)

Operating activity Noncash activity Investing activity Investing activity Operating activity

Be. 186 (a) (b)

Identify several alternatives for presenting significant noncash activities in financial statements. Give three examples of significant noncash activities.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 186

(8-12 min.)

(a)

Significant noncash activities may appear at the bottom of the statement of cash flows as a separate schedule under the heading "Noncash investing and financing activities." They may also be presented in a separate note or supplementary schedule to the financial statements.

(b)

1. 2. 3. 4.

Direct issuance of common stock to purchase assets Conversion of bonds into common stock Direct issuance of debt to purchase assets Exchanges of plant assets

Statement of Cash Flows

12-41

Be. 187 Lake Norman Company reported net income of $225,000 for the current year. Depreciation recorded on buildings and equipment amounted to $75,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $20,000 $15,000 Accounts receivable 22,000 32,000 Inventory 50,000 60,000 Accounts payable 12,000 18,000 Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 187

(8-12 min.)

Net income ......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ Decrease in accounts receivable ............................................................... Decrease in inventory ................................................................................. Decrease in accounts payable ................................................................... Net cash provided by operating activities ..................................................

$225,000 75,000 10,000 10,000 (6,000) $314,000

Be. 188 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 Add to Net Income A Deduct from Net Income D 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Increase in income taxes payable Depreciation expense Loss on sale of investment Gain on disposal of equipment Amortization expense

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12-42

Solution 188 1. 2. 3. 4. 5.

D D A D A

(10 min.) 6. 7. 8. 9. 10.

A A A D A

Be. 189 Assuming a statement of cash flows is prepared using the indirect method, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D Cash Flows From Investing Activities Cash Flows From Financing Activities

IA FA Category

Common stock is issued for cash at an amount above par value

_____

Inventory increased during the period

_____

Depreciation expense recorded for the period

_____

Building was purchased for cash

_____

Bonds payable were acquired and retired at their carrying value

_____

Accounts payable decreased during the period

_____

Prepaid expenses decreased during the period

_____

Treasury stock was acquired for cash

_____

Land is sold for cash at an amount equal to book value

_____

10.

Patent amortization expense recorded for a period

_____

Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 189

(8-12 min.) Category

Common stock is issued for cash at an amount above par value

Inventory increased during the period

Depreciation expense recorded for the period

Building was purchased for cash

Bonds payable were acquired and retired at their carrying value

Accounts payable decreased during the period

Prepaid expenses decreased during the period

Treasury stock was acquired for cash

FA .

Statement of Cash Flows

Land is sold for cash at an amount equal to book value

10.

Patent amortization expense recorded for a period

12-43

Be. 190 Lacey Company prepared the tabulation below at December 31, 2014. Net Income .................................................

$310,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $45,000 ....................................................................

______

Increase in accounts receivable, $55,000 .....................................................

______

Decrease in inventory, $12,000 ....................................................................

______

Increase in accounts payable, $6,000 ..........................................................

______

Increase in prepaid expenses, $4,000 ..........................................................

______

Decrease in income taxes payable, $3,500 ..................................................

______

Gain on disposal of land, $7,500 ..................................................................

______

Net cash provided (used) by operating activities ...........................................

______

Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 190

(8-12 min.)

Net Income ...........................................................................................................

$310,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................... Increase in accounts receivable ................................................................... Decrease in inventory ................................................................................... Increase in accounts payable ....................................................................... Increase in prepaid expenses ....................................................................... Decrease in income taxes payable ............................................................... Gain on disposal of land ............................................................................... Net cash provided (used) by operating activities ..................................

45,000 (55,000) 12,000 6,000 (4,000) (3,500) (7,500) $303,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*Be. 191 O'Conner Company had total operating expenses of $135,000 in 2014, which included depreciation expense of $22,000. Also during 2014, prepaid expenses increased by $9,000 and accrued expenses decreased by $5,500. Instructions Calculate the amount of cash payments for operating expenses in 2014 using the direct method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 191

(5-8 min.)

Operating expenses .......................................................... Less: Noncash depreciation expense ................................ Add: Increase in prepaid expenses .................................... Add: Decrease in accrued liabilities ................................... Cash payments for operating expenses .............................

$135,000 (22,000) 9,000 5,500 $127,500

*Be. 192 a. Sales = $650,500; Accounts receivable increased by $27,500. Calculate cash receipts from sales. b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased by $28,500. Calculate cash payments for purchases. c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase in taxes payable of $1,500. Calculate the cash paid for income taxes. d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses increased by $15,400; Accrued wages decreased by $10,600. Calculate cash payments for operating expenses. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 192

(10 min.)

a. $623,000; $650,500 – $27,500 b. $383,500; $430,000 – $75,000 + $28,500 c. $11,000; $12,500 – $1,500 d. $64,550; $75,750 – $37,200 + $15,400 + $10,600

Statement of Cash Flows

12-45

*Be. 193 a. Sales = $850,000; Accounts receivable decreased by $40,000. Calculate cash receipts from sales. b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased by $28,000. Calculate cash payments for purchases. c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in taxes payable of $3,500. Calculate the cash paid for income taxes. d. Operating expenses total $103,000; Depreciation expense = $14,000; Prepaid expenses decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for operating expenses. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 193

(10 min.)

a. $890,000; $850,000 + $40,000 b. $644,000; $650,000 + $22,000 – $28,000 c. $22,000; $25,500 – $3,500 d. $70,000; $103,000 – $14,000 – $13,000 - $6,000 *Be. 194 The general ledger of the Summer Company provides the following information:

Accounts Receivable Inventory Accounts Payable

End of Year $ 64,000 240,000 42,000

Beginning of Year $ 84,000 205,000 62,000

The company's net sales for the year was $2,000,000 and cost of goods sold amounted to $1,700,000. Instructions Compute the following: (a)

Cash receipts from customers

(b)

Cash payments to suppliers

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

12-46

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*Solution 194

(8-12 min.)

(a)

Cash receipts from customers Sales + Decrease in Accounts Receivable $2,000,000 + $20,000 = $2,020,000

(b)

Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending Inventory Cost of goods sold

$ 205,000 ? ? 240,000 $1,700,000

Purchases = Cost of goods sold + increase in inventory = $1,700,000 + $35,000 = $1,735,000 Amount of cash payments to suppliers: Purchases + Decrease in accounts payable $1,735,000 + $20,000 = $1,755,000 *Be. 195 The income statement of Patterson Inc. for the year ended December 31, 2014, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income

$600,000 360,000 240,000 24,000 $216,000

Patterson's balance sheet contained the following comparative data at December 31: 2014 $50,000 37,000 4,000

Accounts receivable Accounts payable Income taxes payable

2013 $60,000 46,000 2,000

Patterson has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the statement of cash flows using the direct method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Statement of Cash Flows

*Solution 195

12-47

(9-14 min.) PATTERSON INC. Statement of Cash Flows For the Year Ending December 31, 2014

Cash flows from operating activities Cash receipts from customers ($600,000 + $10,000) Cash payments: For operating expenses ($360,000 + $9,000) For income taxes ($24,000 - $2,000) Net cash provided by operating activities

$610,000 $369,000 22,000

391,000 $219,000

EXERCISES Ex. 196 Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Cash Accounts receivable Inventory Prepaid insurance Accounts payable Income taxes payable

End of Year $22,000 17,000 55,000 7,500 11,000 600

Beginning of Year $15,000 32,000 65,000 5,000 18,000 1,200

Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 196

(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 inventory ................................................................................ Increase in prepaid insurance .................................................................... Decrease in accounts payable ................................................................... Decrease in income taxes payable ............................................................ Net cash provided by operating activities ..................................................

$365,000 73,000 15,000 10,000 (2,500) (7,000) (600) $452,900

12-48

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 197 Using the indirect method, calculate the amount of cash flows from operating activities from the following data: Net income Beginning accounts receivable Ending accounts receivable Beginning prepaid insurance Ending prepaid insurance Beginning accounts payable Ending accounts payable Depreciation expense Amortization of intangible asset Dividends declared and paid

$199,000 22,000 29,000 5,000 2,000 15,000 14,000 50,000 6,000 11,000

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197

(15 min.)

Net income – Increase accounts receivable + Decrease in prepaid insurance – Decrease in accounts payable + Depreciation + Amortization Cash flows from Operating Activities

$199,000 (7,000) 3,000 (1,000) 50,000 6,000 $250,000

Ex. 198 Use the following information to perform the calculations below (using the indirect method). Clearly label the amount of each answer as positive or negative and show all your calculations. Net income Depreciation expense Beginning accounts receivable Ending accounts receivable Beginning inventory Ending inventory Beginning prepaid insurance Ending prepaid insurance

$401,000 97,000 420,000 439,000 516,000 550,000 42,000 48,000

Beginning accounts payable Ending accounts payable Purchase of long-term assets Issuance of long-term debt Issuance of stock for cash Issuance of stock for long-term assets Purchase of treasury stock Sale of long-term investment at cost

$119,000 146,000 612,000 220,000 180,000 110,000 64,000 56,000

a. Calculate the amount of cash flows from operating activities.

_____________

b. Calculate the amount of cash flows from investing activities.

_____________

Statement of Cash Flows

Ex. 198

12-49

(Cont.)

c. Calculate the amount of cash flows from financing activities.

_____________

d. Calculate the net change in cash.

_____________

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 198

(20 –25 minutes)

a. Cash flows from operating activities Net income Depreciation expense Increase in accounts receivable Increase in inventory Increase in prepaid insurance Increase in accounts payable Cash flows from operating activities

$401,000 97,000 (19,000) (34,000) (6,000) 27,000 $466,000

b. Cash flows used in investing activities Purchase of long-term assets Sale of long-term investments Cash flows used in investing activities

$(612,000) 56,000 $(556,000)

c. Cash flows from financing activities Issue of long-term debt Issue of stock for cash Purchase of treasury stock Cash flows from financing activities

$220,000 180,000 (64,000) $336,000

d. Net change in cash Increase from operating activities Decrease from investing activities Increase from financing activities Net increase in cash

$466,000 (556,000) 333,000 $246,000

12-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 199 The following information is available for Mergenthaler Corporation for the year ended December 31, 2014: Collection of principal on long-term loan to a supplier Acquisition of equipment for cash Proceeds from the sale of long-term investment at book value Issuance of common stock for cash Depreciation expense Redemption of bonds payable at carrying (book) value Payment of cash dividends Net income Purchase of land by issuing bonds payable

$16,000 10,000 22,000 20,000 25,000 34,000 6,000 30,000 40,000

In addition, the following information is available from the comparative balance sheet for Mergenthaler at the end of 2014 and 2013: 2014 2013 Cash $148,000 $91,000 Accounts receivable (net) 25,000 15,000 Prepaid insurance 19,000 13,000 Total current assets $192,000 $119,000 Accounts payable Salaries and wages payable Total current liabilities

$ 30,000 6,000 $ 36,000

$19,000 7,000 $26,000

Instructions Prepare Mergenthaler's statement of cash flows for the year ended December 31, 2014, using the indirect method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Statement of Cash Flows

Solution 199

12-51

(22-27 min.) MERGENTHALER CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014

Cash flows from operating activities Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation ...................................................................... Increase in accounts receivable ......................................... Increase in prepaid insurance ............................................ Increase in accounts payable ............................................ Decrease in salaries and wages payable ........................... Net cash provided by operating activities ........................... Cash flows from investing activities Collection of long-term loan ........................................................ Proceeds from the sale of investments ....................................... Purchase of equipment ............................................................... Net cash provided by investing activities ............................ Cash flows from financing activities Issuance of common stock ......................................................... Redemption of bonds ................................................................. Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash ................................................................................ Cash at beginning of period ................................................................ Cash at end of period .......................................................................... Noncash investing and financing activities Purchase of land by issuing bonds .............................................

$30,000

$25,000 (10,000) (6,000) 11,000 (1,000)

19,000 49,000

16,000 22,000 (10,000) 28,000 20,000 (34,000) (6,000) (20,000) 57,000 91,000 $148,000

$40,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12-52 Ex. 200

Draper Company prepared the tabulation below at December 31, 2014. Net Income ............................................................

$323,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $27,000 ...................................................................

_______

Increase in accounts receivable, $75,000 ....................................................

_______

Decrease in inventory, $18,000 ...................................................................

_______

Amortization of patent, $4,000 .....................................................................

_______

Increase in accounts payable, $7,500 ..........................................................

_______

Decrease in interest receivable, $4,000 .......................................................

_______

Increase in prepaid insurance, $7,000 .........................................................

_______

Decrease in income taxes payable, $2,500 ..................................................

_______

Gain on disposal of plant assets, $11,000 ....................................................

_______

Net cash provided (used) by operating activities ..........................................

_______

Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 200

(10-14 min.)

Net Income ...........................................................................................................

$323,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................................................................. Increase in accounts receivable ................................................................... Decrease in inventory .................................................................................. Amortization of patent .................................................................................. Increase in accounts payable ....................................................................... Decrease in interest receivable .................................................................... Increase in prepaid insurance ...................................................................... Decrease in income taxes payable .............................................................. Gain on disposal of plant assets .................................................................. Net cash provided (used) by operating activities .................................

27,000 (75,000) 18,000 4,000 7,500 4,000 (7,000) (2,500) (11,000) $288,000

Statement of Cash Flows

12-53

Ex. 201 The current sections of Magic Marine Inc.'s balance sheets at December 31, 2013 and 2014, are presented here. Magic Marine 's net income for 2014 was $216,000. Depreciation expense was $34,000. 2014

2013

Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets

$106,000 91,000 168,000 28,000 $393,000

$ 99,000 89,000 173,000 22,000 $383,000

Current liabilities Interest payable Accounts payable Total current liabilities

$ 13,000 85,000 $ 98,000

5,000 92,000 $ 97,000

Instructions Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2014, using the indirect method. Ans: N/A, LO: 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

(5 min.) Magic Marine INC. Partial Statement of Cash Flows For the Year Ended December 31, 2014

$216,000

$34,000 8,000 5,000 (6,000) (7,000) (2,000)

32,000 $248,000

12-54

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 202 The following information is available for Chenard Corporation for the year ended December 31, 2014. Beginning cash balance Accounts payable decrease Depreciation expense Accounts receivable increase Inventory increase Net income Cash received for sale of land at book value Sales revenue Cash dividends paid Income tax payable increase Cash used to purchase building Cash used to purchase treasury stock Cash received from issuing bonds

$ 35,000 3,200 76,000 8,200 13,000 269,100 35,000 747,000 12,000 4,700 144,000 32,000 206,000

Instructions Prepare a statement of cash flows using the indirect method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 202

(8 min.)

CHENARD CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2014 ___________________________________________________________________________ Cash flows from operating activities Net income ................................................................................ $269,100 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... $76,000 Increase in income tax payable .......................................... 4,700 Decrease in accounts payable ........................................... (3,200) Increase in accounts receivable ......................................... (8,200) Increase in inventory .......................................................... (13,000) 56,300 Net cash provided by operating activities ........................ 325,400 Cash flows from investing activities Sale of land ................................................................................ Purchase of building ................................................................... Net cash used by investing activities ..................................

35,000 (144,000)

Cash flows from financing activities Issuance of bonds ....................................................................... Payment of dividend ................................................................... Purchase of treasury stock .......................................................... Net cash provided by financing activities ............................

206,000 (12,000) (32,000)

Net Increase in cash ............................................................................ Cash at beginning of period ................................................................. Cash at end of period .......................................................................... .

(109,000)

162,000 378,400 35,000 $413,400

Statement of Cash Flows

12-55

Ex. 203 The three accounts shown below appear in the general ledger of Hale Corp. during 2014 Equipment Date Jan. 1 July 31 Sept. 2 Nov. 10 Date Jan. 1 Nov. 10 Dec. 31 Date Jan. 1 Aug. 23 Dec. 31

Debit Balance Purchase of equipment 70,000 Cost of equipment constructed 53,000 Cost of equipment sold Accumulated Depreciation—Equipment Debit Balance Accumulated depreciation on equipment sold 30,000 Depreciation for year Retained Earnings Debit Balance Dividends (cash) 19,000 Net income

Credit

59,000 Credit

23,000 Credit

54,000

Balance 160,000 230,000 283,000 224,000 Balance 71,000 41,000 64,000 Balance 105,000 86,000 143,000

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 equipment was $7,000. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 203

(10 min.)

HALE CORP Partial Statement of Cash Flows For the Year Ended December 31, 2014 ___________________________________________________________________________ Cash flows from operating activities Net income ................................................................................ $54,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... $23,000 Loss on disposal of plant assets ........................................ 7,000 30,000 Net cash provided by operating activities .......................................................................... 84,000 Cash flows from investing activities Sale of equipment ...................................................................... Purchase of equipment ............................................................... Construction of equipment .......................................................... Net cash used by investing activities .................................. Cash flows from financing activities Payment of cash dividends .........................................................

22,000* (70,000) (53,000) (101,000) (19,000)

12-56

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 203

(Cont.)

*Cost of equipment sold ................................................................ Accumulated depreciation ........................................................... Book value ................................................................................ Loss on disposal of plant assets ................................................. Cash proceeds ............................................................................

$59,000 (30,000) 29,000 (7,000) $22,000

Ex. 204 The comparative balance sheets for Russell Company appear below: RUSSELL COMPANY Comparative Balance Sheet Dec. 31, 2014

Dec. 31, 2013

Cash Accounts receivable Inventory Prepaid insurance

$ 38,000 18,000 25,000 7,000

$13,000 14,000 15,000 9,000

Stock investments Equipment Accumulated depreciation—equipment Total assets

-060,000 (18,000) $130,000

18,000 30,000 (14,000) $85,000

Assets

Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity

$ 25,000 37,000 40,000 28,000 $130,000

$ 7,000 45,000 23,000 10,000 $85,000

Additional information: 1. Net income for the year ending December 31, 2014, was $30,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Stock investments that had a book value of $18,000 were sold for $13,000. 4. Sales for 2014 are $130,000. Instructions 1. Prepare a statement of cash flows for the year ended December 31, 2014, using the indirect method. 2. Compute the following cash based ratios: a. Current cash debt coverage b. Cash debt coverage Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Statement of Cash Flows

Solution 204

12-57

(25-30 min.)

RUSSELL COMPANY Statement of Cash Flows For the Year Ended December 31, 2014

Cash flows from operating activities Net income ................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ Loss on sale of stock investments ...................................... Increase in accounts receivable ......................................... Decrease in prepaid insurance .......................................... Increase in inventory .......................................................... Increase in accounts payable ............................................ Net cash provided by operating activities ........................... Cash flows from investing activities Sale of stock investments on balance sheet ............................... 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 .......................................................................... 2. a. Current cash debt coverage =

$30,000

$ 4,000 5,000 (4,000) 2,000 (10,000) 18,000

13,000 (30,000) (17,000) 17,000 (8,000) (12,000) (3,000) 25,000 13,000 $38,000

Net cash provided by operating activities Average current liabilities $45,000 ($7,000 + $25,000) ÷ 2

b. Cash debt coverage =

15,000 45,000

= 2.8 times

Net cash provided by operating activities Average total liabilities $45,000 ($52,000 + $62,000) ÷ 2

= .79 times

12-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 205 A comparative balance sheet for the Beneteau Corporation is presented below: BENETEAU CORPORATION Comparative Balance Sheet 2014

2013

$ 37,000 80,000 22,000 18,000 70,000 (20,000) $207,000

$ 31,000 60,000 17,000 40,000 60,000 (13,000) $195,000

Liabilities and Stockholders' Equity Accounts payable $ 12,000 Bonds payable 27,000 Common stock 140,000 Retained earnings 28,000 Total liabilities and stockholders' equity $207,000

$ 6,000 19,000 115,000 55,000 $195,000

Assets Cash Accounts receivable (net) Prepaid insurance Land Equipment Accumulated depreciation Total Assets

Additional information: 1. Net loss for 2014 is $12,000. Net sales for 2014 are $250,000. 2. Cash dividends of $15,000 were declared and paid in 2014. 3. Land was sold for cash at a loss of $2,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying (book) value. 6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000. Instructions 1. Prepare a statement of cash flows for the year ended 2014 using the indirect method. 2. Compute the following cash based ratios: a. Current cash debt coverage b. Cash debt coverage Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Statement of Cash Flows

Solution 205

12-59

(22-27 min.)

BENETEAU CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 ___________________________________________________________________________

Cash flows from operating activities Net loss .................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation (a) .................................................................. Loss on disposal of plant assets ......................................... Increase in accounts receivable ......................................... Increase in prepaid insurance ............................................ Increase in accounts payable ............................................ Net cash used by operating activities ................................. Cash flows from investing activities Proceeds from the sale of land (b) ............................................... Proceeds from the sale of equipment ......................................... Net cash provided by investing activities............................. Cash flows from financing activities Retirement of bonds payable ...................................................... Issuance of bonds payable (c) ..................................................... Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash .................................................................................. Cash at beginning of period ................................................................ Cash at end of period ..........................................................................

$(12,000)

$17,000 2,000 (20,000) (5,000) 6,000

20,000 5,000 25,000 (12,000) 20,000 (15,000)

Noncash investing and financing activities Purchase of equipment through issuance of common stock ....... (a)

Accumulated Depreciation 12/31/13 Accumulated Depreciation 12/31/14 Difference Add: Accumulated depreciation on equipment sold Depreciation expense

$13,000 20,000 7,000 10,000 17,000

(b)

Cost of land sold Less: Loss on disposal of land Proceeds from sale of land

22,000 (2,000) $20,000

(c)

Bonds Payable 12/31/13 Retirement of bonds Difference Add: Bonds issued Bonds Payable 12/31/14

$19,000 (12,000) 7,000 20,000 27,000

0 (12,000)

(7,000) 6,000 31,000 $37,000

$25,000

12-60

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 205

(Cont.)

2. a. Current cash debt coverage =

Net cash provided by operating activities Average current liabilities ($12,000) ($6,000 + $12,000) ÷ 2

b. Cash debt coverage =

= (1.3) times

Net cash provided by operating activities Average total liabilities ($12,000) ($25,000 + $39,000) ÷ 2

= (.38) times

Ex. 206 Information for two companies in the same industry, Tucker Corporation and Wiggins Corporation, is presented here.

Cash provided by operating activities Average current liabilities Average total liabilities Net earnings Capital expenditures Dividends paid

Tucker Corporation $140,000 50,000 200,000 200,000 60,000 5,000

Wiggins Corporation $140,000 100,000 250,000 200,000 90,000 10,000

Instructions Using the cash-based measures presented in this chapter, compare the (a) liquidity and (b) solvency of the two companies. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 206

(8 min.)

(a) Liquidity – Current cash debt coverage

Tucker Corporation $140,000 2.8 times $50,000

Wiggins Corporation $140,000 1.4 times $100,000

(b) Solvency – Cash debt coverage

$140,000 $200,000

$140,000 $250,000

Free cash flow

$140,000 – $60,000 – $5,000 = $75,000

0.70 times

0.56 times

$140,000 – $90,000 – $10,000 = $40,000

Tucker's liquidity and solvency ratios are higher (better) than Wiggins's comparable ratios. In particular, Tucker's current cash debt coverage ratio is twice as high as Wiggins's. This ratio indicates that Tucker is substantially more liquid than Wiggins. Tucker's solvency, as measured by the cash debt coverage ratio and free cash flow, is also better than Ace's.

Statement of Cash Flows

12-61

*Ex. 207 Condensed financial data of Gorni Company appear below: GORNI COMPANY Comparative Balance Sheet December 31 2014

2013

$ 70,000 82,000 120,000 19,000 80,000 310,000 (65,000) $616,000

$ 35,000 53,000 132,000 25,000 65,000 250,000 (60,000) $500,000

$ 85,000 22,000 130,000 245,000 134,000 $616,000

$ 75,000 24,000 150,000 170,000 81,000 $500,000

Assets Cash Accounts receivable Inventories Prepaid expenses Investments Plant assets Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total

GORNI COMPANY Income Statement For the Year Ended December 31, 2014 Sales Less: Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Income taxes Interest expense Loss on disposal of plant assets Net income

$480,000 $290,000 60,000 17,000 15,000 13,000 8,000

403,000 $ 77,000

Additional information: 1. New plant assets costing $85,000 were purchased for cash in 2014. 2. Old plant assets costing $25,000 were sold for $5,000 cash when book value was $13,000. 3. Bonds with a face value of $20,000 were converted into $20,000 of common stock. 4. A cash dividend of $24,000 was declared and paid during the year. 5. Accounts payable pertain to merchandise purchases. Instructions 1. Prepare a statement of cash flows for the year using the direct method. 2. Compute the following cash basis ratios: a. Current cash debt coverage b. Cash debt coverage Ans: N/A, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

12-62

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 207

(25-30 min.)

GORNI COMPANY Statement of Cash Flows For the Year Ended December 31, 2014

Cash flows from operating activities Cash receipts from customers ($480,000 - $29,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period

$451,000 $268,000 56,000 15,000 13,000

(a) (b) 352,000 99,000

(15,000) (85,000) 5,000 (95,000) 55,000 (24,000) 31,000 35,000 35,000 $ 70,000

Noncash investing and financing activities Conversion of bonds payable into common stock

$ 20,000

(a)

Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers

$290,000 (12,000) 278,000 (10,000) $268,000

(b)

Operating expenses Deduct: Decrease in prepaid expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses

$60,000 (6,000) 2,000 $56,000

2. Cash basis ratios: a. Current cash debt coverage =

$99,000 ($99,000 + $107,000) ÷ 2

= .96 times

b. Cash debt coverage =

$99,000 ($237,000 + $249,000) ÷ 2

= .41 times

Statement of Cash Flows

12-63

*Ex. 208 The income statement of Gise Company is shown below: GISE COMPANY Income Statement For the Year Ended December 31, 2014 Sales Cost of goods sold Gross profit Operating expenses Selling and administrative expenses Depreciation expense Amortization expense Net income

$8,500,000 5,300,000 3,200,000 $1,210,000 70,000 30,000

1,310,000 $1,890,000

Additional information: 1. Accounts receivable increased $600,000 during the year. 2. Inventory increased $250,000 during the year. 3. Prepaid expenses increased $150,000 during the year. 4. Accounts payable to merchandise suppliers increased $125,000 during the year. 5. Accrued expenses payable increased $180,000 during the year. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2014, for Gise Company, using the direct method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 208

(15-20 min.) GISE COMPANY Statement of Cash Flows For the Year Ended December 31, 2014

Cash flows from operating activities Cash receipts from customers (1) Cash payments: To suppliers (2) For operating expenses (3) Net cash provided by operations

$7,900,000 $5,425,000 1,180,000

(1)

Sales Deduct: Increase in accounts receivable Cash receipts from customers

$8,500,000 600,000 $7,900,000

(2)

Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers

$5,300,000 250,000 5,550,000 125,000 $5,425,000

6,605,000 $1,295,000

12-64

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 208 (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

$1,210,000 150,000 180,000 $1,180,000

*Ex. 209 The financial statements of Appalachian Mountain Company appear below: APPALACHIAN MOUNTAIN COMPANY Comparative Balance Sheet December 31 2014

2013

$ 47,000 21,000 22,000 50,000 (20,000) $120,000

$ 25,000 34,000 15,000 78,000 (24,000) $128,000

$ 12,000 13,000 10,000 41,000 44,000 $120,000

$ 31,000 10,000 25,000 24,000 38,000 $128,000

Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

APPALACHIAN MOUNTAIN COMPANY Income Statement For the Year Ended December 31, 2014 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income

$350,000 280,000 70,000 $20,000 16,000

36,000 34,000 4,000 30,000 8,000 $ 22,000

Statement of Cash Flows

*Ex. 209

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(Cont.)

The following additional data were provided: 1. Dividends declared and paid were $16,000. 2. During the year equipment was sold for $12,000 cash. This equipment cost $28,000 originally and had a book value of $12,000 at the time of sale. 3. All depreciation expense is in the selling expense category. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions Prepare a statement of cash flows for Appalachian Mountain Company using the direct method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 209

(22-28 min.) APPALACHIAN MOUNTAIN COMPANY Statement of Cash Flows For the Year Ended December 31, 2014

Cash flows from operating activities Cash receipts from customers ($350,000 + $13,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes ($8,000 – $3,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Cash flows from investing 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

$363,000 $306,000 (a) 24,000 (b) 4,000 5,000

12,000 (15,000) 17,000 (16,000) (14,000) 22,000 25,000 $ 47,000

(a)

Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers

$280,000 7,000 287,000 19,000 $306,000

(b)

Operating expenses Less: Depreciation expense Cash payments for operating expenses

$36,000 (12,000)* $24,000

*$24,000 - $16,000 = $8,000 balance in accumulated depreciation after sale. Ending balance, $20,000 - $8,000 = $12,000 depreciation expense.

339,000 24,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

*Ex. 210 Wave Rider Company completed its first year of operations on December 31, 2014. Its initial income statement showed that Wave Rider had revenues of $207,000 and operating expenses of $108,000. Accounts receivable and accounts payable at year-end were $80,000 and $28,000, respectively. Assume that accounts payable related to operating expenses. Ignore income taxes. Instructions Compute net cash provided by operating activities using the direct method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*Solution 210

(8 min.)

Revenues ................................................................... Deduct: Increase in accounts receivable .................... Cash receipts from customers* .............................. Operating expenses ................................................... Deduct: Increase in accounts payable ........................ Cash payments for operating expenses** .............. Net cash provided by operating activities.................... * Balance, Beginning of year Revenues for the year Balance, End of year ** Payments for the year

$207,000 (80,000) $127,000 108,000 (28,000) 80,000 $ 47,000

Accounts Receivable 0 207,000 Cash receipts for year 80,000 Accounts Payable Balance, Beginning of year 80,000 Operating expenses for year Balance, End of year

127,000

0 108,000 28,000

*Ex. 211 The income statement for McDonald's Corporation shows cost of goods sold $6,175.6 million and operating expenses (including depreciation expense of $1,214.1 million) $18,907.6 million. The comparative balance sheet for the year shows that inventory increased $12.9 million, prepaid expenses increased $102.9 million, accounts payable (merchandise suppliers) decreased $44.6 million, and accrued expenses payable increased $162.4 million. Instructions Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Statement of Cash Flows

*Solution 211 (a)

(b)

12-67

(8 min.)

Cash payments to suppliers Cost of goods sold ................................ Add: Increase in inventory .................... Cost of purchase................................... Add: Decrease in accounts payable ................................................ Cash payments to suppliers .................. Cash payments for operating expenses Operating expenses exclusive of depreciation ($18,907.6 – $1,214.1)...................... Add: Increase in prepaid expenses ..................................... Deduct: Increase in accrued expenses payable ............................ Cash payments for operating expenses ........................................

$6,175.6 million 12.9 $6,188.5 million 44.6 $6,233.1 million

$17,693.5 million $102.9 (162.4)

(59.5) $17,634.0 million

COMPLETION STATEMENTS 212. A statement of cash flows summarizes the operating, ____________, and ___________ activities of an entity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

213. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

214. Net cash provided/used by operating activities can be determined using the ____________ method or the ______________ method. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

215. During the _______________, cash from operations and net income are approximately the same. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

216. During the growth phase, a company will start to generate small amounts of cash _______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

217. Using the indirect approach, noncash charges in the income statement are ___________ to net income and noncash credits are ______________ to compute cash provided by operations. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

218. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

219. The sale of equipment at less than its book value is a(an) ______________ of cash that is reported in the ______________ activities section. Ans: N/A, LO: 4,6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

220. The current cash debt coverage is computed by dividing net cash provided by operating activities by _________________ liabilities. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

221. The cash ______________ is a measure of solvency that uses cash figures. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

*222. Cost of goods sold for the year amounted to $100,000, and during the year, inventory ______________ by $7,000 and accounts payable ______________ by $3,000 resulting in cash paid to suppliers of $90,000. Ans: N/A, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*223. In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*224. In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*225. Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 212. investing, financing (or vice versa) 213. operating 214. indirect, direct (or vice versa) 215. maturity phase 216. from operations 217. added, deducted 218. higher (greater) 219. inflow, investing

220. average current 221. debt coverages *222. decreased, increased *223. deducted, deducted *224. added *225. receipts from customers, payments to suppliers (or vice versa)

Statement of Cash Flows

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MATCHING

Set 1 — Indirect Method 226. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. A. B. C. D. E. F. G.

Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity

____

1. Decrease in accounts payable during a period

____

2. Declaration and payment of a cash dividend.

____

3. Loss on disposal of land.

____

4. Decrease in accounts receivable during a period.

____

5. Redemption of bonds for cash.

____

6. Proceeds from sale of equipment at book value.

____

7. Issuance of common stock for cash.

____

8. Purchase of a building for cash.

____

9. Acquisition of land in exchange for common stock.

____ 10. Increase in inventory during a period. Ans: N/A, LO: 2, Bloom: AP, 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.

B E A A E

6. 7. 8. 9. 10.

D F C G B

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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Set 2 — Direct Method *227. 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 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, LO: 6, Bloom: AP, 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.

C G A J I

6. 7. 8. 9. 10.

D F H E J

Statement of Cash Flows

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SHORT-ANSWER ESSAY QUESTIONS S-A E 228 Why is the statement of cash flows useful? Ans: N/A, LO: 1, 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 statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company's ability to generate future cash flows, (2) the company's ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. S-A E 229 Distinguish among the three activities reported in the statement of cash flows. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 229 The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive 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 230 (a) What are the phases of the corporate life cycle? (b) What effect does each phase have on the numbers reported in a statement of cash flows? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 230 (a)

The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase.

(b)

During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, cash from operations, investing, and financing would all be expected to be positive while in the decline phase, cash from operations and investing would continue to be positive while cash from financing would be negative.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 231 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows. Ans: N/A, LO: 3,4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 231 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 232 When preparing a statement of cash flows using the indirect method, why is depreciation added back to net income within the operating activities section when using the indirect method? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 232 The indirect method begins with net income based on accrual accounting. This includes a legitimate deduction for depreciation expense. However, depreciation expense does not represent a cash outflow and thus must be added back to net income to cancel the deduction. *S-A E 233 Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same dollar amount for net cash provided by operating activities. Ans: N/A, LO: 4,6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

*Solution 233 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. .

Statement of Cash Flows

*Solution 233

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(Cont.)

The same adjustments are used in both methods, regardless of whether net income is adjusted or individual revenues and expenses are adjusted. Therefore, both methods arrive at the same result. S-A E 234 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? Ans: N/A, LO: 4,6, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 234 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. *S-A E 235 When preparing a statement of cash flows using the direct method, why must the sales revenue figure be adjusted to arrive at cash receipts from sales? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

*Solution 235 Sales revenue is an accrual-based figure that includes both cash and credit sales for the period. The statement of cash flows is to report the cash collections for the period, whether or not the sale arose in that period or whether the credit sale had yet to be collected. An adjustment based on the change in accounts receivable accomplishes this conversion. S-A E 236

(Ethics)

Mooresville Hills Trading Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better. Mindy Ross, 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. William Bowden, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures. Required: 1. Were Mindy Ross's actions ethical? Explain. 2. Were William Bowden's actions ethical? Explain. 3. Were the company president's actions ethical? Explain. Ans: N/A, LO: 4,6, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Decision Analysis

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 236 1. There is a valid question as to whether Mindy Ross's actions are ethical or not. Either answer could be considered correct. On the one hand, She was probably within his legal rights to reclassify the workers. She also might be commended for allowing more workers to have a job than was previously the case. On the other hand, She has removed a very real benefit from the former full-time workers, and She has done it fairly arbitrarily. She may have harmed morale, and harmed the company if the workers quit and new workers have to be hired. 2. William Bowden'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 237

(Communication)

You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you prepare a schedule of predicted cash sources and cash needs at the end of each week for the following week. Isabelle Alix, the company's president, has asked whether a statement of cash flows would also be useful. Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 237 TO:

Isabelle Alix

FROM: Martha King RE:

Statement of Cash Flows vs. Cash Sources and Needs

You asked whether a statement of cash flows would be useful, in addition to the cash sources and needs schedule. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the cash sources and needs does. A statement of cash flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. 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)

Statement of Cash Flows

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IFRS QUESTIONS 1. Under IFRS, the cash flow statement can be prepared using a. the direct method only. b. the indirect method only. c. either the direct or indirect method. d. the T-account method only. Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

2. Under IFRS, bank overdrafts are classified as a. operating activities. b. investing activities. c. financing activities. d. cash and cash equivalents. Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

3. Which of the following activities is excluded from the statement of cash flows under IFRS? a. Financing activities b. Investing activities c. Noncash investing and financing activities d. operating activities Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

4. Each of the following items may be classified as operating or financing activities under IFRS except a. dividends paid. b. dividends received. c. interest paid. d. All of these answer choices may be classified as such. Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

5. Under IFRS, some companies present which section of the cash flow statement as a single line item? a. Operating activities b. Investing activities c. Financing activities d. Noncash investing and financing activities Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

CHAPTER 13 FINANCIAL ANALYSIS: THE BIG PICTURE SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9.

1 2 2 2 2 2 2 3 3

K K K K K K K K K

10. 11. 12. 13. 14. 15. 16. 17. 18.

3 3 4, 5 4 4 4 4 4 5

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. 73. 74. 75. 76. 77. 78.

1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3

K K K AP AP K K C C K K K C K K K C K AP AP AP AP K K K C K AP K AP AP K K

79. 80. 81. 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. 107. 108. 109. 110. 111.

3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5

Item

True-False Statements K 19. 5 K 28. K 20. 5 K 29. K 21. 5 K 30. K 22. 5 K 31. K 23. 5 K 32. K 24. 5 K 33. AP 25. 5 K 34. C 26. 5 C 35. K 27. 5 K 36. Multiple Choice Questions AP 112. 5 K 145. AP 113. 5 K 146. C 114. 5 K 147. K 115. 5 K 148. K 116. 5 K 149. K 117. 5 K 150. AP 118. 5 AP 151. K 119. 5 AP 152. K 120. 5 AP 153. AP 121. 5 AP 154. K 122. 5 AP 155. K 123. 5 K 156. K 124. 5 K 157. K 125. 6,8 K 158. K 126. 6,8 K 159. K 127. 6,8 K 160. AP 128. 6,8 K 161. AP 129. 6,8 K 162. AP 130. 6,8 K 163. AP 131. 6,8 C 164. K 132. 6,8 C 165. AP 133. 6,8 K 166. K 134. 6,8 K 167. AP 135. 6,8 K 168. K 136. 6,8 K 169. AP 137. 6,8 K 170. K 138. 6,8 K 171. K 139. 6,8 C 172. K 140. 6,8 K 173. K 141. 6,8 AP 174. K 142. 6,8 AP 175. K 143. 6,8 C 176. K 144. 6,8 AP 177.

Item

6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8

K K K K K K K K K

37. 38. 39. 40. 41. 42. 43. 44. 45.

6,8 6,8 6,8 6,8 6,8 6,8 7 7 7

C K C K K K K K K

6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8

AP AP AP AP AP AP AP K K K K AP AP AP AP K AP K AP K AP K K K K K AN K K AN AN AN K

178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210.

6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8 6,8

K AN C AN AP AP AP AP AP AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K K K K K

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

13-2

211. 212. 213.

6,8 6,8 6,8

AN AP AP

214. 215. 216.

222. 223. 224. 225. 226.

2 2 2 2 4

K K AP AP AP

227 228 229. 230. 231.

244. 245. 246.

4 4 4

AN AP AP

247. 248. 249.

257. 258. 259.

2 2 2

K K K

260. 261. 262.

270.

6,8

271.

272. 273.

1 2

C K

274. 275.

Multiple Choice Questions (Cont.) 6,8 K 217. 7 C 220. 7 6,8 AN 218. 7 C 221. 7 6,8 C 219. 7 C Brief Exercises 4 AP 232. 4, 5 AP 237. 6,8 4 AP 233. 5 AP 238. 6,8 4 AP 234. 5 AP 239. 6,8 4 AN 235. 6,8 AP 240. 6,8 4 C 236. 6,8 AP 241. 6,8 Exercises 4,5 AP 250. 5 AP 253. 6,8 4, 5 AP 251. 6,8 AP 254. 6,8 5 AN 252. 6,8 AP 255. 6,8 Completion Statements 4 K 263. 6,8 K 266. 6,8 5 K 264. 6,8 K 267. 6,8 6,8 K 265. 6,8 K 268. 6,8 Matching 6,8 K Short Answer Essay 3 K 276. 6,8 K 278. 6,8 4, 5 C 277. 7 C

K C

AP AP AP AN AP

242. 243.

6,8 6,8

AP AP

AN AP AN

256.

6,8

K K K

269.

6,8

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

46.

47.

48.

272.

MC MC MC MC MC MC MC

71. 72. 73. 74. 75. 76. 222.

MC MC MC MC MC MC Be

MC MC MC

85. 86. 274.

MC MC SA

Item

Type

223. 224. 225. 257. 258. 259. 273.

Be Be Be C C C SA

Learning Objective 2

2. 3. 4. 5. 6. 7. 49.

TF TF TF TF TF TF MC

50. 51. 52. 53. 54. 55. 56.

MC MC MC MC MC MC MC

57. 58. 59. 60. 61. 62. 63.

MC MC MC MC MC MC MC

64. 65. 66. 67. 68. 69. 70.

Learning Objective 3

8. 9. 10.

TF TF TF

11. 77. 78.

TF MC MC

79. 80. 81.

MC MC MC

82. 83. 84.

Financial Analysis: The Big Picture

Learning Objective 4 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

12. 13. 14. 15. 16. 17. 87.

TF TF TF TF TF TF MC

88. 89. 90. 91. 92. 93. 94.

MC MC MC MC MC MC MC

95. 96. 97. 98. 99. 100. 101.

MC MC MC MC MC MC MC

102. 103. 104. 226. 227. 228. 229.

MC MC MC Be Be Be Be

230. 231. 232. 244. 245. 246. 247.

Be Be Be Ex Ex Ex Ex

248. 260. 275.

Ex C SA

MC MC MC MC MC MC MC

122. 123. 124. 232. 233. 234. 247.

MC MC MC Be Be Be Ex

248. 249. 250. 261. 275.

Ex Ex Ex C SA

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 235. 236. 237. 238. 239. 240. 241. 242.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be Be Be

243. 251. 252. 253. 254. 255. 256. 262. 263. 264. 265. 266. 267. 268. 269. 270. 276. 278.

Be Ex Ex Ex Ex Ex Ex C C C C C C C C Ma SA SA

Learning Objective 5

12. 18. 19. 20. 21. 22. 23.

TF TF TF TF TF TF TF

24. 25. 26. 27. 105. 106. 107.

TF TF TF TF MC MC MC

108. 109. 110. 111. 112. 113. 114.

MC MC MC MC MC MC MC

115. 116. 117. 118. 119. 120. 121.

Learning Objective 6

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 125. 126. 127. 128. 129. 130. 131. 132.

TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC

133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.

13-3

13-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Learning Objective 7 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

43. 44.

TF TF

45. 217.

TF MC

218. 219.

MC MC

220. 221.

MC MC

277.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 235. 236. 237. 238. 239. 240. 241. 242.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be Be Be

Item

Type

243. 251. 252. 253. 254. 255. 256. 262. 263. 264. 265. 266. 267. 268. 269. 270. 276. 278.

Be Ex Ex Ex Ex Ex Ex C C C C C C C C Ma SA SA

Learning Objective 8

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 125. 126. 127. 128. 129. 130. 131. 132.

TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC

133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.

C = Completion Ex = Exercise SA = Short Answer Essay

Financial Analysis: The Big Picture

13-5

CHAPTER LEARNING OBJECTIVES 1. Understand the concept of sustainable income. Sustainable income refers to a company’s ability to sustain its profits from operations. 2. Indicate how irregular items are presented. Irregular items—discontinued operations and extraordinary items—are presented on the income statement net of tax below “Income before irregular items” to highlight their unusual nature. Changes in accounting principle are reported retroactively. 3. Explain the concept of comprehensive income. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders. “Other comprehensive income” is added to net income to arrive at comprehensive income. 4. Describe and apply horizontal 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. 5. Describe and apply vertical analysis. Vertical analysis is a technique that expresses each item in a financial statement as a percentage of a relevant total or a base amount. 6. Identify and compute ratios used in analyzing a company's liquidity, solvency, and profitability. Financial ratios are provided in Illustration 13-16 (liquidity), Illustration 13-17 (solvency) and Illustration 13-18 (profitability). 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 the financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition. The price-earnings (P-E) ratio reflects investors' assessment of a company's future earnings potential. *8. Evaluate a company comprehensively using ratio analysis. To evaluate a company, ratios (liquidity, solvency, and profitability) provide clues to underlying conditions, but intracompany, intercompany, and industry average comparisons are also needed.

13-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

TRUE-FALSE STATEMENTS 1.

Analysts are interested in sustainable income, which is equal to the past year’s net income.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Companies report most changes in accounting principle currently.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The loss on disposal of a significant component of a business is disclosed in the statement of retained earnings.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

12.

13-7

Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis.

Ans: F, LO: 4, 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13.

In horizontal analysis, the base year is the most current year being examined.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

14.

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

15.

Another name for horizontal analysis is trend analysis.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

16.

If a company has sales of $130 in 2014 and $182 in 2013, the percentage decrease in sales from 2013 to 2014 is 40%.

Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

17.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

18.

A primary purpose of vertical analysis is to observe trends over a three-year period.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

19.

Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

20.

Common size analysis expresses each item in a financial statement as a percent of a base amount.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

21.

In a common size income statement, net sales are represented by 100%.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

22.

In a common size income statement, each item is expressed as a percentage of net income.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

23.

In a common size balance sheet, total assets are represented by 100%.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-8 24.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

25.

Vertical analysis is useful in making comparisons of companies of different sizes.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

26.

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

27.

In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

28.

Liquidity ratios measure the ability of the enterprise to survive over a long period of time.

Ans: F, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

29.

A solvency ratio measures the income or operating success of an enterprise for a given period of time.

Ans: F, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

30.

The current ratio is a measure of all the ratios calculated for the current year.

Ans: F, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

31.

Accounts receivable turnover is useful in assessing the profitability of receivables.

Ans: F, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

32.

Inventory turnover measures the number of times on average the inventory was sold during the period.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

33.

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

34.

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

35.

Both profit margin and asset turnover affect a company’s return on assets.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

36.

13-9

Leverage and return on equity are closely related.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

37.

The return on assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

Ans: F, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

38.

The current ratio is one of the most utilized measures of profitability.

Ans: F, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

39.

From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.

Ans: F, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

40.

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

41.

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

42.

Declining profitability and liquidity ratios are indications that a company may not survive.

Ans: T, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

43.

Alternative accounting methods affect the quality of earnings.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

44.

Improper recognition of income is not one of the factors affecting the quality of earnings.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

45.

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.

F T T F F F F

8. 9. 10. 11. 12. 13. 14.

T F T T F F F

15. 16. 17. 18. 19. 20. 21.

T F T F F T T

22. 23. 24. 25. 26. 27. 28.

F T F T F F F

29. 30. 31. 32. 33. 34. 35.

F F F T T T T

36. 37. 38. 39. 40. 41. 42.

T F F F T T T

43. T 44. F 45. F

13-10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

MULTIPLE CHOICE QUESTIONS 46.

Which of the following income statement figures would probably be the best indicator of a company’s future performance? a. Total revenues b. Income from operations c. Net income d. Gross profit

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

47.

Which of the following is the best definition of sustainable income? a. Sustainable income is a measure of solvency that does not include capital expenditure. b. Sustainable income is the same as net income. c. Sustainable income is income that is unusual in nature and infrequent in occurrence. d. Sustainable income is the most likely level of income to be obtained in the future.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

48.

When preparing an income statement, which of the following is the proper order for income statement components? a. Comprehensive income, Other comprehensive income items, irregular items, Net income b. Net income, irregular items, Comprehensive income, Other comprehensive income items c. Irregular items, Net income, Other comprehensive income items, Comprehensive income d. Irregular items, Net income, Comprehensive income, Other comprehensive income items

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49.

Sophie's Dog Supplies has income before taxes of $550,000 and an extraordinary loss of $170,000. 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. $550,000 and ($170,000). b. $385,000 and ($86,700). c. $385,000 and ($119,000). d. $165,000 and ($51,000).

50.

If a company has an extraordinary gain of $20,000 and a 32% tax rate, what is the effect on net income? a. Increase of $20,000. b. Increase of $13,600. c. Increase of $6,400. d. No effect.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $20,000  (1 − .32) = $13,600

Financial Analysis: The Big Picture

51.

13-11

An extraordinary item must meet which of the following two criteria? a. Foreseeable and material b. Infrequent and unusual c. Substantial and measurable d. Unusual and measurable

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

52.

All of the following are reported on the income statement net of tax except a. irregular items. b. other comprehensive income items. c. income from operations. d. extraordinary items.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

Indian River Groves in central Florida lost about 10% of its strawberries (or $750,000) due to frost. Based on this information, how will Indian River Groves most likely report this loss? a. As an extraordinary item net of taxes. b. Below discontinued operations. c. As a pretax ordinary loss prior to income before income taxes. d. As a discontinued operation net of taxes.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54.

All of the following statements regarding changes in accounting principles are true except which of the following? a. Most changes in accounting principles are only reported in current periods when the principle change takes place. b. Changes in accounting principles are allowed when new principles are preferable to old ones. c. Most changes in accounting principles are retroactively reported. d. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55.

An income statement would not include a. other revenue and gains. b. extraordinary items. c. discontinued operations. d. dividends paid.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56.

The discontinued operations section of the income statement refers to a. discontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant component of a business.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13-12

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

57.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58.

When a change in depreciation method occurs a. prior years' financial statements should be changed to reflect the newly adopted method. b. the change should be reported in current and future years. c. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year. d. the cumulative effect of the change in accounting principle should be classified as an extraordinary item on the income statement.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60.

The order of presentation of items that may appear on the income statement is a. Extraordinary items, Discontinued operations, Income before income taxes. b. Discontinued operations, Extraordinary items, Income before income taxes. c. Income before income taxes, Discontinued operations, Extraordinary items. d. Income before income taxes, Extraordinary items, Discontinued operations.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61.

Which of the following items appears on the income statement before income before irregular items? a. Other comprehensive income. b. Extraordinary items. c. Income tax expense. d. Discontinued operations.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

62.

13-13

Which of the following items should be classified as an extraordinary item on an income statement? a. Gain on the sale of property, plant or equipment b. Loss due to expropriation of property by a foreign government c. Loss due to discontinued operations d. Excess of the selling price over the cost of treasury stock

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63.

Which of the following statements is true with respect to financial statement reporting for all cases when a company changes from one acceptable accounting method to another? a. Comparability across periods is impaired b. Only a footnote is required to report the change c. Changes in both depreciation methods and inventory methods are reported retroactively. d. Management must indicate that the accounting method change is preferable to the old method.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64.

The Holiday House had severe damage done to its Christmas inventory due to an escaped circus monkey rampaging through the store. The inventory loss was $150,000 before applicable taxes of $30,000. The Holiday House should record the loss as a(n) a. $150,000 loss in other expenses and losses. b. $180,000 extraordinary loss. c. $120,000 extraordinary loss. d. $130,000 extraordinary loss.

65.

Shambhala Spice Company has experienced a $60,000 loss due to tornado damage to their 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. $36,000

13-14 66.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Patchett Company reported income before taxes of $800,000 and an extraordinary loss of $200,000. Assume that the company’s tax rate is 25%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively? a. $600,000 and $200,000 b. $600,000 and $150,000 c. $600,000 and $180,000 d. $600,000 and $170,000

67.

Dandy Candy Company sold its licorice division resulting in a loss of $60,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount? a. $75,000 b. $15,000 c. $60,000 d. $45,000

68.

Which of the following is not an irregular item on the income statement? a. Discontinued operations b. Extraordinary items c. Other revenues and expenses d. Loss on disposal of a significant component of a business

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69.

Which of the following would not be considered an example of a discontinued operation? a. Shifting production processes within an operation b. Elimination of a major class of customers c. Elimination of an entire activity d. Disposal of a significant component of a business

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

Extraordinary items are reported on the income statement immediately a. below income from continuing operations. b. after comprehensive income. c. below income before taxes. d. after discontinued operations.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

71.

13-15

Which of the following would not be considered a change in accounting principle? a. Changing the estimated percentage used in calculating bad debt expense b. Changing the inventory costing method used from FIFO to LIFO c. Changing from straight-line depreciation to double-declining balance depreciation d. Changing from the cost method of accounting for investments to the equity method

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

72.

In reporting discontinued operations, the income statement should show in a special section 1. gains on the disposal of a discontinued component. 2. losses on the disposal of a discontinued component. a. 1 only. b. 2 only. c. neither 1 nor 2. d. both 1 and 2.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73.

R. Stone Corporation has income before taxes of $780,000 and an extraordinary gain of $200,000. 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. $635,000 and $200,000. b. $635,000 and $150,000. c. $585,000 and $200,000. d. $585,000 and $150,000.

74.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

75.

Lupton Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $160,000 loss in the year of disposal. The loss on disposal of the segment was $80,000. If the tax rate is 30%, and income before income taxes was $1,300,000, a. the income tax expense on the income before discontinued operations is $318,000. b. the income from continuing operations is $910,000. c. net income is $1,060,000. d. the losses from discontinued operations are reported net of income taxes at $240,000.

13-16 76.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Stellar, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $840,000 are sold for $600,000. Operating income from January 1 to June 30 for the division amounted to $130,000. Ignoring income taxes, what total amount should be reported on Stellar’s income statement for the current year under the caption, Discontinued Operations? a. $130,000 b. $110,000 loss c. $240,000 loss d. $370,000

77.

Comprehensive income would not include a. dividends declared. b. unrealized gains on available-for-sale securities. c. discontinued operations. d. extraordinary gains and losses.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78.

Which of the following would be considered an “Other Comprehensive Income” item? a. Net income b. Gain on disposal of discontinued operations c. Extraordinary loss related to flood d. Unrealized loss on available-for-sale securities

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79.

Jack's by the Tracks. has the following partial balance sheet: JACK'S BY THE TRACKS. Balance Sheet (partial) Stockholders’ Equity: Common Stock $6,000,000 Retained Earnings 2,000,000 Total Paid-in capital and retained earnings 8,000,000 Add: Unrealized gain on available-for-sale securities 800,000 Total Stockholders’ Equity: $8,800,000 What effect will the unrealized gain on available for sales securities have on comprehensive income? a. No effect on comprehensive income. b. Increase of $800,000 in comprehensive income. c. Increase of $8,800,000 in comprehensive income. d. Decrease of $800,000 in comprehensive income.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Financial Analysis: The Big Picture

80.

13-17

Reardon Inc. has an investment in trading securities of $120,000. This investment experienced an unrealized loss of $6,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be a. no effect. b. $120,000 increase. c. $42,000 decrease. d. $78,000 decrease.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

81.

Which of the following would be considered an “Other comprehensive income” item? a. Loss on disposal of discontinued operations b. Unrealized loss on available-for-sale securities c. Extraordinary gain due to expropriated plant facilities d. Net income

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82.

Comparisons of financial data made within a company are called a. intracompany comparisons. b. interior comparisons. c. intercompany comparisons. d. industry comparisons.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

83.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

84.

All of the following statements are true regarding comprehensive income except a. companies are required to report comprehensive income. b. a company would add an unrealized loss on available-for-sale securities to net income to calculate comprehensive income. c. comprehensive income does not include changes resulting from investments by stockholders. d. comprehensive income does not include dividends to stockholders.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13-18 85.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, 2014, Tri-State Industries had cash and common stock of $180,000. At that date the company had no other asset, liability or equity balances. On January 2, 2014, it purchased $160,000 of equity securities for cash that it classified as available-for-sale. It received cash dividends of $9,000 during the year on these securities. In addition, it had an unrealized holding gain on these securities of $24,000 net of tax. Based on this information, what is the amount of comprehensive income in 2014? a. $33,000 b. $273,000 c. $9,000 d. $24,000

86.

A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons? a. Industry average comparison b. Intracompany comparison c. Intercompany comparison d. Comprehensive income comparison

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

87.

When a horizontal analysis is performed and a zero or negative amount is reported in the base year, then a. no percentage change can be computed. b. the percent change will be negative. c. the accountant has made a mistake. d. the percentage change will be 100% of greater.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

88.

Danner Corporation reported net sales of $600,000, $680,000, and $780,000 in the years 2013, 2014, and 2015, respectively. If 2013 is the base year, what percentage do 2015 sales represent of the base? a. 115% b. 130% c. 77% d. 30%

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $780,000  $600,000 = $130%

89.

In analyzing financial statements, horizontal analysis is a a. requirement. b. tool. c. principle. d. theory.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

90.

13-19

Horizontal analysis is also known as a. linear analysis. b. vertical analysis. c. trend analysis. d. common size analysis.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

91.

Under which of the following cases may a percentage change be computed? a. The trend of the amounts is decreasing but all amounts are positive. b. There is no amount in the base year. c. There is a negative amount in the base year and a negative amount in the subsequent year. d. There is a negative amount in the base year and a positive amount in the subsequent year.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

92.

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a. that has been arranged from the highest number to the lowest number. b. that has been arranged from the lowest number to the highest number. c. to determine which items are in error. d. to determine the amount and/or percentage increase or decrease that has taken place.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

93.

Horizontal analysis of comparative financial statements includes the a. development of common size statements. b. calculation of liquidity ratios. c. calculation of dollar amount and percentage changes from financial statements over a period of time, as compared to a base year. d. evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

94.

Horizontal analysis is a technique for evaluating financial statement data a. within a period of time. b. over a period of time. c. on a certain date. d. as it may appear in the future.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-20 95.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If Year 1 equals $800, Year 2 equals $840, and Year 3 equals $900, the percentage to be assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is a. 112.5%. b. 105%. c. 88.8%. d. 100%.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $900 / $800 = 112.5%

96.

If Year 1 equals $780, Year 2 equals $858, and Year 3 equals $896, the percentage to be assigned for Year 2 in a trend analysis, assuming that Year 1 is the base year, is a. 100%. b. 120%. c. 110%. d. 115%.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $858 / $780 = 110%

97.

Assume the following sales data for a company: 2015 $910,000 2014 $770,000 2013 700,000 If 2013 is the base year, what is the percentage increase in sales from 2013 to 2014? a. 130% b. 110% c. 30% d. 10%

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($770,000 − $700,000) / $700,000 = 10%

98.

If Year 1 equals $700, Year 2 equals $810, and Year 3 equals $650, the percentage to be assigned for Year 1 in a trend analysis, assuming that Year 1 is the base year, is a. 100%. b. 89%. c. 105%. d. 112%.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

99.

In horizontal or trend analysis, each item is expressed as a(n) a. amount. b. percentage. c. rate. d. amount or a percentage.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

100.

13-21

Assume the following sales data for a company: 2015 $960,000 2014 720,000 2013 600,000 If 2013 is the base year, what is the percentage increase in sales from 2013 to 2014? a. 60% b. 20% c. 120% d. 160%

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($720,000 − $600,000) / $600,000 = 20%

101.

Comparative balance sheets a. are usually prepared for at least one year. b. are usually prepared for at least two years. c. do not show both dollar amount and percentage changes. d. do not show a comparison of total stockholders’ equity.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102.

Assume the following cost of goods sold data for a company: 2015 $1,300,000 2014 1,200,000 2013 1,000,000 If 2013 is the base year, what is the percentage increase in cost of goods sold from 2013 to 2015? a. 130% b. 30% c. 70% d. 20%

103.

In horizontal analysis, each item is expressed as a percentage of the a. net income amount. b. stockholders’ equity amount. c. total assets amount. d. base-year amount.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-22 104.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Boone Trading Company reported net sales of $400,000, $440,000, and $520,000 in the years 2013, 2014, and 2015, respectively. If 2013 is the base year, what is the trend percentage for 2015? a. 77% b. 118% c. 130% d. 78%

105.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

106.

Vertical analysis is also known as a. perpendicular analysis. b. common size analysis. c. trend analysis. d. straight-line analysis.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

107.

In a common size balance sheet, the 100 percent figure is a. total current assets. b. total property, plant and equipment. c. total liabilities. d. total assets.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

108.

In a common size financial statement, which of the following is given a percentage of 100 percent? a. Total liabilities b. Net income c. Total assets d. Cost of goods sold

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

109.

In a common size income statement, the 100% figure is a. net income. b. cost of goods sold. c. gross profit. d. net sales.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

110.

13-23

A balance sheet that displays only component percentages is called a ________ balance sheet. a. condensed b. common size c. comparative d. trendy

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

111.

Vertical analysis is a technique that expresses each item in a financial statement a. in dollars and cents. b. as a percent of the item in the previous year. c. as a percent of a base amount. d. starting with the highest value down to the lowest value.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

112.

In vertical analysis a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

113.

The best way to study the relationship of the components within a financial statement is to prepare a. common size statements. b. a trend analysis. c. profitability analysis. d. ratio analysis.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

114.

In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities. d. prepaid expenses in a previous year.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

115.

In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales. b. sales revenue. c. net income. d. cost of goods available for sale.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-24 116.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In performing a vertical analysis, the base for sales returns and allowances is a. sales revenue. b. sales discounts. c. net sales. d. total revenues.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

117.

In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses. b. net sales. c. total revenues. d. total expenses.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

118.

Salamagundi, Inc. has the following Income Statement (in millions): SALAMAGUNDI, INC. Income Statement For the Year Ended December 31, 2014 Net Sales $160 Cost of Goods Sold 90 Gross Profit 70 Operating Expenses 40 Net Income $ 30 Using vertical analysis, what percentage is assigned to net sales? a. 150% b. Can’t be computed. c. 60% d. 100%

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

119.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $70 / $160 = 43.8%

Financial Analysis: The Big Picture

120.

13-25

Cochran Corporation, Inc. has the following income statement (in millions): COCHRAN CORPORATION, INC. Income Statement For the Year Ended December 31, 2014 Net Sales $240 Cost of Goods Sold 80 Gross Profit 160 Operating Expenses 65 Net Income $ 95 Using vertical analysis, what percentage is assigned to cost of goods sold? a. 67% b. 33% c. 100% d. 30%

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $80 / $240 = 33%

121.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $95 / $240 = 40%

122.

Given the following data for the King Company: Current liabilities $ 400 Long-term debt 480 Common stock 700 Retained earnings 520 Total liabilities & stockholders’ equity $2,100 How would common stock appear on a common size balance sheet? a. 25% b. 58% c. 33% d. 30%

13-26 123.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following schedule is a display of what type of analysis? Amount Percent Current assets $100,000 25% Property, plant, and equipment 300,000 75% Total assets $400,000 100% a. Horizontal analysis b. Differential analysis c. Vertical analysis d. Ratio analysis

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

124.

In vertical analysis, the base amount for salaries and wages expense is generally a. net sales. b. salary & wages expense in a previous year. c. gross profit. d. net income.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

125.

Which one of the following is not a characteristic generally evaluated in ratio analysis? a. Liquidity b. Profitability c. Marketability d. Solvency

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

126.

Ratios are most useful in identifying a. trends. b. differences. c. causes. d. relationships.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

127.

Short-term creditors are usually most interested in assessing a. solvency. b. liquidity. c. marketability. d. profitability.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

128.

A common measure of liquidity is a. return on assets. b. accounts receivable turnover. c. profit margin. d. debt to equity.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

129.

13-27

A common measure of profitability is the a. current ratio. b. current cash debt coverage. c. return on common stockholders’ equity. d. debt to assets.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

130.

A common measure of long-term solvency is a. the cash debt coverage. b. the current ratio. c. the asset turnover. d. inventory turnover.

Ans: A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

131.

Return on assets is most closely related to a. profit margin and debt to assets ratio. b. profit margin and asset turnover. c. times interest earned and debt to stockholders’ equity. d. profit margin and free cash flow.

Ans: B, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

132.

Return on common stockholders’ equity is most closely related to a. gross profit rate and operating expenses to sales ratio. b. profit margin and free cash flow. c. times interest earned and debt to stockholders’ equity ratio. d. return on asset and leverage (debt to assets ratio).

Ans: D, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

133.

Long-term creditors are usually most interested in evaluating a. liquidity. b. marketability. c. profitability. d. solvency.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

134.

Which one of the following would be considered a long-term solvency ratio? a. Accounts receivable turnover b. Return on assets c. Current cash debt coverage d. Debt to assets ratio

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-28 135.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Stockholders are most interested in evaluating a. liquidity. b. solvency. c. profitability. d. marketability.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

136.

In ratio analysis, the ratios are never expressed as a a. rate. b. logarithm. c. percentage. d. simple proportion.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

137.

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, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

138.

The current ratio is a a. liquidity ratio. b. profitability ratio. c. long-term solvency ratio. d. cash flow ratio.

Ans: A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

139.

A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease. b. both increase. c. increase and remain the same, respectively. d. remain the same and decrease, respectively.

Ans: C, LO: 6, 8, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

140.

The accounts receivable turnover and inventory turnover are used to analyze a. long-term solvency. b. profitability. c. liquidity. d. leverage.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

141.

13-29

Winsor Clothing Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $6,800,000. The average collection period of the accounts receivable in terms of days was a. 30 days. b. 365 days. c. 45.1 days. d. 42.9 days.

Ans: D, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $6,800,000 ÷ [($760,000 + $840,000) ÷ 2] = 8.5; 365 ÷ 8.5 = 42.9

142.

Bill's Dollar Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $6,880,000. The accounts receivable turnover was a. 8.2 times. b. 9.1 times. c. 8.6 times. d. 4.3 times.

Ans: C, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($760,000 + $840,000) / Z = $800,000; $6,880,000 / $800,000 = 8.6

143.

A high accounts receivable turnover indicates a. customers are making payments quickly. b. a large portion of the company’s sales are on credit. c. many customers are not paying their receivables. d. the company’s sales have increased.

Ans: A, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

144.

LKN Company had net credit sales of $4,290,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The accounts receivable turnover ratio was a. 7.2 times. b. 6.6 times. c. 3.3 times. d. 6.1 times.

Ans: B, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $4,290,000 / $650,000 = 6.6

145.

Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $7,310,000. The accounts receivable turnover was a. 8.6 times. b. 8.3 times. c. 8.2 times. d. 8.9 times.

Ans: A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $7,310,000 / $850,000 = 8.6

13-30 146.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $7,310,000. The average collection period of the receivables in terms of days was a. 44 days. b. 42.4 days. c. 365 days. d. 41 days.

147.

Somen to Park Corporation had net credit sales of $4,060,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The accounts receivable turnover was a. 6.7 times. b. 6.2 times. c. 5.8 times. d. 6.4 times.

148.

Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $2,500,000. The inventory turnover for the year is a. 3.7 times. b. 5.3 times. c. 3.1 times. d. 1.4 times.

149.

Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $2,500,000. The average days in inventory during the year was approximately a. 260 days. b. 120 days. c. 99 days. d. 70 days.

Ans: C, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: 365 / ($9,250,000 / $2,500,000) = 99

Financial Analysis: The Big Picture

150.

13-31

Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $2,500,000. The inventory turnover for the year is a. 3.2 times. b. 2.8 times. c. 2.6 times. d. 2.1 times.

Ans: D, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $5,250,000 / $2,500,000 = 2.1

151.

Savory Thymes, Inc.had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $2,500,000. The average days in inventory during the year was approximately a. 115 days. b. 130 days. c. 139 days. d. 174 days.

152.

Which one of the following would not be considered a liquidity ratio? a. Current ratio b. Inventory turnover c. Current cash debt coverage d. Return on assets

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

153.

The asset turnover is a. net sales divided by net income. b. average total assets divided by net income. c. net sales divided by average total assets. d. average total assets divided by net sales.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

154.

The 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, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-32 155.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The profit margin is calculated by dividing a. sales by cost of goods sold. b. gross profit by net sales. c. net income by stockholders' equity. d. net income by net sales.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

156.

Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $500,000 in 2014. The weighted average number of shares outstanding in 2014 was 500,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's price-earnings ratio is a. 3 times. b. 10 times. c. 12.5 times. d. 4 times.

157.

Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $500,000 in 2014. The weighted average number of shares outstanding in 2014 was 500,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's payout ratio for 2014 is a. $5 per share. b. 20%. c. 25%. d. 10%.

158.

BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2014. The weighted average number of shares outstanding in 2014 was 500,000 shares. BVI Corporation's common stock is selling for $50 per share on the NASDAQ. BVI Corporation's price-earnings ratio is a. 3.2 times. b. 15.6 times. c. 10 times. d. 5 times.

Financial Analysis: The Big Picture

159.

13-33

BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2014. The weighted average number of shares outstanding in 2014 was 500,000 shares. BVI Corporation's common stock is selling for $50 per share on the NASDAQ. BVI Corporation's payout ratio for 2014 is a. $5 per share. b. 25%. c. 20%. d. 12.5%.

160.

The debt to assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

161.

Aps Company reported the following on its income statement: Income before income taxes $420,000 Income tax expense 120,000 Net income $300,000 An analysis of the income statement revealed that interest expense was $70,000. Aps Company's times interest earned was a. 5.3 times. b. 9 times. c. 7 times. d. 4.3 times.

162.

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, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-34 163.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Rama Company reported the following on its income statement: Income before income taxes $500,000 Income tax expense 150,000 Net income $350,000 An analysis of the income statement revealed that interest expense was $60,000. Rama Company's times interest earned was a. 6.8 times. b. 9.3 times. c. 8.3 times. d. 5.8 times.

Ans: B, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($60,000 + $500,000) / $60,000 = 9.3

164.

A company that is leveraged is one that a. has a high earnings per share. b. contains debt financing. c. contains equity financing. d. has a high current ratio.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

165.

The current assets of Orangette Company are $227,500. The current liabilities are $130,000. The current ratio expressed as a proportion is a. 175%. b. 1.75:1. c. .57:1. d. $210,000 ÷ $120,000.

166.

A weakness of the current ratio is a. the difficulty of the calculation. b. it uses year-end balances of current asset and current liability accounts. c. it is rarely used by sophisticated analysts. d. it can be expressed as a percentage, as a rate, or as a proportion.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

167.

A supplier to a company would be most interested in the a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

168.

13-35

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a. Current ratio b. Inventory turnover c. Asset turnover d. Accounts receivables turnover

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

169.

Ratios are used as tools in financial analysis a. instead of horizontal and vertical analyses. b. because they can provide information that may not be apparent from inspection of the individual components of the financial statements. c. because even single ratios by themselves are quite meaningful. d. because they are prescribed by GAAP.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

170.

The ratios that are used to determine a company's short-term debt paying ability are a. asset turnover, times interest earned, current ratio, and accounts receivables turnover. b. times interest earned, inventory turnover, current ratio, and receivables turnover. c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory turnover. d. current ratio, current debt coverage, receivable turnover, and inventory turnover.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

171.

Ed's Drive-In $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Ed's Drive-In's current ratio? a. The ratio remained unchanged. b. The change in the current ratio cannot be determined. c. The ratio decreased. d. The ratio increased.

Ans: C, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

172.

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, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

13-36 173.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If equal amounts are added to the numerator and the denominator of the current ratio and the ratio is over one, the ratio will always a. increase. b. decrease. c. stay the same. d. equal zero.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

174.

If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivable a. Increase No effect b. Increase Increase c. Decrease No effect d. Decrease Decrease

Ans: C, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

175.

A company has an accounts receivable turnover ratio of 10. The average net accounts receivable during the period are $700,000. What is the amount of net credit sales for the period? a. $70,000 b. $7,000,000 c. $700,000 d. $770,000

Ans: B, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $700,000  $10 = 7,000,000

176.

If the average collection period is 52 days, what is the accounts receivable turnover? a. 7.0 times b. 14.2 times c. 14.0 times d. 5.2 times

Ans: A, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $365  52 = 7.0

177.

A general rule to use in assessing the average collection period is that it a. should not exceed 30 days. b. can be any length as long as the customer continues to buy merchandise. c. should not greatly exceed the return period. d. should not greatly exceed the credit term period.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

178.

13-37

The inventory turnover is calculated by dividing a. cost of goods sold by the ending inventory. b. cost of goods sold by the beginning inventory. c. cost of goods sold by the average inventory. d. average inventory by cost of goods sold.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

179.

A company has an average inventory on hand of $75,000 and its average days in inventory is 36.5 days. What is the cost of goods sold? a. $750,000 b. $1,752,000 c. $1,680,000 d. $876,000

180.

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, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

181.

Net sales are $2,400,000, beginning total assets are $700,000, and the asset turnover is 3.0. What is the ending total asset balance? a. $800,000 b. $900,000 c. $700,000 d. $750,000

$700, 000 + X

= $800,000; X = $900,000

182.

13-38 182.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross profit Operating expenses Net income

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the current ratio for this company? a. 1.5 b. 1.0 c. 1.17 d. 0.67

6,000 $20 0.90 $30,000

Ans: A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($40,000 + $30,000 + $20,000) / $60,000 = 1.5

183.

Financial Analysis: The Big Picture

183.

13-39

(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock 0.90 Cash provided by operations $30,000 What is the accounts receivable turnover for this company? a. 1.5 times b. 2 times c. 3.0 times d. 6 times Ans: C, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $90,000 / $30,000 = 3.0

184.

The following information pertains to Unique 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 20,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

13-40 184.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) What is the inventory turnover for this company? a. 2 times b. 2.25 times c. 1 time d. .44 times

Ans: B, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $45,000 / $20,000 = 2.25

185.

$ 90,000 45,000 45,000 20,000 $ 25,000 6,000 $20 0.90 $30,000

Financial Analysis: The Big Picture

186.

13-41

$ 90,000 45,000 45,000 20,000 $ 25,000 6,000 $20 0.90 $30,000

Ans: C, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $25,000 / $90,000 = 27.8%

187.

13-42 187.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock 0.90 Cash provided by operations $30,000 What is the return on common stockholders’ equity for this company? a. 16.7% b. 20.0% c. 33.3% d. 40.0% Ans: A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $25,000 / $150,000 = 16.7%

188.

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

Financial Analysis: The Big Picture

188.

13-43

(Cont.) What is the price earnings ratio for this company? a. 4.8 times b. 2.0 times c. 6.4 times d. 3.2 times

189.

$ 90,000 45,000 45,000 20,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock 0.90 Cash provided by operations $30,000 What is the current cash debt coverage for this company? a. 0.5 times b. 3 times c. 0.33 times d. 0.14 times Ans: A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $30,000 / $60,000 = 0.5

13-44 190.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Junebag Corporation reported net income $36,000; net sales $400,000; and average assets $600,000 for 2014. What is the 2014 profit margin? a. 9% b. 11% c. 60% d. 67%

191.

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 15,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the current ratio for this company? a. 1.00 b. 1.25 c. 1.50 d. 0.67

$ 121,000 66,000 55,000 30,000 $ 25,000 6,000 $20 .50 $40,000

Financial Analysis: The Big Picture

192.

13-45

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 121,000 66,000 55,000 30,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock .50 Cash provided by operations $40,000 What is the accounts receivable turnover for this company? a. 2.2 times b. 4.4 times c. 8.1 times d. 4.0 times Ans: D, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $121,000 / $30,000 = 4.0

193.

13-46 193.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the inventory turnover for this company? a. 4.4 times b. 8.1 times c. 8.8 times d. 0.23 time

$ 121,000 66,000 55,000 30,000 $ 25,000 6,000 $20 .50 $40,000

194.

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

$ 121,000 66,000 55,000 30,000 $ 25,000 6,000 $20 .50 $40,000

Financial Analysis: The Big Picture

194.

13-47

(Cont.) What is the return on assets for this company? a. 18.3% b. 13.3% c. 8.3% d. 16.7%

195.

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the profit margin for this company? a. 41.3% b. 45.5% c. 33.1% d. 20.7%

$ 121,000 66,000 55,000 30,000 $ 25,000 6,000 $20 .50 $40,000

Ans: D, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $25,000 / $121,000 = 20.7%

13-48 196.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 121,000 66,000 55,000 30,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock .50 Cash provided by operations $40,000 What is the return on common stockholders’ equity for this company? a. 33.3% b. 16.7% c. 26.7% d. 36.7% Ans: B, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $25,000  $150,000 = 16.7%

197.

Financial Analysis: The Big Picture

197.

13-49

(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 121,000 66,000 55,000 30,000 $ 25,000

Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock .50 Cash provided by operations $40,000 What is the price earnings ratio for this company? a. 1.9 times b. 2.7 times c. 3.8 times d. 4.8 times Ans: D, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20 / ($25,000 / $6,000) = 4.8

198.

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 15,000 Property, plant and equipment 210,000 Total Assets $300,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 90,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $300,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

$ 121,000 66,000 55,000 30,000 $ 25,000 6,000 $20 .50 $40,000

13-50 198.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.) What is the current cash debt coverage ratio for this company? a. 0.67 times b. 1.5 times c. 0.27 times d. 0.44 times

199.

The following information is available for Patterson Company: 2014 2013 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,000,000 2,600,000 Cost of goods sold 1,500,000 840,000 Net income 300,000 170,000 The accounts receivable turnover for 2014 is a. 8.3 times. b. 4.3 times. c. 8.6 times. d. 7.6 times.

200.

The following information is available for Patterson Company: 2014 2013 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,000,000 1,400,000 Cost of goods sold 1,500,000 840,000 Net income 300,000 170,000 The inventory turnover for 2014 is a. 5.4 times. b. 5.0 times. c. 2.5 times. d. 3.0 times.

201.

The following amounts were taken from the financial statements of R.Dodd Company: 2014 2013 Current liabilities $1,280,000 $1,220,000 Long-term liabilities 1,800,000 1,600,000 Interest expense 100,000 50,000 Income tax expense 50,000 30,000 Net income 400,000 170,000 Net cash provided by operating activity 425,000 270,000

Financial Analysis: The Big Picture

201.

13-51

(Cont.) The times interest earned for 2014 is a. 4.0 times. b. 5.0 times. c. 4.5 times. d. 5.5 times.

202.

203.

The following amounts were taken from the financial statements of Ando Company: 2014 2013 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 126,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $35 $39 The return on assets for 2014 is a. 16%. b. 14%. c. 32%. d. 28%.

13-52 204.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The following amounts were taken from the financial statements of Ando Company: 2014 2013 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 144,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $35 $39 The profit margin ratio for 2014 is a. 20.6%. b. 21.0%. c. 20%. d. 40.9%.

205.

The following amounts were taken from the financial statements of Ando Company: 2014 2013 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 144,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $48 $39 The price-earnings ratio for 2014 is a. 30 times. b. 25 times. c. 48 times. d. 3 times.

206.

Solvency is of most interest to a. short-term creditors. b. stockholders. c. competitors. d. long-term creditors.

Ans: D, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

207.

The current ratio would be of most interest to a. short-term creditors. b. long-term creditors. c. stockholders. d. customers.

Ans: A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Financial Analysis: The Big Picture

208.

13-53

Which measure(s) is(are) an evaluation of a company’s ability to pay current liabilities? 1. Current cash debt coverage ratio. 2. Current ratio. a. 1 only. b. 2 only. c. Both 1 and 2. d. Neither 1 nor 2.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

209.

Which measure(s) is(are) useful in evaluating the efficiency in managing inventories? 1. Inventory turnover 2. Days in inventory a. 1 only. b. 2 only. c. Both 1 and 2. d. Neither 1 nor 2.

Ans: C, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

210.

Which of these is not a liquidity ratio? a. Current ratio b. Asset turnover c. Inventory turnover d. Accounts receivable turnover

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

211.

Akers Corporation reported net income $48,000; net sales $480,000; and average assets $800,000 for 2014. What is the 2014 profit margin? a. 6% b. 10% c. 48% d. 60%

212.

Beta Corporation had net income of $325,000 and paid dividends to common stockholders of $50,000 in 2014. The weighted average number of shares outstanding in 2014 was 50,000 shares. Beta Corporation's common stock is selling for $45.50 per share on the New York Stock Exchange. Beta Corporation's price-earnings ratio is a. 14.0 times. b. 7.0 times. c. 6.1 times. d. 8.3 times.

13-54 213.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Bertram Corporation had net income of $325,000 and paid dividends to common stockholders of $50,000 in 2014. The weighted average number of shares outstanding in 2014 was 50,000 shares. Bertram Corporation's common stock is selling for $45.50 per share on the New York Stock Exchange. Bertram Corporation's payout ratio for 2014 is a. $6.5 per share. b. 18%. c. 15.4%. d. 40%.

214.

A successful discount retail store such as Kmart would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.

Ans: B, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

215.

Net sales are $3,000,000, beginning total assets are $1,400,000, and the asset turnover is 2.5 times. What is the ending total asset balance? a. $1,200,000 b. $1,000,000 c. $1,400,000 d. $1,600,000

Ans: B, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 / 2.5 = $1,200,000; (1,400,000 + X) / 2 = $1,200,000; X = $1,000,000

216.

All of the following are ways that a company's current ratio would decrease except a. purchasing inventory on account. b. adding equal amounts to the numerator and denominator. c. paying off one-third of its accounts payable. d. paying cash for new equipment.

Ans: C, LO: 6, 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

217.

All of the following may be indicators of channel stuffing except a. deep discounts to customers. b. customers incentives for buying early. c. an extremely good earnings period followed by several subsequent bad periods. d. inventory levels that reflect seasonal demand levels.

Ans: D, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Professional Demeanor, IMA: Performance Measurement

Financial Analysis: The Big Picture

218.

13-55

The use of alternative accounting methods a. is not a problem in ratio analysis because the footnotes disclose the method used. b. may be a problem in ratio analysis even if disclosed. c. is not a problem in ratio analysis since eventually all methods will lead to the same end. d. is only a problem in ratio analysis with respect to inventory.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

219.

Which situation below might indicate a company has a low quality of earnings? a. Revenue is recorded when recognized b. Repair costs are capitalized and then depreciated. c. The financial statements are prepared in accordance with generally accepted accounting principles. d. The same accounting principles are used each year.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

220.

Which of the following ratios may be used to measure a company’s quality of earnings? a. Price-earnings ratio b. Return on assets ratio c. Current ratio d. Times interest earned ratio

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

221.

All of the following situtations below might indicate a company has a low quality of earnings except a. A lack of disclosure about guaranteed payments that were mentioned in the MD&A of the annual report. b. Maintenance costs are capitalized and then depreciated. c. Revenue is recognized when earned. d. Adoption of a different inventory method for each of the last three years.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

13-56

Answers to Multiple Choice Questions 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.

b d c c b b c c a d d a b d c c b d c b b d c a d a

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. 97.

d d d b b a d b a b a b b a c a b b c a d c b a c d

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.

a d b b b d c c b d c d b c a a b a c b d a b c c c

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.

a c d b b c a b d d d c b b a c c d c a b a b c a c

150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.

d d d c b d c c b b d c c b b b b c c b d c c b c b

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.

a d c a b b a c b a c a a a a c d a c d b d a c b d

202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221.

a b c a d a c c b b b c b b c d b b a c

Financial Analysis: The Big Picture

13-57

BRIEF EXERCISES Be. 222 Listed below are some selected Items that may appear on a corporate income statement. Indicate the order in which these items would appear on an income statement. (The first one should be assigned the number “1”, the second “2,” etc.) _____ _____ _____ _____ _____ _____

Extraordinary item Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 222 5 1 4 6 3 2

(5-8 min.)

Extraordinary item Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense

Be. 223 Indicate whether the following items would be reported as an ordinary or an extraordinary item in Chemco Corporation's income statement. (a)

Loss attributable to labor strike.

(b)

Gain on sale of fixed assets.

(c)

Loss from fire. Chemco is a chemical company.

(d)

Loss from sale of marketable securities.

(e)

Expropriation of property by a foreign government.

(f)

Loss from tornado damage. Chemco Corporation is located in the Midwest's tornado alley.

(g)

Loss from government condemnation of property through newly enacted law.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 223 (a) (b) (c) (d) (e) (f) (g)

(6-9 min.)

ordinary ordinary ordinary ordinary extraordinary ordinary extraordinary

13-58

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 224 Dos Amugus Company has income from continuing operations of $621,000(after tax) for the year ended December 31, 2014. It also has the following items (before considering income taxes): (1)

An extraordinary fire loss of $120,000.

(2)

A gain of $60,000 on the discontinuance of a major component.

(3)

A cumulative effect of a change in accounting principle that resulted in an increase in prior years' depreciation of $50,000.

Assume all items are subject to income taxes at a 30% tax rate. Instructions Prepare an income statement, beginning with income from continuing operations. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 224

(10-15 min.) DOS AMUGUS COMPANY Partial Income Statement For the Year Ended December 31, 2014

Income from continuing operations ............................................................ Discontinued operations Gain on discontinued segment, net of $18,000 income taxes ............ Extraordinary item Fire loss, net of $36,000 tax savings ................................................. Net income ................................................................................................

$621,000 42,000 (84,000) $579,000

Be. 225 An inexperienced accountant for CJS Transport Corporation showed the following in CJS Transport’s 2014 income statement: income before income taxes $420,000; Extraordinary loss from tornado (before taxes) $60,000; and net income $132,000. The extraordinary loss and taxable income are both subject to a 30% tax rate. Instructions Prepare a corrected income statement beginning with “Income before income taxes.” Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 225

(5-10 min.) CJS TRANSPORT CORPORATION Partial Income Statement

Income before income taxes ................................................................. Income tax expense ($420,000 × 30%)................................................. Income before extraordinary item ......................................................... Extraordinary loss from tornado, net of $18,000 ($60,000 × 30%) tax savings ........................................................... Net income ...........................................................................................

$420,000 126,000 294,000 (42,000) $252,000

Financial Analysis: The Big Picture

13-59

Be. 226 Comparative information taken from the Bergeron Company financial statements is shown below:

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

2014 $ 175,000 30,000 855,000 170,000 11,000

Accounts receivable Retained earnings Sales revenue Operating expenses Income taxes payable

2013 $ 140,000 (14,000) 750,000 200,000 10,000

Instructions Using horizontal analysis, show the percentage change from 2013 to 2014 with 2013 as the base year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 226 (a) (b) (c) (d) (e)

(6-10 min.)

$35,000 ÷ $140,000 = 25% increase Base year is negative. Not possible to compute. $105,000 ÷ $750,000 = 14% increase $30,000 ÷ $200,000 = 15% decrease $1,000 ÷ $11,000 = 10% increase

Be. 227 The following items were taken from the financial statements of Kramer Manufacturing, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit

2015 $226,000 150,000 $ 76,000

2014 $212,000 140,000 $ 72,000

2013 $200,000 125,000 $ 75,000

Instructions Using horizontal analysis and 2013 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 227

(8-12 min.)

Item Net Sales Cost of Goods Sold Gross Profit

2015 113% 120% 101%

2014 106% 112% 96%

2013 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.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

13-60 Be. 228

The following items were taken from the financial statements of Mint, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit

2015 $355,000 214,000 $141,000

2014 $336,000 206,000 $130,000

2013 $300,000 186,000 $114,000

Instructions Compute the following for each of the above time periods. a. The amount and percentage change from 2013 to 2014. b. The amount and percentage change from 2014 to 2015. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 228

(5-9 min.)

Item

2015

Net Sales Cost of Goods Sold Gross Profit

$ 19,000 8,000 11,000

2014 $___ Percent 36,000 12.0 20,000 10.8 16,000 14.0

Percent 5.6 3.9 8.5

Be. 229 Using these data from the comparative balance sheet of Sunta Fe Spice Company, perform horizontal analysis. December 31, 2014 December 31, 2013 Accounts receivable $ 375,000 $ 300,000 Inventory 780,000 600,000 Total assets 3,220,000 2,800,000 Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 229

(5-10 min.)

Accounts receivable Inventory Total assets $75,000 $300,000

= 0.25

Dec. 31, 2014 $ 375,000 780,000 3,220,000 $180,000 $600,000

Dec. 31, 2013 $ 300,000 600,000 2,800,000 = 0.30

Increase or (Decrease) Amount Percentage* $75,000 25% 180,000 30% 420,000 15% $420,000 = 0.15 $2,800,000

Be. 230 If Hard in Parle Company had net income of $620,000 in 2014 and it experienced a 19% increase in net income over 2013, what was its 2013 net income? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 230

(5-10 min.) 2014 $620,000

Net Income 0.19 =

13-61

2013 X

Increase 19%

$620,000 – X X

0.19X = $620,000 – X 1.19X = $620,000 X = $521,008 Be. 231 Horizontal analysis (trend analysis) percentages for Omega Company’s sales, cost of goods sold, and expenses are listed here. Horizontal Analysis Sales revenue Cost of goods sold Expenses

2015 98.2% 103.1 108.6

2014 104.8% 97.5 96.4

2013 100.0% 100.0 100.0

Instructions Explain whether Omega’s net income increased, decreased, or remained unchanged over the 3year period. Ans: N/A, LO: 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 231

(5-10 min.)

Comparing the percentages presented results in the following conclusions: The net income for Omega increased in 2014 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 2015 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. Be. 232 Using the following selected items from the comparative balance sheet of Kato Company, illustrate horizontal and vertical analysis.

Accounts Receivable Inventory Total Assets

December 31, 2014 $ 720,000 450,000 3,200,000

December 31, 2013 $ 630,000 360,000 3,000,000

Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 232

(8-12 min.) HORIZONTAL ANALYSIS

Accounts Receivable Inventory Total Assets

December 31, 2014 114% 125% 107%

December 31, 2013 100% 100% 100%

VERTICAL ANALYSIS Accounts Receivable Inventory Total Assets

December 31, 2014 22.5% 14% 100%

December 31, 2013 21% 12% 100%

Be. 233 Using these data from the comparative balance sheet of K. Leen Company, perform vertical analysis.

Accounts receivable Inventory Total assets

December 31, 2014 $ 400,000 864,000 3,200,000

December 31, 2013 $ 400,000 600,000 3,000,000

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 233

(5-10 min.)

Accounts receivable Inventory Total assets

Dec. 31, 2014 Amount Percentage* $ 400,000 12.5% 864,000 27.0% 3,200,000 100.0%

Dec. 31, 2013 Amount Percentage** $ 400,000 13.3% 600,000 20.0% 3,000,000 100.0%

$400,000 $3,200,000

= 0.125

$400,000 $3,000,000

= 0.133

$864,000 $3,200,000

= 0.270

$600,000 $3,000,000

= 0.200

FOR INSTRUCTOR USE ONLY

Financial Analysis: The Big Picture

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Be. 234 Vertical analysis (common-size) percentages for Austin Company’s sales, cost of goods sold, and expenses are listed here. Vertical Analysis 2015 2014 2013 Sales revenue 100.0% 100.0% 100.0% Cost of goods sold 61.2 62.4 63.5 Expenses 26.5 27.4 28.5 Did Austin Company’s net income as a percent of sales increase, decrease, or remain unchanged over the 3-year period? Provide numerical support for your answer. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 234

(5-10 min.)

Sales revenue Cost of goods sold Expenses Net income

2015 100.0 (61.2) (26.5) 12.3

2014 100.0 (62.4) (27.4) 10.2

2013 100.0 (63.5) (28.5) 8.0

Net income as a percent of sales for Austin increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year. Be. 235 Selected information from the comparative financial statements of Barcelona Company for the year ended December 31 appears below: 2014 2013 Accounts receivable (net) $ 175,000 $200,000 Inventory 130,000 170,000 Total assets 1,100,000 800,000 Current liabilities 140,000 110,000 Long-term debt 410,000 300,000 Net credit sales 900,000 700,000 Cost of goods sold 600,000 530,000 Interest expense 40,000 25,000 Income tax expense 60,000 29,000 Net income 120,000 85,000 Net cash provided by operating activities 250,000 135,000 Instructions Answer the following questions relating to the year ended December 31, 2014. Show computations. 1. The inventory turnover for 2014 is __________. 2. The number of times interest earned in 2014 is __________. 3. The accounts receivable turnover for 2014 is __________. 4. The return on assets for 2014 is __________. 5. The current cash debt coverage for 2014 is __________. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 235

(10-15 min.) $600,000 ———————————— = 4.0 times. ($130,000 + $170,000) ÷ 2

1. The inventory turnover for 2014 is 4.0 times.

2. The number of times interest earned in 2014 is 5. 5 times. $120,000 + $60,000 + $40,000 —————————————— = 5. 5 times. $40,000 3. The accounts receivable turnover for 2014 is 4.8 times. $ 900,000 ———————————— = 4.8 times. ($175,000 + $200,000) ÷ 2 4. The return on assets for 2014 is 12.6%. $120,000 ————————————— = 12.6%. ($1,100,000 + $800,000) ÷ 2 5. The current cash debt coverage for 2014 is 2.0 times. $250,000 ———————————— = 2.0 times ($140,000 + $110,000) ÷ 2 Be. 236 Selected data for Buechner Corporation appear below. 2014 $630,000 409,500 64,000 90,000

Net credit sales Cost of goods sold Inventory at end of year Accounts receivable at end of year

2013 $520,000 312,000 85,000 50,000

Instructions Compute the following for 2014: (a) Gross profit percentage (b) Inventory turnover (c) Accounts receivable turnover Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 236 (a)

13-65

(6-10 min.)

Gross profit = Net Sales - Cost of goods sold = $630,000 - $409,500 = $220,500 Gross profit percentage = Gross profit ÷ Net sales = $220,500 ÷ $630,000 = 35%

(b)

Inventory turnover = Cost of goods sold ÷ Average inventory = $409,500 ÷ [($64,000 + $85,000) ÷ 2] = 5.5 times

(c)

Accounts receivable turnover = Net credit sales ÷ Average accounts receivables = $630,000 ÷ [($90,000 + $50,000) ÷ 2] = $630,000 ÷ $70,000 = 9 times

Be. 237 Corsig Corporation had the following comparative current assets and current liabilities: Dec. 31, 2014 Dec. 31, 2013 Current assets Cash $ 25,000 $ 30,000 Debt investments 40,000 10,000 Accounts receivable 60,000 90,000 Inventory 110,000 90,000 Prepaid expenses 35,000 25,000 Total current assets $270,000 $245,000 Current liabilities Accounts payable $120,000 $110,000 Salaries and wages payable 40,000 30,000 Income tax payable 10,000 15,000 Total current liabilities $170,000 $155,000 During 2014, net credit sales and cost of goods sold were $570,000 and $350,000, respectively. Net cash provided by operating activities for 2014 was $140,000. Instructions Compute the following liquidity measures for 2014: 1. Current ratio 2. Current cash debt coverage 3. Accounts receivable turnover 4. Inventory turnover Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 237

(8-12 min.)

1. Current Ratio = Current Assets ÷ Current Liabilities = $270,000 ÷ $170,000 = 1.59:1 2. Current cash debt coverage Cash provided by operations Average current liabilities

= =

$140,000 ($170,000 + $155,000) / 2

$140,000 $162,500

0.86 times

Net credit sales $570,000 3. Accounts receivable Turnover = ————————————— = ——————————— Average accounts receivables ($60,000 + $90,000) ÷ 2 $570,000 = ———— = 7.6 times $75,500 4. Inventory Turnover

Cost of goods sold $350,000 = ————————— = ——————————— Average inventory ($110,000 + $90,000) ÷ 2 $350,000 = ———— = 3.5 times $100,000

Be. 238 Selected data from the Florida Fruit Company are presented below: Total assets $1,500,000 Average total assets 1,850,000 Net income 175,000 Net sales 1,300,000 Average common stockholders' equity 1,000,000 Net cash provided by operating activities 275,000 Instructions Assuming that no dividends were declared or paid during the period, calculate the following profitability ratios from the above information: 1. Profit margin 2. Asset turnover 3. Return on assets 4. Return on common stockholders’ equity Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 238

13-67

(10-15 min.)

With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Net income ÷ Net sales = $175,000 ÷ $1,300,000 = 13.5% 2. Asset turnover = Net sales ÷ Average total assets = $1,300,000 ÷ $1,850,000 = .70 times 3. Return on assets = Net income ÷ Average total assets = $175,000 ÷ $1,850,000 = 9.5% Net income 4. Return on common stockholders' equity = ————————————————— Average common stockholders' equity = $175,000 ÷ $1,000,000 = 17.5%

Be. 239 The following data are taken from the financial statements of Bar Harbor Company: 2014 $ 530,000 5,800,000

Average accounts receivable Net sales on account Terms for all sales are 2/10, n/30

2013 $ 550,000 5,200,000

Instructions (a) Compute the accounts receivable 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, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 239

(8-12 min.)

(a) Accounts receivable turnover

Average collection period

2014

2013

$5,800,000 ————— 530,000

$5,200,000 ————— 550,000

10.9 times

9.5 times

365 days ————— 10.9 times

365 days ———— 9.5 times

33.5 days

38.4 days

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 239 (b)

(Cont.)

The accounts receivable are turning faster in 2014 than they did in 2013. There is still a problem since the normal credit period is 30 days, and the average collection period for both years exceed this target. Therefore, improvement in the management of the accounts receivable would appear to be desirable.

Be. 240 State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer. (a)

Collection of an accounts receivable

(b)

Declaration of cash dividends

(c)

Additional stock is sold for cash

(d)

Accounts payable are paid

(e)

Equipment is purchased for cash

(f)

Inventory purchases are made for cash

(g)

Temporary investments are purchased for cash

Ans: N/A, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 240 (a) (b) (c) (d) (e) (f) (g)

(7-11 min.)

no effect decrease increase increase decrease no effect no effect

Be. 241 The balance sheet for Appalachian Corporation at the end of the current year includes the following: Bonds payable, 6% ...................................................... 6% Preferred stock, $100 par ...................................... Common stock, $10 par ...............................................

$5,000,000 1,000,000 2,000,000

Net income was $565,000 and income tax expense for the current year amounted to $285,000. Cash dividends paid on common stock were $200,000, and the common stock was selling for $28 per share at the end of the year. There were no ownership changes during the year.

Financial Analysis: The Big Picture

Be. 241

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(Cont.)

Instructions Determine each of the following: (a) Number of times that bond interest was earned. (b) Earnings per share for common stock. (c) Price-earnings ratio. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 241

(6-12 min.)

(a) Times interest earned =

Income before income taxes and interest expense Interest expense $565,000 + $285,000 + $300,000 $300,000

= 3.8 times

Net income - Preferred dividends Weighted average common shares outstanding

(b) Earnings per share =

$565,000 - $60,000 200,000 shares

= $2.53 per share

Market price per share Earnings per share

$28 $2.53

= 11.1 times

Be. 242 The income statement for the Carolina Service Company for the year ended December 31, 2014, appears below. Sales revenue Cost of goods sold Gross profit Expenses Net income

$670,000 390,000 280,000 180,000* $100,000

*Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2014, was 50,000 shares. On July 1, 2014, 10,000 more shares were issued. 2. The market price of Carolina's stock was $22 at the end of 2014. 3. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 242

(Cont.)

Instructions Compute the following ratios for 2014: (a) Earnings per share. (b) Price-earnings. (c) Times interest earned. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 242 (a)

(6-10 min.)

Earnings per share $100,000 - $5,000 $95,000 —————————— = ———— = $1.73 [50,000 + (10,000 ÷ 2)] 55,000

(b)

Price-earnings $22.00 ——— = 12.7 times 1.73

(c)

Times interest earned $100,000 + $25,000 + $20,000 ————————————— = 5.8 times $25,000

Be. 243 Selected data taken from the 2014 financial statements of Phillips Card Company, Inc. are as follows (in millions). Net sales Current liabilities, February 28, 2013 Current liabilities, February 28, 2014 Net cash provided by operating activities Total liabilities, February 28, 2013 Total liabilities, February 28, 2014 Capital expenditures Cash dividends

$295.9 39.5 47.5 17.0 64.2 71.2 2.6 6.5

Instructions Compute these ratios at February 20, 2014: (a) Current cash debt coverage (b) Cash debt coverage (c) Free cash flow Provide a brief interpretation of your results. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 243 (a)

13-71

(10-15 min.) Net cash provided by operating activities Average current liabilities

Current cash debt coverage =

$17.0 = 0.39 times ($39.5 + $47.5) /2 Phillips could cover (or pay) approximately 39% of its current liabilities with cash generated by operating activities. (b)

Net cash provided by operating activities Average total liabilities

Cash debt coverage =

$17.0 ($64.2 + $71.2) / 2

= 0.25 times

Phillips could cover (or pay) a fourth of its total liabilities with cash generated by operating activities. (c) Free cash flow = Cash provided by operating activities – Capital expenditures – Cash dividends $7.9 = $17.0 – $2.6 – $6.5 Phillips generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt.

EXERCISES Ex. 244 Exeter Corporation had net income of $3,000,000 in 2013. Using 2013 as the base year, net income decreased by 40% in 2014 and increased by 110% in 2015. Instructions Compute the net income reported by Exeter Corporation for 2014 and 2015. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 244

(8-12 min.)

2014: X ÷ $3,000,000 = 40% X = $3,000,000 × .40 = $1,200,000 The decrease is $1,200,000; therefore net income for 2014 is $1,800,000; ($3,000,000 – $1,200,000). 2015: X ÷ $3,000,000 = 110% X = $3,000,000 × 1.1 = $3,300,000 The increase is $3,300,000; therefore net income for 2015 is $6,300,000; ($3,000,000 + $3,300,000).

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 245 The following items were taken from the financial statements of St. Johns, Inc., over a four-year period: Item Net Sales Cost of Goods Sold Gross Profit

2015 $655,000 520,000 $135,000

2014 $640,000 480,000 $160,000

2013 $575,000 435,000 $140,000

2012 $500,000 400,000 $100,000

Instructions Using horizontal analysis and 2012 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 245

(10-15 min.)

Item Net Sales Cost of Goods Sold Gross Profit

2015 131% 130% 135%

2014 128% 120% 160%

2013 115% 109% 140%

2012 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 except in 2015. Ex. 246 Here is financial information for Valdez Express Inc.

Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Retained earnings

December 31, 2014 $114,000 414,000 91,000 134,500 149,500 153,000

December 31, 2013 $80,000 360,000 65,000 90,000 115,000 170,000

Instructions Prepare a schedule showing a horizontal analysis for 2014 using 2013 as the base year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 246

13-73

(10 min.) VALDEZ EXPRESS INC. Condensed Balance Sheet December 31 Increase or (Decrease) Amount Percentage

2014

2013

Assets Current assets Plant assets (net) Total assets

$114,000 414,000 $528,000

$ 80,000 360,000 $440,000

$34,000 54,000 $88,000

42.5% 15.0% 20.0%

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 91,000 134,500 $225,500

$ 65,000 90,000 $155,000

$26,000 44,500 $70,500

40.0% 49.4% 45.5%

$149,500 153,000

$115,000 170,000

$34,500 (17,000)

30.0% (10.0%)

302,500

285,000

17,500

6.1%

$528,000

$440,000

$88,000

20.0%

Stockholders' Equity Common Stock, $1 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Ex. 247

Here are the comparative income statements of Georgia Development Corporation. GEORGIA DEVELOPMENT CORPORATION Comparative Income Statements For the Years Ended December 31

Net sales Cost of goods sold Gross profit Operating expenses Net income

December 31, 2014 $600,000 414,000 186,000 150,000 $36,000

December 31, 2013 $500,000 350,000 150,000 120,000 $30,000

Instructions (a) Prepare a horizontal analysis of the income statement data for Georgia Development Corporation using 2013 as a base. (Show the amounts of increase of decrease.) (b) Prepare a vertical analysis of the income statement data for Georgia Development Corporation for both years. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 247

(12 min.)

(a)

GEORGIA DEVELOPMENT CORPORATION Condensed Income Statement For the Years Ended December 31 Increase or (Decrease) During 2014

Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

Net sales Cost of goods sold Gross profit Operating expenses Net income

2014 $600,000 414,000 186,000 150,000 $ 36,000

2013 $500,000 350,000 150,000 120,000 $ 30,000

Amount $100,000 64,000 36,000 30,000 $ 6,000

Percentage 20.0% 18.3% 24.0% 25.0% 20.0%

GEORGIA DEVELOPMENT CORPORATION Condensed Income Statement For the Years Ended December 31

2014 $ Percent $600,000 100.0% 414,000 69.0% 186,000 31.0% 150,000 25.0% $ 36,000 6.0%

2013 $ $500,000 350,000 150,000 120,000 $ 30,000

Percent 100.0% 70.0% 30.0% 24.0% 6.0%

Ex. 248 The comparative balance sheet of Delta Company appears below: Delta COMPANY Comparative Balance Sheet December 31, ___________________________________________________________________________ Assets 2014 2013 Current assets ..................................................................................... $ 450 $280 Plant assets ......................................................................................... 550 520 Total assets ................................................................................... $1,000 $800 Liabilities and stockholders' equity Current liabilities .................................................................................. Long-term debt .................................................................................... Common stock .................................................................................... Retained earnings ............................................................................... Total liabilities and stockholders' equity .........................................

$ 180 250 310 260 $1,000

$120 160 320 200 $800

Financial Analysis: The Big Picture

Ex. 248

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(Cont.)

Instructions (a) Using horizontal analysis, show the percentage change for each balance sheet item using 2013 as a base year. (b) Using vertical analysis, prepare a common size comparative balance sheet. Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 248

(14-19 min.) DELTA COMPANY Comparative Balance Sheet December 31, 2014 (b)

Assets Current assets Plant assets Total assets

Amount $ 450 550 $1,000

Percent 45% 55% 100%

Liabilities and stockholders' equity Current liabilities Long-term debt Common stock Retained earnings Total liabilities and stockholders' equity

$ 180 250 310 260 $1,000

18% 25 31 26 100%

2013 (b)

(a) Percentage Amount Percent Change $280 35% 61% 520 65 27% $800 100% 25%

$120 160 320 200 $800

15% 20 40 25 100%

50% 56% (3)% 30% 25%

Ex. 249 The following information was taken from the financial statements of Bjorg Company: Gross profit on sales ................................................................ Income before income taxes .................................................... Net income ............................................................................... Net income as a percentage of net sales .................................

2014 $600,000 230,000 180,000 10%

2013 $680,000 221,000 153,000 9%

Instructions (a) Compute the net sales for each year. (b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year. (c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses). Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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Solution 249 (a)

(12-15 min.)

To calculate net sales, divide net income by the percentage of net income to net sales. Net Sales

(b)

2014 $180,000 ÷ 10% = $1,800,000

2013 $153,000 ÷ 9% = $1,700,000

Using the net sales information from (a) and the gross profits given, it is possible to calculate the cost of goods sold. 2014 2013 Net Sales $1,800,000 $1,700,000 Less: Gross profit 600,000 680,000 Cost of goods sold $ 1,200,000 $ 1,020,000 % of net sales

66.7%

60%

2014 $600,000 230,000 $370,000

2013 $680,000 221,000 $459,000

20.55%

27.0%

Ex. 250 Operating data for Panola Land Corporation are presented below 2014 $800,000 480,000 120,000 80,000 24,000 96,000

Sales revenue Cost of goods sold Selling expenses Administrative expenses Income tax expense Net income

2013 $600,000 390,000 78,000 54,000 25,000 53,000

Instructions Prepare a schedule showing a vertical analysis for 2014 and 2013. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Financial Analysis: The Big Picture

Solution 250

13-77

(10 min.)

PANOLA LAND COMPANY Condensed Income Statement For the Years Ended December 31 ___________________________________________________________________________ 2014 Amount Percent $800,000 100.0% 480,000 60.0 320,000 40.0 120,000 15.0% 80,000 10.0% 200,000 25.0% 120,000 15.0% 24,000 3.0% $96,000 12.0%

Sales revenue Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2013 Amount Percent $600,000 100.0% 390,000 65.0% 210,000 35.0% 78,000 13.0% 54,000 9.0% 132,000 22.0% 78,000 13.0% 25,000 4.2% $53,000 8.8%

Ex. 251 Armada Company has these comparative balance sheet data: ARMADA COMPANY Balance Sheets December 31, 2014 $ 40,000 65,000 60,000 185,000 $350,000 $ 50,000 100,000 140,000 60,000 $350,000

Cash Accounts receivable (net) Inventories Plant assets (net) Accounts payable Mortgage payable (15%, due in 15 years) Common stock, $10 par Retained earnings

2013 $ 30,000 60,000 50,000 180,000 $320,000 $ 60,000 100,000 120,000 40,000 $320,000

Additional information for 2014: 1. 2. 3. 4. 5.

Net income was $25,000. Sales on account were $450,000. Sales returns and allowances amounted to $25,000. Cost of goods sold was $275,000. Net cash provided by operating activities was $49,000. Capital expenditures were $23,000, and cash dividends were $18,000.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 251

(Cont.)

Instructions Compute the following ratios at December 31, 2014. (a) Current. (e) Days in inventory (b) Accounts receivable turnover. (f) Cash debt coverage. (c) Average collection period. (g) Current cash debt coverage. (d) Inventory turnover. (h) Free cash flow. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 251

(10 min.)

(a) Current ratio =

$165,000 = 3.3:1 $50,000

(b) Accounts receivable turnover =

$425,000 = 6.8 times ($65,000 + $60,000) / 2

$275,000 ($60,000 + $50,000) / 2

= 5.0 times

(e) Days in inventory = 365 days ÷ 5.0 = 73 days (f) Cash debt coverage =

(g) Current cash debt coverage =

$49,000 ($160,000 + $150,000) / 2 $49,000 ($50,000 + $60,000) / 2

= 0.32 times

= 0.89 times

(h) Free cash flow = $49,000 – $23,000 – $18,000 = $8,000 Ex. 252 Here is the income statement for Ginsberg, Inc. GINSBERG, INC. Income Statement For the Year Ended December 31, 2014 ___________________________________________________________________________ Sales revenue $400,000 Cost of goods sold 250,000 Gross profit 150,000 Expenses (including $12,000 interest and $22,000 income taxes) 100,000 Net income $ 50,000

Financial Analysis: The Big Picture

Ex. 252

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(Cont.)

Additional information: 1. Common stock outstanding January 1, 2014, was 30,000 shares, and 40,000 shares were outstanding at December 31, 2014. 2. The market price of Gillman, Inc., stock was $15.86 in 2014. 3. Cash dividends of $16,000 were paid, $4,500 of which were to preferred stockholders. Instructions Compute the following measures for 2014. (a) Earnings per share. (b) Price-earnings ratio. (c) Payout ratio. (d) Times interest earned. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 252

(10 min.)

(a) Earnings per share =

$50,000 - $4,500 ($30,000 + $40,000) / 2

(b) Price-earnings ratio =

$15.86 $1.30

$16,000 - $4,500 $50,000

(d) Times interest earned =

$45,500 35,000

= $1.30

= 12.2 times

= 23%

$50,000 + $12,000 + $22,000 $12,000

$84,000 $12,000

= 7 times

Ex. 253 Belcanto Corporation experienced a fire on December 31, 2014, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances.

Cash Accounts receivable (net) Inventory Accounts payable Notes payable Common stock, $100 par Retained earnings

December 31, 2014 $ 40,000 84,000 200,000 50,000 30,000 400,000 170,000

December 31, 2013 $ 15,000 126,000 180,000 10,000 20,000 400,000 101,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 253

(Cont.)

Additional information: 1. The inventory turnover is 4.2 times 2. The return on common stockholders' equity is 14%. The company had no additional paid-incapital. 3. The accounts receivable turnover is 10.2 times. 4. The return on assets is 12.5%. 5. Total assets, Dec. 31, 2013 = 604,750. Instructions Compute the following values for 2014. (a) Cost of goods sold. (b) Net credit sales. (c) Net income. (d) Total assets. Ans: N/A, LO: 6, 8, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 253

(25 min.)

(a) Inventory turnover =

(b) Accounts receivable turnover =

Cost of goods sold Average inventory

= 4.2 times

Cost of goods sold ($200,000 + $180,000) / 2

= 4.2 times

Cost of goods sold $190,000

= 4.2 times

$190,000 X 4.2 times

= Cost of goods sold

$798,000

= Cost of goods sold

Net sales (Credit) Average accounts receivable

= 10.2

Net sales (Credit) ($126,000 + $84,000) / 2

= 10.2

Net sales (Credit) $105,000

= 10.2

$105,000 X 10.2

= Net sales (Credit)

$1,071,000

= Net sales (Credit)

Financial Analysis: The Big Picture

Solution 253

13-81

(Cont.)

(d) Return on assets =

Net income - Preferred stock dividends Average common stockholders’ equity

= 14%

Net income - $0 ($400,000 + $170,000 + $400,000 + $101,000) / 2

= 14%

Net income $535,500

= 14%

$535,500 X 14%

= Net income

$74,970

= Net income

Net income Average total assets

= 12.5%

$74,970 (See c, above) Average total assets

= 12.5%

$74,970 / 12.5%

= Average assets

$599,760

= Average assets

(Total assets 2014 + Total assets 2013) /2

= Average assets $599,760

(Total assets 2014 + $604,750) /2

= Average assets $599,760

($599,760 X 2) - $604,750

= Total assets 2014

($1,199,520) - $604,750

= Total assets 2014

$594,770

= Total assets 2014

Ex. 254 The financial statements of Elcamino Company appear below: ELCAMINO COMPANY Comparative Balance Sheet December 31, ___________________________________________________________________________ Assets 2014 2013 Cash ............................................................................................. $ 25,000 $ 40,000 Debt investments .......................................................................... 20,000 60,000 Accounts receivable (net) .............................................................. 50,000 30,000 Inventory ....................................................................................... 140,000 170,000 Property, plant and equipment (net) .............................................. 170,000 200,000 Total assets ............................................................................. $405,000 $500,000

13-82 Ex. 254

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

(Cont.)

Liabilities and stockholders' equity Accounts payable .......................................................................... $ 25,000 Short-term notes payable .............................................................. 40,000 Bonds payable ............................................................................... 75,000 Common stock .............................................................................. 160,000 Retained earnings ......................................................................... 105,000 Total liabilities and stockholders' equity .................................... $405,000

$ 30,000 90,000 160,000 145,000 75,000 $500,000

ELCAMINO COMPANY Income Statement For the Year Ended December 31, 2014 Net sales (all on credit) .................................................................. Cost of goods sold ......................................................................... Gross profit .................................................................................... Expenses Interest expense ...................................................................... Selling expenses ..................................................................... Administrative expenses .......................................................... Total expenses .................................................................. Income before income taxes .......................................................... Income tax expense ...................................................................... Net income ....................................................................................

$360,000 184,000 176,000 $11,000 30,000 20,000 61,000 115,000 35,000 $ 80,000

Additional information: a. Cash dividends of $50,000 were declared and paid on common stock in 2014. b. Weighted-average number of shares of common stock outstanding during 2014 was 50,000 shares. c. Market value of common stock on December 31, 2014, was $16 per share. d. Net cash provided by operating activities for 2014 was $70,000.

Financial Analysis: The Big Picture

Ex. 254

13-83

(Cont.)

Instructions Using the financial statements and additional information, compute the following ratios for the Lewis Company for 2012. Show all computations. Computations 1.

Current ratio _________.

Return on common stockholders' equity _________.

Price-earnings ratio _________.

Inventory turnover _________.

Accounts receivable turnover _________.

Times interest earned _________.

Profit margin _________.

Average days in inventory _________.

Payout ratio _________.

10.

Return on assets _________.

11.

Cash debt coverage _________.

Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 254

(15-20 min.) $235,000 ————— = 3.6 $65,000

Current ratio 3:6.

$80,000 Return on common stockholders' equity 32.99%. ———— ———————— = .3299 ($265,000 + $220,000) ÷ 2

Price-earnings ratio 10.0 times.

$80,000 EPS = ———— = $1.60 50,000 $16 ——— = 10.0 times $1.60

Inventory turnover 1.19 times.

Accounts receivable turnover 9.0 times.

$184,000 ———————————— = 1.19 ($140,000 + $170,000) ÷ 2 $360,000 ——————————— = 9.0 ($50,000 + $30,000) ÷ 2

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Solution 254

(Cont.)

Times interest earned 11.5 times.

$80,000 + $35,000 + $11,000 —————————————— = 11.5 $11,000

Profit margin 22.2%.

$80,000 ———— = .222 $360,000

Average days in inventory 306.7 days.

Payout ratio 63%.

$50,000 ———— = .63 $80,000

10.

Return on assets 17.7%.

$80,000 ———————————— = .177 ($405,000 + $500,000) ÷ 2

11.

Cash debt coverage .33 times.

365 days ———— = 306.7 1.19

$70,000 ———————————— = .33 ($140,000 + $280,000) ÷ 2

Ex. 255 The following ratios have been computed for Southern Company for 2014. Profit margin ratio Times interest earned Accounts receivable turnover

20% 12 times 5 times

Current ratio Debt to assets ratio

2.5:1 24%

The 2014 financial statements for Southern Company with missing information follows: SOUTHERN COMPANY Comparative Balance Sheet December 31, —————————————————————————————————————————— Assets 2014 2013 Cash ........................................................................................ $ 25,000 $ 35,000 Debt Investments ..................................................................... 15,000 15,000 Accounts receivable (net) ........................................................ ? (6) 50,000 Inventory ................................................................................. ? (7) 50,000 Property, plant, and equipment (net) ....................................... 200,000 160,000 Total assets ...................................................................... $ ? (8) $310,000

Financial Analysis: The Big Picture

Ex. 255

13-85

(Cont.)

Liabilities and stockholders' equity Accounts payable ..................................................................... $ 15,000 Short-term notes payable ......................................................... 35,000 Bonds payable ......................................................................... ? (9) Common stock ......................................................................... 200,000 Retained earnings .................................................................... 47,000 Total liabilities and stockholders' equity ............................. $ ? (10)

$ 25,000 30,000 20,000 200,000 35,000 $310,000

SOUTHERN COMPANY Income Statement For the Year Ended December 31, 2014 —————————————————————————————————————————— Net sales .................................................................................. $200,000 Cost of goods sold ................................................................... 100,000 Gross profit ............................................................................... 100,000 Expenses: Depreciation expense ......................................................... $ ? (5) Interest expense ................................................................. 5,000 Selling expenses ................................................................ 10,000 Administrative expenses .................................................... 15,000 Total expenses ............................................................. ? (4) Income before income taxes .................................................... ? (2) Income tax expense ........................................................... ? (3) Net income ............................................................................... $ ? (1) Instructions Use the above ratios and information from the Southern Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. Ans: N/A, LO: 6, 8, Bloom: AN, Difficulty: Medium, Min: 35, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

Solution 255

(35-40 min.)

SOUTHERN COMPANY Comparative Balance Sheet December 31, —————————————————————————————————————————— Assets 2014 2013 Cash .................................................................................. $ 25,000 $ 35,000 Debt investments ............................................................... 15,000 15,000 Accounts receivable (net) ................................................... 30,000 (6) 50,000 Inventory ............................................................................ 55,000 (7) 50,000 Property, plant, and equipment (net) .................................. 200,000 160,000 Total assets ................................................................ $325,000 (8) $310,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 255

(Cont.) Liabilities and stockholders' equity

Accounts payable .............................................................. Short-term notes payable .................................................. Bonds payable ................................................................... Common stock .................................................................. Retained earnings ............................................................. Total liabilities and stockholders' equity .......................

$ 15,000 35,000 28,000 (9) 200,000 47,000 $325,000 (10)

$ 25,000 30,000 20,000 200,000 35,000 $310,000

SOUTHERN COMPANY Income Statement For the Year Ended December 31, 2014 —————————————————————————————————————————— Net sales ........................................................................... $200,000 Cost of goods sold ............................................................. 100,000 Gross profit ......................................................................... 100,000 Expenses Depreciation expense .................................................. $15,000 (5) Interest expense .......................................................... 5,000 Selling expenses ......................................................... 10,000 Administrative expenses .............................................. 15,000 Total expenses ...................................................... 45,000 (4) Income before income taxes .............................................. 55,000 (2) Income tax expense .......................................................... 15,000 (3) Net income ........................................................................ $ 40,000 (1) (1) Net income = $40,000; ($200,000 × 20%). (2)

Income before income taxes = $55,000. Let X = Income before income taxes and interest expense. X ——— = 12 times; X = $60,000; $60,000 – $5,000 = $55,000. 5,000

(3)

Income tax expense = $15,000; ($55,000 – $40,000).

(4)

Total operating expenses = $45,000; ($100,000 – $55,000).

(5)

Depreciation expense = $15,000; [$45,000 – ($5,000 + $10,000 + $15,000)].

(6)

Accounts receivable (net) = $30,000. Let X = Average receivables. $200,000 ———— = 5 times; 5X = $200,000; X = $40,000. X

Financial Analysis: The Big Picture

Solution 255

13-87

(Cont.)

Let Y = Accounts receivable at 12/31/14. $50,000 + Y —————— = $40,000; $50,000 + Y = $80,000; Y = $30,000. 2 (7)

Inventory = $55,000 Let X = Total current assets. X ———— = 2.5; X = $125,000; $125,000 – ($25,000 + $15,000 + $30,000) = $55,000. $50,000

(8)

Total assets = $325,000

(9)

Bonds payable = $28,000 Let X = Total debt X ———— = 24%; X = $78,000; $78,000 – ($15,000 + $35,000) = $28,000. $325,000

($25,000 + $15,000 + $30,000 + $55,000 + $200,000)

(10) Total liabilities and stockholders' equity = $325,000; same as total assets—see (9) above. Ex. 256 B. Jones 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 $ 482,000 Purchases 4,346,000 Ending inventory ? Average accounts receivable 700,000 Average common stockholders' equity 3,100,000 Sales revenue (all on credit) 5,600,000 Net income 341,000 Instructions Compute the following: (a) Accounts receivable turnover and the average number of days required to collect the accounts receivable. (b) The inventory turnover and the average days in inventory. (c) Return on common stockholders' equity. Ans: N/A, LO: 6, 8, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 256 (13-18 min.) (a) Accounts receivable turnover

= = =

Average collection period

= = =

(b)

Credit sales ————————————— Average accounts receivable $5,600,000 ÷ $700,000 8.0 times

365 days —————————————— Accounts receivable turnover 365 ÷ 8.0 times 45.6 days

Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 4,346,000 - Cost of Goods Sold (4,480,000)* Ending Inventory $ 348,000 *Since the gross profit ratio is 20%, the cost of goods sold ratio is 80%. 80% × $5,600,000 (net sales) = $4,480,000. Ending Inventory = $348,000 (per above) Average Inventory = ($482,000 + $348,000) ÷ 2 = $415,000 Inventory Turnover = $4,480,000 ÷ $415,000 = 10.8 times Days in Inventory = 365 days ÷ 10.8 times = 33.8 days

(c)

Net income Return on common stockholders' equity = ————————————————— Average common stockholders' equity $341,000 ÷ $3,100,000 = 11%

COMPLETION STATEMENTS 257. Discontinued operations refers to the disposal of a __________________ of a business. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

258. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

259. A change in depreciation methods during the year would be classified as a change in ____________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

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260. ______________ analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

261. Expressing each item in a financial statement as a percent of a base amount is called ______________ analysis. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

262. For analysis of the financial statements, ratios can be classified into three types: (1)_____________ ratios, (2)_____________ ratios, and (3)______________ ratios. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

263. The times interest earned is calculated by dividing ___________________ before __________________ and __________________ by interest expense. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

264. The liquidity ratio, known as the _______________ ratio, has a disadvantage that it uses year-end balances for current assets and current liabilities. The ___________ partially corrects for this problem by using cash provided by operating activities and average current liabilities rather than point in time numbers. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

265. The accounts receivable turnover is calculated by dividing ________________ by average ___________________. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

266. If the inventory turnover is 7.3 times, and the average inventory was $600,000, the cost of goods sold during the year was $______________ and the average days to sell the inventory was ______________ days. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

267. Hobson Corporation had net sales for the year of $300,000 and average total assets of $200,000. The asset turnover is ____________ times. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

268. The ______________ ratio measures the percentage of earnings distributed in the form of cash dividends. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

269. The lower the _______________ to _______________ ratio, the more equity "buffer" is available to the creditors if the company becomes insolvent. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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Answers to Completion Statements 257. 258. 259. 260. 261. 262. 263.

significant component unusual in nature, infrequent in occurrence accounting principle Horizontal vertical (common size) liquidity, solvency, profitability (any order) income, income taxes, interest expense

264. 265. 266. 267. 268. 269.

current, current cash debt coverage net credit sales, net receivables 4,380,000, 50 1.5 payout debt, assets

MATCHING SET A 270. 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. Return on assets ____ 3. Accounts receivable turnover ratio ____ 4. Earnings per share ____ 5. Payout ratio ____ 6. Current cash debt coverage ____ 7. Current ratio ____ 8. Debt to assets ratio ____ 9. Free cash flow ____ 10. Inventory turnover Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Answers to Matching P

1. Price-earnings ratio

6. Current cash debt coverage

2. Return on assets

7. Current ratio

3. Accounts receivable turnover

8. Debt to assets ratio

4. Earnings per share

9. Free cash flow

5. Payout ratio

L 10.

Inventory turnover

Financial Analysis: The Big Picture

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SET B 271. Match the ratios with their formulas by entering the appropriate letter in the space provided. A. Current ratio B. Current cash debt coverage C. Profit margin D. Asset turnover E. Price-earnings ratio

F. Times interest earned G. Inventory turnover H. Average collection period I. Average days in inventory J. Payout ratio

____ 1.

Cost of goods sold Average inventory

____ 2.

Net income Net sales

____ 3.

Cash dividends declared on common stock Net income

____ 4.

Net sales Average total assets

____

Current assets Current liabilities

____ 6.

365 days Accounts receivable turnover

____ 7.

Market price per share of stock Earnings per share

____ 8.

365 days Inventory turnover

____ 9.

Income before income taxes and interest expense Interest expense

____ 10.

Net cash provided by operating activities Average current liabilities

Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

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

G C J D A

6. 7. 8. 9. 10.

H E I F B

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 272 Explain sustainable income. What relationship does this concept have to the treatment of irregular items on the income statement? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 272 Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company's net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income statement. S-A E 273 What issues must be considered when determining whether or not a loss from earthquake destruction should be treated as an extraordinary item? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 273 For the loss to be treated as extraordinary, the earthquake must be unusual and infrequently occurring (not expected to recur in the foreseeable future, given the geographic area.) S-A E 274 Tim Forsyth, the CEO of Magical Products, is a successful entrepreneur and his focus is his products, not his accounting system. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Performance Measurement

Solution 274 To: Tim Forsyth 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.

Financial Analysis: The Big Picture

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S-A E 275 Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies. Ans: N/A, LO: 4, 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Performance Measurement

Solution 275 Horizontal analysis allows an analyst to develop a picture of current trends in a company's operations. The analyst can see whether the account amounts are increasing or decreasing and how large these changes actually are in comparison to a base year. Vertical analysis allows an analyst to evaluate financial statement items within a single financial statement. This technique helps the analyst to evaluate the relative size of the financial statement items and how the items relate to the financial statement as a whole. An example would be if current liabilities were a very large percentage of total liabilities and stockholders' equity. Both techniques allow an analyst to evaluate a company’s performance and position relative to its competitors and its industry as a whole. For example, the analyst could evaluate a company’s current trend in sales and see how favorably its sales performance compared to the sales performance of other companies in the industry. Another example would be comparing the relative size of long-term liabilities or retained earnings. This would show which companies have taken on a large amount of debt and which companies have reinvested earnings. S-A E 276 What does each type of ratio measure? (a) Liquidity ratios. (b) Solvency ratios. (c) Profitability ratios. Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Performance Measurement

Solution 276 (a) Liquidity ratios measure the short-term ability of the enterprises to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the company's ability to survive over a long period of time. (c) Profitability ratios measure the income or operating success of an enterprise for a given period of time. S-A E 277 Identify and explain factors that affect quality of earnings. Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 277 (1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period. S-A E 278

(Communication)

Zip Delivery specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release. • • • • • •

The financial statements are being released. Net income this year was $3.1 million. Last year's net income had been $2.8 million. The current ratio has changed to 2:1 from last year's 1.6:1. The debt to assets ratio has changed to 4:6 from last year's 3:6. The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans. The company is now the largest medical courier in the mid-Atlantic region.

Required: Prepare a brief press release incorporating the above information. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news. Ans: N/A, LO: 6, 8, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Performance Measurement

Solution 278 Zip Delivery released its financial statements today, disclosing an 11% increase in earnings, to $3.1 million from $2.8 million last year. The company also improved its short-term liquidity. Its current ratio improved to 2:1 from last year's 1.6:1. Part of the improved performance is no doubt due to the addition of ten new delivery vans to its fleet, allowing it to become the largest medical courier in the mid-Atlantic region. The purchase of the vans, however, caused the debt/total assets ratio to deteriorate. There are now $4 of debt for every $6 in assets, while last year, there were only $3 of debt to $6 in assets.

Financial Analysis: The Big Picture

13-95

IFRS QUESTIONS 1. Under IFRS, there is no classification for a. changes in accounting estimates. b. changes in accounting principles. c. discontinued operations. d. extraordinary items. Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Distinguishing normal levels of income from irregular items is of interest for the FASB IASB a. no no b. no yes c. yes no d. yes yes Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

7. 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 these answer choices are acceptable. Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8. Under IFRS, other comprehensive income must be displayed(reported) in a. the equity section of the statement of financial position. b. a second income income statement. c. the income statement. d. the retained earnings statement. Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 14 MANAGERIAL ACCOUNTING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

6 7 7 8 8 8 1 2

C C K K K K K K

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 6 6 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 4 4

K K K K K C C K

17. 18. 19. 20. 21. 22. 23. 24.

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.

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 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 4 3,4

C C C C AP

167. 168. 169. 170. 171.

4 4 4 5,6 6,7

AP C C AP C

172. 173. 174. 175. 176.

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 6 5,6 6

AP AP AP AP AN

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Test Bank for Accounting, Tools for Business Decision Making Fifth 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

198. 199. 200.

6 6 7

K K K

Item

Type

Matching Statements 201.

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 LEARNING 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. 33.

TF TF TF TF TF TF

64. 65. 66. 67. 68. 69.

MC MC MC MC MC MC

70. 71. 72. 73. 74. 75.

15. 16. 17. 18.

TF TF TF TF

19. 20. 34. 82.

TF TF TF MC

83. 84. 85. 86.

21. 22. 23.

TF TF TF

35. 92. 93.

TF MC MC

94. 95. 96.

Type

Item

Type

Item

Learning Objective 1 MC 47. MC 52. MC 48. MC 53. MC 49. MC 54. MC 50. MC 142. MC 51. MC 162. Learning Objective 2 MC 62. MC 190. MC 63. MC 191. MC 143. MC 203. MC 189. C Learning Objective 3 MC 76. MC 152. MC 77. MC 153. MC 78. MC 154. MC 79. MC 155. MC 80. MC 163. MC 81. MC 164. Learning Objective 4 MC 87. MC 91. MC 88. MC 144. MC 89. MC 145. MC 90. MC 156. Learning Objective 5 MC 110. MC 123. MC 115. MC 148. MC 119. MC 170.

Type

Item

Type

MC MC MC MC Ex

186. 187. 188. 201. 202.

C C C MA SA

BE BE BE BE Ex Ex

166. 192. 193. 194. 204. 206.

Ex C C C SA SA

208. 169. 195.

SA Ex C

MC MC MC BE

165. 166. 167. 168.

Ex Ex Ex Ex

205.

MC MC Ex

172. 173. 175.

Ex Ex Ex

196.

C C SA

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

Learning Objective 6 MC 125. MC 146. MC 126. MC 147. MC 127. MC 149. MC 128. MC 150. MC 129. MC 157. MC 130. MC 158. MC 131. MC 159. MC 132. MC 160. MC 133. MC 170. Learning Objective 7 MC 151. MC 172. MC 161. BE 173. MC 171. Ex 184. Learning Objective 8 MC 139. MC 141. MC 140. MC 207. BE = Brief Exercise Ex = Exercise

MC MC MC MC BE BE BE BE Ex

171. 172. 173. 174. 175. 176. 177. 178. 179.

Ex Ex Ex Ex Ex Ex Ex Ex Ex

Ex Ex Ex

185. 200.

Ex C

180. 181. 182. 183. 184. 197. 198. 199.

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Ex Ex Ex Ex Ex C C C

MC SA C = Completion

CHAPTER LEARNING 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 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.

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Test Bank for Accounting, Tools for Business Decision Making Fifth 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 expense recognition principle, these costs do not become expenses until the company sells the finished goods inventory. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs. 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. Companies add the cost of the beginning work in process to the total manufacturing costs for the current year to arrive at the total cost of work in process for the year. They then subtract the ending work in process 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. Improved practices include a focus on managing the value chain through techniques such as just-in-time inventory, total quality management, activity-based costing, and theory of constraints. The balanced scorecard is now used by many companies in order to attain a more comprehensive view of the company's operations. Finally, companies are now evaluating their performance with regard to their corporate social responsibility.

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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Managerial accounting information generally pertains to an entity as a whole and is highly aggregated.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Managerial accounting applies to all forms of business organizations.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Determining the unit cost of manufacturing a product is an output of financial accounting.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Managerial accounting internal reports are prepared more frequently than are classified financial statements.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Managerial Accounting 6.

14 - 5

The management function of organizing and directing is mainly concerned with setting goals and objectives for the entity.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Decision Analysis

The Sarbanes-Oxley Act replaces generally accepted accounting principles in a manufacturing company.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Controlling is the process of determining whether planned goals are being met.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls

Decision-making is an integral part of the planning, directing, and controlling functions.

Ans: T, LO: 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.

Direct materials costs and indirect materials costs are manufacturing overhead.

Ans: F, LO: 3, Bloom: K, 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

15.

Both direct labor cost and indirect labor cost are product costs.

Ans: T, LO: 4, Bloom: C, 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

18.

Direct materials and direct labor are the only product costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

14 - 6 19.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Total period costs are deducted from total cost of work in process to calculate cost of goods manufactured.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Cost Management

31.

Managerial accounting is primarily concerned with managers and external users.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

Managerial Accounting 32.

14 - 7

Planning involves coordinating the diverse activities and human resources of a company to produce a smooth running operation.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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 F T F

13. 14. 15. 16. 17. 18.

F T T 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.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39.

Managerial accounting information is generally prepared for a. stockholders. b. creditors. c. managers. d. regulatory agencies.

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

40.

Managerial accounting information a. pertains to the entity as a whole and is highly aggregated. b. pertains to subunits of the entity and may be very detailed. c. is prepared only once a year. d. is constrained by the requirements of generally accepted accounting principles.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics

46.

Management accountants would not a. assist in budget planning. b. prepare reports primarily for external users. c. determine cost behavior. d. be concerned with the impact of cost and volume on profits.

Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 47.

14 - 9

Internal reports must be communicated a. daily. b. monthly. c. annually. d. as needed.

Ans: d, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting

53.

Internal reports are generally a. aggregated. b. detailed. c. regulated. d. unreliable.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

60.

The management function that requires managers to look ahead and establish objectives is a. controlling. b. directing. c. planning. d. constraining.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Decision Analysis

Managerial Accounting 61.

14 - 11

In determining whether planned goals are being met, a manager is performing the function of a. planning. b. follow-up. c. directing. d. controlling.

Ans: d, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

73.

Which of the following is not a manufacturing cost category? a. Cost of goods sold b. Direct materials c. Direct labor d. Manufacturing overhead

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 74.

14 - 13

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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 87.

14 - 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth 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, LO: 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, LO: 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, LO: 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 $20,000 of ending finished goods inventory as of December 31, 2013. If beginning finished goods inventory was $10,000 and cost of goods sold was $50,000, how much would Kushman report for cost of goods manufactured? a. $70,000 b. $10,000 c. $60,000 d. $40,000

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $20,000 + $50,000 − $10,000 = $60,000

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, LO: 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, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 100.

14 - 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102.

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2013 Dec. 31, 2012 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2013, $600,000 of raw materials were purchased, direct labor costs amounted to $500,000, and manufacturing overhead incurred was $480,000. The total raw materials available for use during 2013 for Dolan Company is a. $910,000. b. $460,000. c. $550,000. d. $860,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $260,000 + $600,000 = $860,000

103.

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2013 Dec. 31, 2012 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2013, $600,000 of raw materials were purchased, direct labor costs amounted to $500,000, and manufacturing overhead incurred was $480,000. Dolan Company's total manufacturing costs incurred in 2013 amounted to a. $1,530,000. b. $1,490,000. c. $1,390,000. d. $1,580,000.

Ans: a, LO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($260,000 + $600,000 − $310,000) + $500,000 + $480,000 = $1,530,000

14 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 104.

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2013 Dec. 31, 2012 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2013, $600,000 of raw materials were purchased, direct labor costs amounted to $500,000, and manufacturing overhead incurred was $480,000. If Dolan Company's cost of goods manufactured for 2013 amounted to $1,390,000, its cost of goods sold for the year is a. $1,500,000. b. $1,250,000. c. $1,350,000. d. $1,430,000.

Ans: c, LO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem S olving, IMA: Business Economics Solution: $150,000 + $1,390,000 − $190,000 = $1,350,000

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

106.

Worth Company reported the following year-end information: beginning work in process inventory, $180,000; cost of goods manufactured, $816,000; beginning finished goods inventory, $252,000; ending work in process inventory, $220,000; and ending finished goods inventory, $264,000. Worth Company's cost of goods sold for the year is a. $804,000. b. $828,000. c. $776,000. d. $552,000.

Managerial Accounting 107.

14 - 19

Laflin Company reported the following year-end information: Beginning work in process inventory $1,080,000 Beginning raw materials inventory 300,000 Ending work in process inventory 900,000 Ending raw materials inventory 480,000 Raw materials purchased 960,000 Direct labor 800,000 Manufacturing overhead 720,000 Laflin Company's cost of goods manufactured for the year is a. $2,300,000. b. $2,480,000. c. $2,120,000. d. $2,660,000.

Ans: b, LO: 6, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,080,000 + ($300,000 + $960,000 − $480,000) + $800,000 + $720,000 − $900,000 = $2,480,000

108.

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2013 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2013, Benson purchased $1,160,000 of raw materials, incurred direct labor costs of $200,000, and incurred manufacturing overhead totaling $128,000. How much raw materials were transferred to production during 2013 for Benson? a. $1,392,000 b. $1,176,000 c. $1,160,000 d. $1,144,000

Ans: b, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $80,000 + $1,160,000 − $64,000 = $1,176,000

109.

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2013 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2013, Benson purchased $1,060,000 of raw materials, incurred direct labor costs of $200,000, and incurred manufacturing overhead totaling $128,000. How much is total manufacturing costs incurred during 2013 for Benson? a. $1,392,000 b. $1,404,000 c. $1,388,000 d. $1,400,000

Ans: b, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($80,000 + $1,060,000 − $64,000) + $200,000 + $128,000 = $1,404,000

14 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 110.

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2013 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2013, Benson purchased $1,160,000 of raw materials, incurred direct labor costs of $200,000, and incurred manufacturing overhead totaling $128,000. Assume Benson’s cost of goods manufactured for 2013 amounted to $1,360,000. How much would it report as cost of goods sold for the year? a. $1,368,000 b. $1,400,000 c. $1,460,000 d. $1,352,000

Ans: a, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $100,000 + $1,360,000 − $92,000 = $1,368,000

111.

Walker Company reported the following year-end information: Beginning work in process inventory $ 46,000 Beginning raw materials inventory 24,000 Ending work in process inventory 50,000 Ending raw materials inventory 20,000 Raw materials purchased 830,000 Direct labor 240,000 Manufacturing overhead 100,000 How much is Walker’s cost of goods manufactured for the year? a. $834,000 b. $1,174,000 c. $1,170,000 d. $1,178,000

Ans: c, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem S olving, IMA: FSA Solution: $46,000 + ($24,000 + $830,000 − $20,000) + $240,000 + $100,000 − $50,000 = $1,170,000

112.

Ogleby Inc.'s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2013 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2013, Ogleby purchased $840,000 of raw materials, incurred direct labor costs of $150,000, and incurred manufacturing overhead totaling $192,000. How much is total manufacturing costs incurred during 2013 for Ogleby? a. $1,188,000 b. $1,206,000 c. $1,182,000 d. $1,200,000

Ans: b, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($120,000 + $840,000 − $96,000) + $150,000 + $192,000 = $1,206,000

Managerial Accounting 113.

14 - 21

Ogleby Inc.'s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2013 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2013, Ogleby purchased $840,000 of raw materials, incurred direct labor costs of $150,000, and incurred manufacturing overhead totaling $192,000. How much would Ogleby Manufacturing report as cost of goods manufactured for 2013? a. $1,164,000 b. $1,224,000 c. $1,218,000 d. $1,188,000

Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $156,000 + ($120,000 + $840,000 − $96,000) + $150,000 + $192,000 − $174,000 = $1,188,000

114.

Wasson Company reported the following year-end information: Beginning work in process inventory Beginning raw materials inventory Ending work in process inventory Ending raw materials inventory Raw materials purchased Direct labor Manufacturing overhead

$ 35,000 18,000 38,000 15,000 560,000 180,000 120,000

How much is Wasson’s total cost of work in process for the year? a. $608,000 b. $863,000 c. $860,000 d. $898,000 Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $35,000 + ($18,000 + $560,000 − $15,000) + $180,000 + $120,000 = $898,000

115.

Edmiston 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $50,000 + $780,000 − $40,000 = $790,000

14 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 116.

Using the following information, compute the direct materials used. Raw materials inventory, January 1 $ 20,000 Raw materials inventory, December 31 40,000 Work in process, January 1 18,000 Work in process, December 31 12,000 Finished goods, January 1 40,000 Finished goods, December 31 32,000 Raw materials purchases 1,400,000 Direct labor 560,000 Factory utilities 150,000 Indirect labor 50,000 Factory depreciation 400,000 Operating expenses 420,000 a. b. c. d.

$1,460,000. $1,420,000. $1,400,000. $1,380,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $20,000 + $1,400,000 − $40,000 = $1,380,000

117.

Assuming that the direct materials used is $1,400,000, compute the total manufacturing costs 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.

20,000 40,000 18,000 12,000 40,000 32,000 1,400,000 560,000 150,000 50,000 400,000 420,000

$2,560,000. $2,554,000. $2,360,000. $2,980,000.

Ans: a, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,400,000 + $560,000 + $150,000 + $50,000 + $400,000 = $2,560,000

Managerial Accounting 118.

14 - 23

Using $2,500,000 as the total manufacturing costs, compute the cost of goods manufactured 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.

20,000 40,000 18,000 12,000 40,000 32,000 1,400,000 560,000 150,000 50,000 400,000 420,000

$2,492,000. $2,494,000. $2,506,000. $2,508,000.

Ans: c, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem S olving, IMA: FSA Solution: $18,000 + $2,500,000 − $12,000 = $2,506,000

119.

Using $2,540,000 as the cost of goods manufactured, 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.

20,000 40,000 18,000 12,000 40,000 32,000 1,400,000 560,000 150,000 50,000 400,000 420,000

$2,546,000. $2,508,000. $2,532,000. $2,548,000.

Ans: d, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 + $2,540,000 − $32,000 = $2,548,000

14 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 120.

Using the following information, compute the cost of 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.

30,000 60,000 27,000 18,000 60,000 48,000 1,500,000 690,000 225,000 75,000 500,000 630,000

$1,590,000. $1,530,000. $1,500,000. $1,470,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,000 + $1,500,000 − $60,000 = $1,470,000

121.

Assuming the cost of direct materials used is $1,500,000, compute the total manufacturing costs 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 1,500,000 690,000 225,000 75,000 500,000 630,000

$2,990,000. $2,981,000. $2,690,000. $3,620,000.

Ans: a, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,500,000 + $690,000 + $225,000 + $75,000 + $500,000 = $2,990,000

Managerial Accounting

14 - 25

122. Assuming that the total manufacturing costs are $2,900,000, 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 1,500,000 690,000 225,000 75,000 500,000 630,000

$2,888,000. $2,891,000. $2,909,000. $2,912,000.

Ans: c, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem S olving, IMA: FSA Solution: $27,000 + $2,900,000 − $18,000 = $2,909,000

123.

Assuming that the cost of goods manufactured is $2,960,000 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 1,500,000 690,000 225,000 75,000 500,000 630,000

$2,969,000. $2,912,000. $2,948,000. $2,972,000.

Ans: d, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 + $2,960,000 − $48,000 = $2,972,000

14 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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. $416,000 d. $184,000

Ans: d, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300,000 − $52,000 − $64,000 = $184,000

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, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem S olving, IMA: FSA Solution: (A) $230,000 + $150,000 + $225,000 = $605,000; (B) $30,000 + $605,000 − $15,000 = $620,000

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $410,000 − $78,000 − $96,000 = $236,000

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) $750,000 $770,000 $770,000 $790,000

$270,000 200,000 300,000 350,000

Beginning work in process Ending work in process Beginning finished goods Ending finished goods

$40,000 20,000 50,000 30,000

(B) $790,000 $750,000 $790,000 $810,000

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (A) $270,000 + $200,000 + $300,000 = $770,000; (B) $40,000 + $770,000 − $20,000 = $790,000

Managerial Accounting 128.

14 - 27

Barton Company has beginning work in process inventory of $144,000 and total manufacturing costs of $686,000. If cost of goods manufactured is $640,000, what is the cost of the ending work in process inventory? a. $170,000. b. $198,000. c. $210,000. d. $190,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $144,000 + $686,000 − $640,000 = $190,000

129.

Gammil Company has beginning and ending raw materials inventories of $96,000 and $120,000, respectively. If direct materials used were $440,000, what was the cost of raw materials purchased? a. $440,000. b. $470,000. c. $416,000. d. $464,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 + $440,000 − $96,000 = $464,000

130.

Molina Company has beginning and ending work in process inventories of $130,000 and $145,000 respectively. If total manufacturing costs are $650,000, what is the total cost of goods manufactured? a. $780,000. b. $795,000. c. $635,000. d. $665,000.

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $130,000 + $650,000 − $145,000 = $635,000

131.

Costas Company has beginning and ending raw materials inventories of $64,000 and $80,000, respectively. If direct materials used were $290,000, what was the cost of raw materials purchased? a. $290,000. b. $310,000. c. $274,000. d. $306,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $80,000 + $290,000 − $64,000 = $306,000

132.

Wood Company has beginning work in process inventory of $128,000 and total manufacturing costs of $477,000. If cost of goods manufactured is $480,000, what is the cost of the ending work in process inventory? a. $110,000. b. $131,000. c. $140,000. d. $125,000.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $128,000 + $477,000 − $480,000 = $125,000

14 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $20,000 + $120,000 + $200,000 + $150,000 − $10,000 = $480,000

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, LO: 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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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 total quality management.

Ans: c, LO: 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 business processes associated with providing a product or service? a. The manufacturing chain b. The product chain c. The supply chain d. The value chain

Ans: d, LO: 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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Performance Measurement

Managerial Accounting 139.

14 - 29

What is “balanced” in the balanced scorecard approach? a. The number of products produced b. The emphasis on financial and non-financial performance measurements c. The amount of costs allocated to products d. The number of defects found on each product

Ans: b, LO: 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, LO: 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.

Many companies now focus on reducing defects in finished products with the goal of zero defects. This is called a. Activity-based costing. b. Balanced scorecard. c. Value chain. d. Total quality management.

Ans: d, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

142.

Financial and managerial accounting are similar in that both a. have the same primary users. b. produce general-purpose reports. c. have reports that are prepared quarterly and annually. d. deal with the economic events of an enterprise.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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: 6, 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: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

148.

The principal 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, LO: 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Managerial Accounting 151.

14 - 31

The inventory accounts that show the cost of completed goods on hand and the costs applicable to production that is only partially completed are, respectively a. Work in Process Inventory and Raw Materials Inventory. b. Finished Goods Inventory and Raw Materials Inventory. c. Finished Goods Inventory and Work in Process Inventory. d. Raw Materials Inventory and Work in Process Inventory.

Ans: c, LO: 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.

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

14 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 152

(3 min.)

Direct Materials (a) (b) (c) (d)

Product Costs Direct Labor 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, LO: 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.

MO DM DL MO

(2 min.)

Managerial Accounting

14 - 33

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 154 a. b. c. d. e. f. g. h.

(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, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 155

(2 min.) Product Costs Direct Labor

Direct Materials

a. b. c. d.

Manufacturing Overhead

X X X X

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, LO: 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 Company has the following data: direct labor $580,000, 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, LO: 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

$ 580,000 421,000 206,000 $1,207,000

(b) Beginning work in process Total manufacturing costs Total cost of work in process

47,000 1,207,000 $1,254,000

Managerial Accounting

14 - 35

BE 158 Presented below are incomplete 2013 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

$480,000

Instructions Determine the missing amounts. Ans: N/A, LO: 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: Factory overhead

$88,000 (17,000) (42,000) $29,000

(b) Total manufacturing costs Less: Direct materials Less: Factory overhead Equals: Direct labor

$480,000 (148,000) (112,000) $220,000

BE 159 Presented below are incomplete 2013 manufacturing cost data for Supreme Corporation. Direct Materials Used

Direct Labor

Factory 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, LO: 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

Factory 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

$270,000

14 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

BE 160 Raynor Company has the following data: Direct labor Direct materials used Total manufacturing overhead Ending work in process Beginning work in process

$76,000 84,000 60,000 30,000 45,000

Instructions Compute (a) total manufacturing costs and (b) cost of goods manufactured. Ans: N/A, LO: 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, 2013. 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, LO: 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 Finished goods Work in process Raw materials Prepaid expenses Total current assets

$ 61,000 41,000 26,000 32,000 $17,000

75,000 3,000 $180,000

Managerial Accounting

14 - 37

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. ____

General-purpose reports

____

Reports are used internally

____

Prepared in accordance with generally accepted accounting principles

____

Special purpose reports

____

Limited to historical cost data

____

Reporting standard is relevance to the decision to be made

____

Financial statements

____

Reports generally pertain to the business as a whole

____

Reports generally pertain to subunits

____ 10.

Reports issued quarterly or annually

Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 162 1. 2. 3. 4. 5.

F M F M F

(7–11 min.) 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: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 163

(5 min.)

1. DL 2. MO 3. DM

4. MO 5. MO 6. DM

Ex. 164 Presented below is a list of costs and expenses incurred in the factory by Nu-Way Corporation, a manufacturer of recreational vehicles. ____

Property taxes on the factory land

____

Nails and glue used in production

____

Cabinet maker's wages

____

Factory supervisors’ salaries

____

Metal used in manufacturing

____

Depreciation on factory machines

____

Factory utilities

____

Carpeting for the recreational vehicles

____

Property taxes on the factory building

____ 10.

Insurance on factory equipment

Instructions Classify the above items into the following categories: DM — Direct Materials DL — Direct Labor MO — Manufacturing Overhead Ans: N/A, LO: 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.

MO MO DL MO DM

(8–10 min.) 6. 7. 8. 9. 10.

MO MO DM MO MO

Managerial Accounting

14 - 39

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

________

Direct materials used

________

Sales salaries

________

Indirect factory labor

________

Repairs to office equipment

________

Factory manager's salary

________

Direct labor

________

Indirect materials

________

Ans: N/A, SO: 4, Bloom: C, Difficulty: Easy, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 165 (6–9 min.) a. Advertising

Direct materials used

Sales salaries

Indirect factory labor

Repairs to office equipment

Factory manager's salary

Direct labor

Indirect materials

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, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

14 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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

(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 2013. 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, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Managerial Accounting Solution 167 (a)

(b)

14 - 41

(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

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 7, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 168 1. 2. 3. 4. 5.

(7–10 min.)

Pr Pe Pe Pr Pr

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 Instructions Complete the following matrix by placing an X mark under the appropriate headings. Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Direct Materials

Direct Labor

Manufacturing Overhead

Period Costs

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Managerial Accounting Solution 169 Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

14 - 43

(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 2013 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, LO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 170 Direct Materials Used

(6 min.) 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

14 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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: 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)

Managerial Accounting

14 - 45

Ex. 172 Klein Company manufactures boats. During September, 2013, 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, 2013, 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, 2013: Raw materials inventory Work in process inventory Finished goods inventory Cost of goods sold Selling expenses Ans: N/A, LO: 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, 2013: 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

Instructions (a) Prepare an income statement through gross profit for the month of June. (b) Indicate the balance sheet presentation of the June 30 inventories. Ans: N/A, LO: 5, 6, 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

14 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 173

(10–15 min.)

(a)

PETERS COMPANY (Partial) Income Statement For the Month Ended June 30, 2013 —————————————————————————————————————————— 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 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: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Managerial Accounting Solution 174

14 - 47

(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: Work-in-process, 12/31 .............................................. 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 ................................. Less: 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, 2013 $ 26,000 13,500 30,000

2013

December 31, 2013 $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, LO: 5, 6, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

14 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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 $166,000 220,000 180,000 566,000 579,500 22,200 $557,300

(b) Sales ......................................................................... Cost of goods sold Finished goods, 1/1 ............................................. Cost of goods manufactured ................................ Cost of goods available for sale ........................... Less: Finished goods, 12/31 ................................ Cost of goods sold ......................................... Gross profit ................................................................

$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. Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Work-in-process, 1/1/13 Total cost of work-in-process Work-in-process, 12/31/13 Cost of goods manufactured

Case A (a) $ 57,000 46,500 185,650 (b) 221,500 (c) 180,275

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, LO: 6, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Managerial Accounting Solution 176

14 - 49

(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 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, 2013.

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

14 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 177

(12–16 min.) SAMPSON MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2013

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 47,000 205,000 225,000 15,000 $210,000

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, LO: 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

Managerial Accounting

14 - 51

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 Costs incurred: Raw materials purchases Direct labor Factory rent Factory utilities Indirect materials Indirect labor Operating expenses

January 1, 2013

December 31, 2013

$ 8,000 15,000 16,000

$ 7,000 13,000 12,000 $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, 2013 in good form. d. Prepare the Cost of Goods Sold section of the Income Statement for Simon Company for the year ended December 31, 2013 in good form. Ans: N/A, LO: 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.

$ 8,000 10,000 4,000 9,000 $31,000

SIMON COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2013 Work in processing, beginning Direct materials Raw materials inventory, beginning Raw materials purchases

$ 15,000 $

8,000 93,000

14 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 179

(Cont.)

Raw materials available for use 101,000 Less: Raw materials inventory, ending 7,000 Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process, ending Cost of goods manufactured d. SIMON COMPANY (Partial) Income Statement For the Year Ended December 31, 2013

$94,000 42,000 31,000

Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory, December 31 Cost of goods sold

167,000 182,000 13,000 $169,000

$ 16,000 169,000 185,000 12,000 $173,000

Ex. 180 Manufacturing costs for Carson Company for selected months are as follows: 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

April $ 80,000 280,000 195,000 (a) 890,000 (b) 75,000 (c) (d) 960,000 (e) 820,000

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, LO: 6, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Managerial Accounting 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)

14 - 53

($960,000 – $895,000).

($480,000 – $385,000).

$125,000 ($480,000 – $355,000).

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, 2013 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, LO: 6, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

14 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 181

(6–9 min.) NOLAND MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2013

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 96,000 442,000 762,000 322,000 $440,000

Ex. 182 Data for the cost of direct materials for the month ended March 31, 2013, are as follows: Materials inventory, March 1, 2011 $76,000 Materials inventory, March 31, 2011 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, LO: 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.

Managerial Accounting

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Ex. 183 Presented below are incomplete 2013 manufacturing cost data for Tardy Corporation.

(a) (b) (c)

Direct Materials Used $56,000 ? $53,000

Direct Labor $72,000 $53,000 ?

Factory Overhead $54,000 $90,000 $96,000

Total Manufacturing Costs ? $252,000 $300,000

Instructions Determine the missing amounts. Ans: N/A, LO: 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

Factory Overhead $54,000 $90,000 $96,000

Total Manufacturing Costs $182,000 $252,000 $300,000

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, LO: 6, 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, 2013. 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185

(6–9 min.) LESTER COMPANY (Partial) Balance Sheet December 31, 2013

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

Managerial Accounting

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COMPLETION STATEMENTS 186. Financial accounting information is prepared mainly for ______________ users, while managerial accounting information is prepared primarily for ______________ users. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

191. Exercising good judgment in performing the managerial functions and choosing among alternative courses of action is called ______________. Ans: N/A, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 195. Each of the manufacturing cost components is a ______________ cost. Ans: N/A, LO: 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, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

200. A

manufacturing

company

usually

has

three

inventory

accounts

which

are

(1)___________________, (2)___________________, and (3)___________________. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting

14 - 59

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 business processes associated with providing a product or service.

_____ 10.

The function of coordinating diverse activities to produce a smooth-running operation.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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 a different focus. Briefly distinguish between financial and managerial accounting as they relate to (1) the primary users, (2) the type and frequency of reports, (3) the purpose of reports, and (4) the content of reports. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Managerial Accounting

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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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

14 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth 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, LO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Decision Analysis

Managerial Accounting

14 - 63

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. 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Decision Analysis

14 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth 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)

CHAPTER 15 JOB ORDER COSTING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

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

2 AP 153. 3 AP 155. 4,6 AP 154. 3 AP 156. 4 .2 . sg This question also appears in the Study Guide. st

AP AP

This question also appears in a self-test at the student companion website.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING 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.

Short-Answer Essay 200. 201.

1 2

S S

202. 203.

4 4

S S

204. 205.

3 4

S S

SUMMARY OF LEARNING 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

Learning Objective 1 MC 40. MC 141. MC 41. MC 189. MC 42. MC 190. MC 43. MC 191. Learning 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. Learning 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

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

Learning 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. Learning 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. Learning 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. BE = Brief Exercise Ex = Exercise

15 - 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

C = Completion MA = Matching

CHAPTER LEARNING 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 system. In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold. 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.

15 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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. Companies use this rate to assign overhead costs to work in process and to specific jobs. 5. Prepare entries for jobs completed and sold. When jobs are completed, companies debit the cost to Finished Goods Inventory and credit it to Work in Process Inventory. When a job is sold the entries are: (a) Debit Cash or Accounts Receivable and credit Sales Revenue for the selling price, and (b) Debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods. 6. Distinguish between under- and overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.

TRUE-FALSE STATEMENTS 1.

Cost accounting is primarily concerned with accumulating information about product costs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A job order cost system is most appropriate when a large volume of uniform products are produced.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting

A process cost accounting system is appropriate for similar products that are continuously mass produced.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting

The perpetual inventory method cannot be used in a job order cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting

A job order cost system and a process cost system are two alternative methods for valuing inventories.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A job order cost system identifies costs with a particular job rather than with a set time period.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A company may use either a job order cost system or a process cost system, but not both.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Raw Materials Inventory, Factory Labor, and Manufacturing Overhead are all control accounts in the general ledger when a job order cost accounting system is used.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 9.

15 - 5

Accumulating and assigning manufacturing costs are two important activities in a job order cost system.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

10.

Recording the acquisition of raw materials is a part of accumulating manufacturing costs.

Ans: T, LO: 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, LO: 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, LO: 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 is no effort at this point to associate the cost of materials with specific jobs.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15 - 6 21.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition There should be a separate job cost sheet for each job.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

22.

Actual manufacturing overhead costs are assigned to each job by tracing each overhead cost to a specific job.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Job Order Costing 33.

15 - 7

Requisitions for direct materials are posted daily to the individual job cost sheets.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

34.

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, LO: 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, LO: 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.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

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.

T F T F T

31. 32. 33. 34. 35.

T F T T F

MULTIPLE CHOICE QUESTIONS 36.

Which of the following is one of the components of cost accounting? a. It involves measuring product costs. b. It involves the determination of company profits. c. It requires GAAP to be applied. d. It requires cost minimizing principles.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15 - 8 39.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

Which of the following would be accounted for using a job order cost system? a. The production of personal computers. b. The production of automobiles. c. The refining of petroleum. d. The construction of a new campus building.

Ans: D, LO: 1, Bloom: C, Difficulty: 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, LO: 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, LO: 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, LO: 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, 2013, Stand Still Industries had $2,500 of raw materials inventory. At the beginning of 2013, 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 2013? a. $312,000 b. $324,500 c. $325,500 d. $313,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics (2,000 + 325,000 – 2,500) = 324,500

Job Order Costing 45.

15 - 9

The flow of costs in a job order cost system a. involves accumulating manufacturing costs incurred and assigning the accumulated costs to work done. b. cannot be measured until all jobs are complete. c. measures product costs for a set time period. d. generally follows a LIFO cost flow assumption.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

46.

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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 50.

Records of individual items of raw materials would not be maintained a. electronically. b. manually. c. on stores ledger cards. d. in the Raw Materials Inventory account.

Ans: D, LO: 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

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, LO: 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, LO: 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, LO: 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, LO: 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. temporary account.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 56.

15 - 11

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, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $490,000 + $50,000 = $540,000

57.

Factory labor costs a. accumulate in advance of utilization. b. accumulate in a control account. c. include sick pay earned by factory workers. d. accumulate in the Factory Labor Expense account.

Ans: C, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

15 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 61.

Which one of the following best describes a job cost sheet? a. It is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. b. It is used to track manufacturing overhead costs to specific jobs. c. It is used by management to understand how direct costs affect profitability. d. It is a daily form that management uses for tracking worker productivity on which employee raises are based.

Ans: A, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls

Job Order Costing 66.

15 - 13

A copy of the materials requisition slip would not include the: a. quantity. b. stock number. c. cost per unit. d. name of the supplier.

Ans: D, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

68.

Postings to control accounts in a costing system are made a. monthly. b. daily. c. annually. d. semi-annually.

Ans: A, LO: 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, LO: 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 Factory Wages Payable c. Work in Process Manufacturing Overhead Raw Materials Inventory d. Factory Labor Raw Materials Inventory Accounts Payable Factory Wages Payable

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

15 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 71.

A time ticket does not indicate the a. employee's name. b. account to be charged. c. number of personal exemptions claimed by the employee. d. job number.

Ans: C, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls

73.

Time tickets should be approved by a. the audit committee. b. co-workers. c. the employee's supervisor. d. the payroll department.

Ans: C, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($80,000 + $120,000 + $60,000)  5,000] × 1000 = $52,000

Job Order Costing 77.

15 - 15

Sportly, Inc. completed Job No. B14 during 2013. 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($55,000 + $30,000 + $20,000)  3,000] × (3,000 − 1,800) = $42,000

78.

Madison Inc. uses job order costing for its brand new line of sewing machines. The cost incurred for production during 2013 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

79.

As of December 31, 2013, Nilsen Industries had $2,000 of raw materials inventory. At the beginning of 2013, 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 2013? a. $324,400 b. $314,400 c. $313,600 d. $323,600

15 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 80.

Cost of goods manufactured equals $65,000 for 2013. 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 2013 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

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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,800,000  $1,000,000 = $1.80

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

83.

Barr Mfg. provided the following information from its accounting records for 2013: 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $900,000  30,000 = $30

Job Order Costing 84.

15 - 17

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.

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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $11,450 + ($15 × 360) + ($22 × 300) = $23,450

86.

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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 + ($180,000  1.2) + $180,000 = $450,000

15 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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

$18,800 600 $16.00 400 $30.00

What is the total manufacturing cost for Job No. 953? a. $37,200 b. $40,400 c. $43,200 d. $46,400 Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $18,800 + ($16 × 600) + ($30 × 400) = $40,400

88.

Minton Company provided the following information from its accounting records for 2013: 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,500,000  60,000 = $25

89.

The labor costs that have been identified as indirect labor should be charged to a. manufacturing overhead. b. direct labor. c. the individual jobs worked on. d. salary expense.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting

90.

Manufacturing overhead is applied to each job a. at the time when the overhead cost is incurred. b. by means of a predetermined overhead rate. c. at the end of the year when actual costs are known. d. only if the overhead costs can be directly traced to that job.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Job Order Costing 91.

15 - 19

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, LO: 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, LO: 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, LO: 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.

95.

Overhead application is recorded with a a. credit to Work in Process Inventory. b. credit to Manufacturing Overhead. c. debit to Manufacturing Overhead. d. credit to job cost sheets.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

96.

Manufacturing overhead applied is added to direct labor incurred and to what other item to equal total manufacturing costs for the period? a. Goods available for sale. b. Raw materials purchased. c. Work in process. d. Direct materials used.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

15 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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.

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.

99.

For Jacobs Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $300,000 of factory labor costs are incurred of which $70,000 is indirect labor. Actual overhead incurred was $160,000. The amount of overhead debited to Work in Process Inventory should be: a. $161,000 b. $160,000 c. $210,000 d. $230,000

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

Job Order Costing 101.

15 - 21

For Wilton Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $360,000 of factory labor costs are incurred of which $100,000 is indirect labor. Actual overhead incurred was $180,000. The amount of overhead debited to Work in Process Inventory should be: a. $182,000 b. $180,000 c. $252,000 d. $260,000

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.

103.

Cost of goods sold is obtained from a. analysis of all the control accounts in the cost system. b. the finished goods inventory records. c. the work in process inventory records. d. the Raw Materials Inventory control account.

Ans: B, LO: 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, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 106.

During 2013, Tanner Manufacturing expected Job No. 26 to cost $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Tanner applied overhead based on direct labor cost. Actual production required an overhead cost of $280,000, $550,000 in materials used, and $210,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods? a. $1,000,000 b. $1,040,000 c. $1,060,000 d. $1,075,000

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, LO: 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, LO: 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, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 111.

15 - 23

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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $480,000 − $96,000 − $144,000 = $240,000

112.

$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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $160,000 + $480,000 − $176,000 = $464,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000 + $600,000 − $450,000 = $900,000

15 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 114.

Which of the following is not used in assigning manufacturing costs to work in process inventory? a. Actual manufacturing overhead b. Time tickets c. Materials requisitions d. Predetermined overhead rate

Ans: A, LO: 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, LO: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,750,000 − ($50,000 + $2,100,000 − $150,000) = $750,000

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.

Job Order Costing 118.

15 - 25

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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $642,000 − $156,000 − $138,000 = $348,000

119.

$ 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $102,000 + $642,000 − $675,000 = $69,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $60,000 + $1,280,000 − $80,000 = $1,260,000

15 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 121.

Barger Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31

$ 90,000 126,000

If the cost of goods manufactured during the year 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 Solution: $2,994,000 − ($90,000 + $1,995,000 − $126,000) = $1,035,000 Ans: D, LO: 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

123.

During 2013, Durham Manufacturing expected Job No. 51 to cost $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Durham applied overhead based on direct labor cost. Actual production required overhead cost of $290,000, $550,000 in materials used, and $220,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods? a. $1,070,000 b. $1,100,000 c. $1,000,000 d. $1,060,000

124.

During 2013, Cotte Manufacturing expected Job No. 59 to cost $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Cotte applied overhead based on direct labor cost. Actual production required an overhead cost of $290,000, $550,000 in materials used, and $220,000 in labor. All of the goods were completed. How much is the amount of over- or underapplied overhead? a. $10,000 underapplied b. $10,000 overapplied c. $40,000 underapplied d. $40,000 overapplied

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($300,000  $200,000) × $220,000] − $290,000 = $40,000

Job Order Costing 125.

15 - 27

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,600,000  400,000) × 380,000 = $1,520,000; $1,520,000 − $1,540,000 = $20,000

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($3,000,000  300,000) × 290,000 = $2,900,000; $2,900,000 − $2,940,000 = $40,000

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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 129.

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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 135.

15 - 29

If actual overhead is less than applied manufacturing overhead, then manufacturing overhead is: a. underapplied. b. overapplied. c. a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.

Ans: B, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 141.

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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $180,000 + ($240,000  2) + $240,000 = $540,000

Job Order Costing 147.

15 - 31

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, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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, LO: 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

10,000

6,000

4,000

Job Order Costing

15 - 33

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, LO: 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 2013: 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, LO: 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, LO: 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

15 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 4, 6, 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, LO: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Job Order Costing

15 - 35

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, LO: 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 2013, 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, LO: 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

15 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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: Raw materials Work in process Finished goods

January 1 $12,000 21,000 14,000

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, LO: 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.

Job Order Costing Ex. 162

15 - 37

(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, LO: 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

15 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 162

(10–15 min.)

——————————————————————————————————————————— Account(s) Account(s) Transactions Debited Credited ——————————————————————————————————————————— 1. Raw materials were purchased on account. C F ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for H A repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280 D C ——————————————————————————————————————————— 4. Factory labor was paid as incurred. G A ——————————————————————————————————————————— 5. Recognized direct labor and indirect labor used D, H G ——————————————————————————————————————————— 6. The production department requisitioned indirect H C materials for use in the factory. ——————————————————————————————————————————— 7. 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.

Raw materials requisitioned by production: Direct materials $8,000 Indirect materials 1,000

Paid factory utilities, $2,100 and repairs for factory equipment, $8,000.

Incurred $96,000 of factory labor.

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

Job Order Costing

15 - 39

Ex. 163 25

(Cont.) Applied manufacturing overhead to production based on a predetermined overhead rate of $7 per direct labor hour worked.

Goods costing $18,000 were completed in the factory and were transferred to finished goods.

Goods costing $15,000 were sold for $20,000 on account.

Ans: N/A, LO: 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

(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 ......................................................................... Finished Goods Inventory ......................................... (To record sales of finished goods and its cost)

20,000 15,000

20,000

9,000

10,100

96,000

42,000

18,000

20,000 15,000

15 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 164 Selected accounts of Kosar Manufacturing Company at year end appear below: RAW MATERIALS INVENTORY (a)

40,000

(d)

25,000

WORK IN PROCESS INVENTORY (d) (e) (f)

FINISHED GOODS INVENTORY (g)

140,000

(h)

120,000

110,000

(e)

(g)

140,000

COST OF GOODS SOLD (h)

FACTORY LABOR (b)

25,000 80,000 100,000

120,000 MANUFACTURING OVERHEAD

110,000

75,000 30,000

(f)

100,000

Instructions Explain the probable transaction that took place for each of the items identified by letters in the accounts. For example: (a) Raw materials costing $40,000 were purchased. Ans: N/A, LO: 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 2013: 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.

Job Order Costing Ex. 165

15 - 41

(Cont.)

Instructions Calculate the balances of the work in process and finished goods inventory accounts at the end of May. Ans: N/A, LO: 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, LO: 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

400,000 48,000

448,000

420,000

15 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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)

8,500

9,900 5,700

7,360

Job Order Costing

15 - 43

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, 1/1/13 (b) 45,000 Total Cost of Work in Process 300,000 (f) Work in Process, 12/31/13 (c) 40,000 Cost of Goods Manufactured 205,000 (g) Instructions Indicate the missing amount for each letter. Assume that overhead is applied on the basis of direct labor cost and that the rate is the same for both cases. Ans: N/A, LO: 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.

15 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 169

(Cont.)

Instructions Journalize the above transactions for Fort Corporation. Ans: N/A, LO: 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 Revenue ..................................................................... Cost of Goods Sold ........................................................................ Finished Goods Inventory ......................................................

130,000

Ex. 170 Lando Company reported the following amounts for 2013: 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

85,000

30,000 120,000 30,000

150,000 168,000 189,000

224,000

130,000 100,000 100,000

Job Order Costing Ex. 170

15 - 45

(Cont.)

Instructions Calculate (a) the cost of materials used in production and (b) total manufacturing costs. Ans: N/A, LO: 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, LO: 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

15 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 171

(8 min.)

(a) (1) The predetermined overhead rate is 150% of direct labor cost. For example, on May 15, the computation is $825 ÷ $550 = 150%. The same result is obtained on May 22 and 31. (2) The total cost is: Direct materials ..................................................... Direct labor ........................................................... Manufacturing overhead ........................................

$5,020 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, 2013, 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, LO: 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 (a)

(10 min.)

KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2013 _____________________________________________________________________________ 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

Job Order Costing Solution 172

15 - 47

(Cont.)

(b)

KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2013 _____________________________________________________________________________ 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, LO: 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

15 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, Payables, 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 2013 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 2013, the actual machine-hours totaled 84,000, and actual overhead costs were $71,000.

Job Order Costing Ex. 174

15 - 49

(Cont.)

Instructions (a) Compute the predetermined overhead rate. (b) Compute the total manufacturing costs for Job 62. (c) How much overhead is over or underapplied for the year for the company? State amount and whether it is over- or underapplied. (d) If Graham Manufacturing sells Job 62 for $14,000, compute the gross profit. Ans: N/A, LO: 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, 2013: 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 2013: 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, LO: 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

15 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 175

(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 Bal. (1) Bal.

Work in Process Inventory

17,000 70,000 19,000

Bal. (4) (5) Bal.

Finished Goods Inventory Bal.

9,000 80,000 35,000 14,000

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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Job Order Costing Solution 176

15 - 51

(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, LO: 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

15 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 177

(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, 2013. 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.

Job Order Costing Ex. 178

15 - 53

(Cont.)

Instructions (a) Compute the balance in Work in Process Inventory at the end of July. (b) Compute the balance in Finished Goods Inventory at the end of September. (c) Compute the gross profit for August. Ans: N/A, LO: 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, LO: 3,5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

15 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 179

(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

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 CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.

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, LO: 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)

Lopez $ 300 3,700 2,250 $6,250

Job Order Costing

15 - 55

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, LO: 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, LO: 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

15 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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)

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, LO: 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 2013, 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

Job Order Costing Ex. 184

15 - 57

(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, LO: 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

150,000 136,000 286,000

15 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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

(c)

Incurred ($166,000 + $1,730,000) Applied ($8 × 236,000) Underapplied overhead

$166,000 176,000 $ 10,000 $1,896,000 1,888,000 $ 8,000

Ex. 186 Klinger Company estimates that annual manufacturing overhead costs will be $4,200,000 for 2013. The actual overhead costs at the end of 2013 are $4,360,000. Activity base information for 2013 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 2013 for each activity base. (c) Compute the amount of under- or overapplied overhead for 2013 for each activity base. Ans: N/A, LO: 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

Job Order Costing Solution 186

15 - 59

(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

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 2013. (c) Compute the cost of goods sold for January. Ans: N/A, LO: 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

15 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 187

(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, 2013 ——————————————————————————————————————————— 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, 2013: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Job Order Costing Solution 188 (a)

(14–18 min.) MARKS COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2013

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)

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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, 2013 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 193. Of these three accounts; Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, ______________ is not a control account. Ans: N/A, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

Job Order Costing

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MATCHING 199. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Cost accounting Materials requisition slip Time ticket Cost accounting system Job order cost system

F. G. H. I. J.

Process cost system Job cost sheets Predetermined overhead rate Overapplied overhead Underapplied overhead

_____ 1. Used to apply manufacturing overhead to jobs. _____ 2. Measures, records, and reports product 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, LO: 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

15 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 200 (a) Distinguish between the two types of cost accounting systems. (b) May a company use both types of cost accounting systems? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: 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, LO: 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, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Job Order Costing

15 - 65

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, LO: 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, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

15 - 66 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics

Job Order Costing Solution 205 TO:

Billing Department

FROM: M. Long, Accounting Manager RE:

Overhead billing, Gordon 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)

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CHAPTER 16 PROCESS COSTING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

7 8 8 8 8 8 1 2

K K K K K K K K

33. 34. sg 35. sg 36. sg, a 37.

3 4 5 6 8

C K K K K

104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125.

6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7

AP AP AP AP AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP K K

126. 127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. st 135. sg 136. st 137. sg 138. sg 139. st 140. sg 141. st 142. sg 143. sg 144. st 145. sg 146.

7 8 8 8 8 8 8 8 8 1 2 2 5 5 5 6 6 6 6 6 7

K AP AP AP AP AP AP AP AP K K K K K K AP K C AP K K

156. 157. a 158.

6 8 8

AP 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. a 26. a 27. a 28. a 29. a 30. sg 31. sg 32.

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.

1 1 1 1 1 2 2 2 2 2 2 2 4 4 4 4 4 4 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

60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6

AP K AP AP AP C AP AP AP AP AP AP AP AP AP AP 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.

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 AP AP C C AP K

Brief Exercises 147. 148. 149. sg st a

5 5 5

AP AP AP

150. 151. 152.

6 6 6

AP AP AP

153. 154. 155.

6 6 6

AP 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.

16 - 2

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

Exercises 159. 160. 161. 162. 163. 164.

4 4 4 4 4 5

AP AP AP AP AP AP

165. 166. 167. 168. 169. 170.

5 5,6 5,6 5,6 5,6 5,6

AP AP AN AP AP AP

171. 172. 173. 174. 175. 176.

5,6 5,6 5,6 5,6 5,6 5,6

AP AP AP AP AP AP

177. 178. 179. 180. 181. 182.

5,6 6 6 6 7 7

AP AP AP AP AP AP

183. 184. a 185. a 186.

7 7 8 8

AP AP AP AP

6 6

AP K

195.

201.

Completion Statements 187. 188.

1 2

K K

189. 190.

2 4

K K

191. 192.

5 6

K K

193. 194.

Matching Statements 196.

Short-Answer Essay 197.

198.

199.

200.

SUMMARY OF LEARNING 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.

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

Learning Objective 1 MC 40. MC 42. MC 41. MC 135. Learning Objective 2 MC 47. MC 136. MC 48. MC 137. MC 49. MC 138. Learning Objective 3 Learning Objective 4 MC 54. MC 159. MC 55. MC 160. MC 138. MC 161. Learning Objective 5 MC 74. MC 147. MC 75. MC 148. MC 76. MC 149. MC 77. MC 164. MC 78. MC 165. MC 79. MC 166. MC 139. MC 167. MC 140. MC 168.

Type

Item

Type

Item

Type

MC MC

187. 197.

C SA

199. 201.

SA SA

MC MC C

189. 196.

C MA

Ex Ex Ex

162. 163. 190.

Ex Ex C

BE BE BE Ex Ex Ex Ex Ex

169. 170. 171. 172. 173. 174. 175. 176.

Ex Ex Ex Ex Ex Ex Ex Ex

177. 191.

Ex C

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. 28.

TF TF TF

29. 30. 127.

TF TF MC

128. 129. 130.

Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay

Learning Objective 6 MC 109. MC 121. MC 110. MC 122. MC 111. MC 123. MC 112. MC 141. MC 113. MC 142. MC 114. MC 143. MC 115. MC 144. MC 116. MC 145. MC 117. MC 150. MC 118. MC 151. MC 119. MC 152. MC 120. MC 153. Learning Objective 7 MC 151. MC 182. MC 181. Ex 183. Learning Objective a8 MC 131. MC 134. MC 132. MC 157. MC 133. MC 158. BE = Brief Exercise Ex = Exercise

Process Costing

16 - 3

MC MC MC MC MC MC MC MC BE BE BE BE

154. 155. 156. 170. 171. 172. 173. 174. 175. 176. 177. 178.

BE BE BE Ex Ex Ex Ex Ex Ex Ex Ex Ex

179. 180. 192. 193. 194. 198. 200.

Ex Ex Cx Cx Cx SA SA

Ex Ex

184. 195.

Ex C

MC BE BE

185. 186. 198.

Ex Ex C

208.

C = Completion MA = Matching

The chapter also contains one set of ten Matching questions and five Short-Answer Essay questions.

CHAPTER LEARNING 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) Both accumulate cost in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both assign accumulated costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. However, the method of assigning costs differs significantly.

16 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

There are four main differences between the two cost systems: (1) A process cost system uses separate accounts for each department or manufacturing process, rather than only one work in process account used in a job order cost system. (2) A process cost system summarizes costs in a production cost report for each department. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost system, but at the completion of a job in a job cost system. (4) A process cost system calculates unit cost as: Total manufacturing costs for the period ÷ Units produced during the period. A job order cost system calculates unit cost as: 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. a

8. Compute equivalent units using the FIFO method. Equivalent units under the FIFO method are the sum of the work performed to: (1) Finish the units of beginning work in process inventory, if any; (2) complete the units started into production during the period; and (3) start, but only partially complete, the units in ending work in process inventory.

Process Costing

16 - 5

TRUE-FALSE STATEMENTS 1.

Process cost accounting focuses on the process involved in mass-producing products that are very similar in nature.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Process cost systems are used to apply costs to a specific job, such as the manufacturing of a specialized machine.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

A company that produces motion pictures would likely use a process cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

In a process cost system, total costs are determined at the end of a month or year.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Separate work in process accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

In a process cost system, materials, labor and overhead are only added in the first production department.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Fewer materials requisitions are generally required in a process cost system than in a job order cost system.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

10.

In a process cost system, labor costs incurred may be captured on time tickets.

Ans: T, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

16 - 6 12.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Equivalent units of production are used to determine the cost per unit of completed products.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

21.

When equivalent units of production are different for materials and conversion costs, unit costs are computed for materials, conversion, and total manufacturing.

Ans: T, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Process Costing 23.

16 - 7

A production cost report is an internal document for management that shows production quantity and cost data for a particular job.

Ans: F, LO: 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, LO: 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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

26.

The FIFO method is easier to understand and use than the weighted-average method.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management a

27.

The FIFO method is conceptually superior to the weighted-average method.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management a

28.

When comparing the FIFO with the weighted-average method, the FIFO method provides current cost information.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management a

29.

There are no units in ending work in process at the end of the period under the FIFO method.

Ans: F, LO: 8, 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.

Companies using the weighted-average method do not complete units left over from the previous accounting periods, they start new units.

Ans: F, LO: 8, 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Cost Management

33.

The flow of costs in a process costing system requires that materials be added in one department, labor added in another department and manufacturing overhead in a third department.

Ans: F, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16 - 8 35.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37.

Under the FIFO method, it is assumed that the beginning work in process is completed before new work is started.

Ans: T, LO: 8, 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.

Ans.

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 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. a 26. a 27. a 28. a 29. a 30.

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31. 32. 33. 34. 35. 36.

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37.

MULTIPLE CHOICE QUESTIONS 38.

A process cost accounting system is most appropriate when a. a variety of different products are produced, each one requiring different types of materials, labor, and overhead. b. the focus of attention is on a particular job or order. c. similar products are mass-produced. d. individual products are custom made to the specification of customers.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

39.

A characteristic of products that are mass-produced in a continuous fashion is that a. the products are identical or very similar in nature. b. they are grouped in batches. c. they are produced at the time an order is received. d. their costs are accumulated on job cost sheets.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

Process Costing 41.

16 - 9

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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

16 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 47.

In process cost accounting, manufacturing costs are summarized on a a. job order cost sheet. b. process order cost sheet. c. production cost report. d. manufacturing cost sheet.

Ans: C, LO: 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, LO: 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, LO: 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. a Work in Process account.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

51.

A product requires processing in two departments, the Baking Department and then the Packaging Department, before it is completed. Costs transferred out of the Baking Department will be transferred to: a. Finished Goods Inventory. b. Cost of Goods Sold. c. Work in Process—Packaging Department. d. Manufacturing Overhead.

Ans: C, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Process Costing 53.

16 - 11

Materials requisitions are: a. not used in process costing. b. generally used more frequently in process costing than job order costing. c. generally used less frequently in process costing than job order costing. d. used more frequently by latter stage production departments.

Ans: C, LO: 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, LO: 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 Company 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, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (1,800 + 3,000) × $5 = $24,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (28,000 − 10,000) + (10,000 × .8) = 26,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 15,000 × .7 = 10,500

16 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 95,000 + (50,000 × .3) = 110,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 80,000 × 100% = 80,000

60.

A department adds raw materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (80,000 − 20,000) + (20,000 × .4) = 68,000

61.

Equivalent units are calculated by a. multiplying the percentage of work done by the equivalent units of output. b. dividing physical units by the percentage of work done. c. multiplying the percentage of work done by the physical units. d. dividing equivalent units by the percentage of work done.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Process Costing 62.

16 - 13

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

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.

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 150,000 + 50,000 = 200,000

16 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 65.

It is necessary to calculate equivalent units of production in a department because a. a physical count of units is impossible. b. some units worked on in the department are not fully complete. c. the physical units in the department are always 100% complete. d. at times a department may use a job order cost system and then switch to a process cost system.

Ans: B, LO: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 20,000 + 80,000 − 10,000 = 90,000

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.

68.

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 20,000 + (80,000 − 10,000) + (10,000 × .4) = 94,000

Process Costing 69.

16 - 15

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management (28,000 + (14,000 x .50) = 35,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 20,000 + (10,000 × .8) = 28,000

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 12,000 + 2,400 = 14,400

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.

16 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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: 12,000 + 1,200 = 13,200

74.

Cohen Company 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 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 of production for conversion costs for the current period? a. 40,000. b. 39,000. c. 4,000. d. 34,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 35,000 + (5,000 × .8) = 39,000

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, LO: 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: 12,000 − 4,000 = 8,000

76.

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.

Process Costing 77.

16 - 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 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.

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.

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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Solution: 640,000 + (80,000 × .4) = 672,000

80.

Crawford Company has the following equivalent units for July: materials 20,000 and conversion costs 18,000. Production cost data are: Materials Work in process, July 1 $ 3,200 Costs added in July 25,200 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

Conversion $ 1,500 21,000

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($3,200 + $25,200) / 20,000 = $1.42; ($1,500 + $21,000) ⁄ 18,000 = $1.25

16 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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: 3,000 + 16,000 − 6,000 = 13,000

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, LO: 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: ($5 × 2,500) + ($3) (2,500 × .2) = $14,000

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($4,800 + $37,800) / 20,000 = $2.13; ($2,250 + $31,500) / 18,000 = $1.88

84.

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.

Process Costing 85.

16 - 19

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($2.50 × 2,000) + ($1.50) (2,000 × .2) = $5,600

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, LO: 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: ($80,000 / 10,000) + ($120,000 / 20,000) = $14

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.

88.

16 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 88 a. b. c. d.

(cont) $40,000. $18,000. $34,000. $58,000.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (($500,000 / 100,000) * 8,000) + (($535,000 / [$92,000 + (8,000) (.4)]) × (8,000) (.4)) = $58,000

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 and 100% complete as to materials. How much are total costs to be assigned to inventory? a. $84,000. b. $144,000. c. $126,000. d. $180,000.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($20,000 × $3) + ($20,000 × .70 × $6) = $144,000

90.

Byrd Company decided to analyze certain costs for June of the current year. Units started into production equaled 14,000 and ending work in process equaled 2,000 units. 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.

91.

Long Company has recently tried to improve its analysis for its manufacturing process. Units started into production equaled 6,000 and ending work in process equaled 400 units. Long had no beginning work in process 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.

Process Costing 92.

16 - 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, LO: 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: $7 + ($60,000 / 20,000) = $10

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.

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.

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.

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 8,000 + (16,000) (X), X = 25%

16 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth 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.

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: {[($40,000 + $920,000) / 12,000] × 2,000} + {($30,000 + $1,020,000) / (10,000 + (2000 × .25))} × (2,000 × .25) = $210,000

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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Process Costing 101.

16 - 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, LO: 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.

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, LO: 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, LO: 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, LO: 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: 160,000 − 10,000 = 150,000

16 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth 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, LO: 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: 160,000 − 50,000 = 110,000

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, LO: 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: 50,000 + 31,000 = 81,000

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, LO: 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: 25,000 + 200,000 − 50,000 = 175,000

Process Costing 109.

16 - 25

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.

110.

If 120,000 units are started into production there was no beginning work in process, 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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 120,000 − 40,000 = 80,000

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, LO: 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, there was no beginning work in process, 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.

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 Materials a. $1.60 b. $1.60

Conversion Costs $1.40 $1.75

16 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 88

(cont) c. d.

$2.00 $2.40

$1.40 $2.13

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $6 + ($80,000 / 10,000) = $14

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, LO: 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: ($240,000 / 60,000) + ($135,000 / 30,000) = $8.50

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, LO: 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: ($48,000 / 5,000)

($80,000 / 10,000) = $17.60

Process Costing 117.

16 - 27

Physical units accounted for 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.

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, LO: 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: $210,000 / ($5 − $3) = 105,000

119.

Maisley Company decided to analyze certain costs for June of the current year. Units started into production equaled 28,000 and ending work in process 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.

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. $1,840,000. b. $2,000,000. c. $1,606,500. d. $1,365,000.

16 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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. $280,000. d. $200,000.

122.

Mayer Company 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.

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.

124.

In a process cost system, a production cost report is prepared a. only for the first processing department. b. for all departments in the aggregate. c. for each processing department. d. only for the last processing department.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Process Costing 125.

16 - 29

A production cost report a. is prepared for each product. b. is prepared from a job cost sheet. c. will show quantity and cost data for a production department. d. will not identify a specific department if more than one department is involved in the production process.

Ans: C, LO: 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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127. The Cutting Department’s output during the period consists of 18,000 units completed and transferred out, and 4,000 units in ending work in process that were 25% complete as to materials and conversion costs. Beginning inventory was 2,000 units that were 25% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 20,300 b. 19,000 c. 21,300 d. 20,000

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 18,000 + (4,000 ×.25) = 19,000

128. The Wrapping Department’s output during the period consists of 17,000 units completed and transferred out, and 900 units in ending work in process that were 75% complete as to materials and conversion costs. Beginning inventory was 1,200 units that were 30% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 18,035 b. 18,515 c. 17,675 d. 17,315

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (1,200 × .7) + (17,000 − 1,200) + (900 × .75) = 17,315

16 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Use the following information to answer questions 129–130. Chicotti Company has 6,000 units in beginning work in process, 30% complete as to conversion costs, 60,000 units transferred out to finished goods, and 2,000 units in ending work in process 20% complete as to conversion costs. The beginning and ending inventory is fully complete as to materials costs. a

129. How much are equivalent units for conversion costs if the FIFO method is used? a. 60,400 b. 64,600 c. 56,000 d. 58,600

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (6,000 × .7) + (60,000 − 6,000) + (2000 × .2) = 58,600 a

130. How much are equivalent units for materials if the FIFO method is used? a. 60,400 b. 62,000 c. 56,000 d. 68,000

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 60,000 − 6,000 + 2,000 = 56,000 a

131. Schiller Company has unit costs of $3 for materials and $9 for conversion costs. There are 5,600 units in ending work in process which are 25% complete as to conversion costs, and fully complete as to materials cost. How much is the total cost assigned to the ending work in process inventory if the FIFO method is used? a. 29,400 b. 67,200 c. 16,800 d. 12,600

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($3 × 5,600) + ($9 × (5,600 × .25)) = $29,400 a

132. Solis Company uses the FIFO method to compute equivalent units. It has 4,000 units in beginning work in process, 20% complete as to conversion costs and 50% complete as to materials costs, 55,000 units started, and 6,000 units in ending work in process, 30% complete as to conversion costs, and 80% complete as to materials cost. How much are the equivalent units for materials under the FIFO method? a. $59,800 b. 55,000 c. 57,800 d. 59,000

Process Costing

16 - 31

133. Special Company had the following department information about physical units and percentage of completion: Physical Units Work in process, May 1 (60%) 36,000 Completed and transferred out 65,000 Work in process, May 31 (50%) 30,000 Materials are added at the beginning of the production process. Conversion costs are added equally throughout production. What is the total number of equivalent units during May for conversion costs if the FIFO method is used? a. 131,000 b. 80,000 c. 58,400 d. 109,400

134. Hanker Company had the following department data on physical units: Work in process, beginning Completed and transferred out Work in process, ending

2,500 14,000 2,000

Materials are added at the beginning of the process. What is the total number of equivalent units for materials if the FIFO method is used? a. 14,500 b. 13,500 c. 16,000 d. 11,500 Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 14,000 + 2,000 − 2,500 = 13,500

135.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

136.

Which of the following is considered a difference between a job order cost and a process cost system? a. The manufacturing cost elements. b. Documents used to track costs. c. The accumulation of the costs of materials, labor, and overhead. d. The flow of costs.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

16 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 137.

The basic similarities between job order cost and process cost systems include all of the following except the a. manufacturing cost elements. b. flow of costs. c. point at which costs are totaled. d. accumulation of the costs of materials, labor, and overhead.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

138

Equivalent units of production are a measure of a. units completed and transferred out. b. units transferred out. c. units in ending work in process. d. the work done in a period expressed in fully completed units.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

139.

Total physical units to be accounted for are equal to the units a. started (or transferred) into production. b. started (or transferred) into production plus the units in beginning work in process. c. started (or transferred) into production less the units in beginning work in process. d. completed and transferred out.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

140.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

141.

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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management Solution: 15,000 + 30,000 − 35,000 = 10,000

142.

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Process Costing 143.

16 - 33

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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

144.

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.

145.

The total costs accounted for in a production cost report equal the a. cost of units completed and transferred out only. b. cost of units started 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146.

In a production cost report, which one of the following sections is not shown under Costs? a. Unit costs. b. Costs to be accounted for. c. Costs during the period. d. Units accounted for.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Answers to Multiple Choice Questions Item

38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.

Ans.

c a c c d c b c b c d b d c d c

Item

54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

Ans.

c d d c c d c c d c b b c b b a

Item

Ans.

70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

d c b a b c a c a c d b c d b c

Item

86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101.

Ans.

a b d b c a a a b b b a b b d c

Item

102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

Ans.

b c c d b a d a c c a b a c d a

Item

118. 119. 120. 121. 122. 123. 124. 125. 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133.

Ans.

a c a c a b c c b b d d c a a c

Item a

134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146.

Ans.

b b b c d b b c c a b c d

BRIEF EXERCISES BE 147 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. Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, LO: 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 147

(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

Equivalent Units Materials Conversion Costs

35,000 8,000 43,000

35,000 2,400 (8,000 × 30%) 37,400

Process Costing

16 - 35

BE 148 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

Solution 148

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, March 1 Started into production Total units Solution 148

Equivalent Units Materials Conversion Costs

2,000 50,000 52,000

(Cont.)

Units accounted for Transferred out Work in process, March 31 Total units

42,000 10,000 52,000

42,000 8,000 (10,000 × 80%) 50,000

BE 149 The Kirkland Department of Delta Company 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, LO: 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 149 QUANTITIES

(4 min.) 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

16 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

BE 150 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, LO: 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 150

(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

Total $90,000 $13.00

BE 151 Apoly Company has the following production data for January. Ending Work in Process Beginning Work in Process

Units Started into Production

Units

% Complete as to Conversion Cost

-0-

8,500

900

30%

Instructions Compute the physical units for January. Ans: N/A, LO: 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 151

(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

Process Costing

16 - 37

BE 152 Sandusky Widget Company has the following production data for March. Ending Work in Process Month

Beginning Work in Process

Units Transferred Out

Units

% Complete as to Conversion Cost

March

1,200

8,100

800

20%

Instructions Compute the physical units for March. Ans: N/A, LO: 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 152

(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

BE 153 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, LO: 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 153

(4 min.)

Units transferred out (50,000 × $14) Work in process, June 30 Materials (6,000 × $5) Conversion costs (6,000 × 30% × $9) Total cost of work in process

$700,000

$30,000 16,200 $46,200

16 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 154 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, LO: 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 154

(4 min.)

Units transferred out (57,000 × $15)

$855,000

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

BE 155 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, LO: 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 155

(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

Process Costing

16 - 39

BE 156 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, LO: 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 156

(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

Total $56,000 $2.60

BE 157

Tip Top Painting Company has the following production data for March: Beginning work in process, 2,000 units, which are 30% complete for conversion costs Units transferred out, 44,000 Units in ending work in process, 6,000, 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 using the FIFO method. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Solution 157

(5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, March 1 Started into production Total Units

2,000 48,000 50,000

Units accounted for Work in process, March 1 Started and completed Work in process, March 31 Total units

2,000 42,000 6,000 50,000

Equivalent Units Materials

0 42,000 6,000 48,000

Conversion Costs

1,400 42,000 4,800 48,200

(2,000 × 70%) (6,000 × 80%)

16 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

BE 158

The Kirkland Department of Delta Company began the month of December with beginning work in process of 4,000 units that are 100% complete as to materials and 20% complete as to conversion costs. Units transferred out are 12,000 units. Ending work in process contains 1,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Instructions Compute equivalent units of production for both materials and conversion costs for the month of December using the FIFO method. Ans: N/A, LO: 8, 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 158

(5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, December 1 Started into production Total Units

4,000 9,000 13,000

Units accounted for Work in process, December 1 Started and completed Work in process, December 31 Total units

4,000 8,000 1,000 13,000

Equivalent Units Materials

0 8,000 1,000 9,000

Conversion Costs

3,200 8,000 600 11,800

(4,000 × 80%) (1,000 × 60%)

Process Costing

16 - 41

EXERCISES Ex. 159 Lutz 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

$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 Company. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 159 (a)

(b)

(c)

(18–22 min.)

Raw Materials Inventory .............................................................. Accounts Payable ............................................................... (Purchase of raw materials on account)

50,000

Work in Process—Mixing ............................................................ Work in Process—Finishing ........................................................ Raw Materials Inventory ..................................................... (To record materials used in production)

20,000 14,000

Factory Labor .............................................................................. Factory Wages Payable ...................................................... (To record payroll liability)

69,000

50,000

34,000

69,000

16 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 159 (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 Revenue.................................................................... (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. 160 Sanders Company has two production departments: Fabricating and Finishing. Beginning inventories are: Work in Process—Fabricating, $6,030; Work in Process—Finishing, $4,100; and Finished Goods, $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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Process Costing Solution 160

16 - 43

(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. 161 The Pasta Factory manufactures spaghetti sauce through two production departments: Cooking and Packaging. For the month of February, the work in process accounts show the following 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 161

(10–15 min.)

Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Raw Materials Inventory ..............................................................

40,000 26,000

Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Factory Labor ..............................................................................

16,000 9,000

Work in Process—Cooking .................................................................. Work in Process—Packaging ............................................................... Manufacturing Overhead .............................................................

30,000 19,000

66,000

25,000

49,000

16 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 161

(Cont.)

Work in Process—Packaging ............................................................... Work in Process—Cooking ..........................................................

65,000 65,000

Ex. 162 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 162

(8–11 min.)

(a) Work in Process—Dept. B............................................................. Work in Process—Dept. A .....................................................

120,000

(b) Work in Process—Dept. B............................................................. Factory Labor......................................................................... Raw Materials Inventory......................................................... Manufacturing Overhead........................................................

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. 163 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.

Process Costing Ex. 163

16 - 45

(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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 163 (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. 164 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, LO: 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 164

(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

42,000 6,000 (8,000 × 75%) 48,000

16 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 165 The Nitrogen Fixation Department of Tomco Company 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, LO: 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 165

(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. 166 At Crenshaw Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion, and production data for its Painting Department in selected months are as follows:

Month July Sept.

Beginning Work In Process Percentage Units Completed -0— 2,500 20%

Units Completed and Transferred Out 11,000 9,000

Ending Work In Process Percentage Units Completed 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, LO: 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

Process Costing Solution 166 (a)

(b)

16 - 47

(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. 167 Watts Company adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Instructions Complete the following calculation of equivalent units for materials and conversion costs. Physical Units Completed and transferred out

Equivalent Units Materials Conversion Costs

40,000

Ending work in process Materials Conversion costs, 75% complete

9,000

Total units Ans: N/A, LO: 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 167

(4–7 min.)

Completed and transferred out Ending work in process Materials Conversion costs—75% complete Total units *9,000 ÷ .75

Physical Units 40,000 12,000*

Equivalent Units Materials Conversion Costs 40,000 40,000 12,000* 52,000

9,000 49,000

16 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 168 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, LO: 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 168

(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. 169 The Assembly Department uses a process cost accounting system and a weighted-average cost flow assumption. The department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. During July, $190,000 of materials costs and $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

(40% complete) (30% complete)

Process Costing Ex. 169

16 - 49

(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, LO: 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 169

(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. 170 The Finishing Department of Edwards Company 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.

16 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 170

(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, LO: 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 170

(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. 171 Massey Corporation uses a process cost system and the weighted-average cost flow assumption. Production begins in the Fabricating Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On March 1, the beginning work in process inventory consisted of 20,000 units which were 60% complete and had a cost of $175,000, $145,000 of which were materials costs. During March, the following occurred: Materials added Conversion costs incurred Units completed and transferred out in March Units in ending work in process March 31 (40% complete)

$305,000 $120,000 65,000 25,000

Instructions Answer the following questions and show the computations that support your answers. 1. What are the equivalent units of production for materials and conversion costs in the Fabricating Department for the month of March? 2. What are the costs assigned to the ending work in process inventory on March 31? 3. What are the costs assigned to units completed and transferred out during March? Ans: N/A, LO: 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

Process Costing Solution 171

16 - 51

(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. 172 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. 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, LO: 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

16 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 172

(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. 173 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, LO: 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

Process Costing Solution 173 (a)

16 - 53

(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) Units transferred out Work in process, May 31 500  100% 500  40%

Work in process, May 1 Costs added Total materials cost

Materials 3,100

Equivalent Units Conversion Costs 3,100

500 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. 174 The Cutting Department of Sanderson Company 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

-060,000 21,600 25,200

16 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 174

(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, LO: 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 174

(8 min.)

Units transferred out Work in process, July 31 5,000  100% 5,000  60%

Materials 10,000 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. 175 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, LO: 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

Process Costing Solution 175

16 - 55

(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. 176 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

Solution 176

(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

16 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 176 (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. 177 The Polishing Department of Estaban Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process. Production: Beginning 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, LO: 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 177

(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

600 34,600

Process Costing Solution 177

16 - 57

(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. 178 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, LO: 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 178

(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

16 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 179 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, LO: 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 179

(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. 180 Production costs chargeable to the Sanding Department in July in Magnum Company are $30,000 for materials, $17,000 for labor, and $13,000 for manufacturing overhead. Equivalent units of production are 25,000 for materials and 15,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, LO: 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 180

(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

Total $60,000 $3.20

Ex. 181 Mayer Company uses a process cost system. The Molding Department adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Work in process 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.

Process Costing Ex. 181

16 - 59

(cont.) MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2013

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, LO: 7, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

16 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 181

(12–16 min.) MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2013

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 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

Total $300,000 $

$ 60,000 240,000 $300,000

$270,000 $ 20,000 10,000

30,000 $300,000

Ex. 182 Baker Winery manufactures a fine wine in two departments, Fermenting and Bottling. In the Fermenting Department, grapes are aged in casks for a period of 30 days. In the Bottling Department, the wine is bottled and then sent to the finished goods warehouse. Labor and overhead are incurred uniformly through both processes. Materials are entered at the beginning of both processes. Cost and production data for the Fermenting Department for December 2013 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

Process Costing Ex. 182

16 - 61

(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, LO: 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 182

(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. 183 The Assembly Department of Nitz Company has the following production and cost data at the end of May, 2013. 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

16 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 183

(22–30 min.) NITZ COMPANY Assembly Department—Production Cost Report For the Month Ended May 31, 2013

Physical Units

Equivalent Units Materials Conversion Costs

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 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 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

$9.60

$ 0 222,000 $222,000

$192,000 18,000 12,000

30,000 $222,000

Ex. 184 Romero Company—Perth Division is a new state of the art production facility that manufactures landing gears for airplanes. The September 30th ending 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:

Process Costing Ex. 184

16 - 63

(cont.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2013

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 Cost Reconciliation Schedule Costs accounted for Transferred out Work in process, September Materials Conversion costs Total costs

700

Total $1,100,000 $

$ 243,400 $

$ $ 78,000 $1,100,000

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 184

(10-15 min.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2013

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

16 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 184

(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

700 300 1,000

Conversion Costs $260,000 1,000 $ 260

Costs to be accounted for Work in process, Sept. 1 Started into production Total costs

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

Ex. 185

At Oxley Company, materials are entered at the beginning of each process. The company uses the FIFO method for process costing. Work in process inventories, with the percentage of work done on conversion, and production data for its Finishing Department for March are as follows:

Month March

Beginning Work in Process Percentage Units Completed 2,100 60%

Units Completed and Transferred Out 18,500

Ending Work in Process Percentage Units Completed 750 90%

Instructions (a) Compute the physical units for March. (b) Compute the equivalent units of production for materials and conversion costs for March. Ans: N/A, LO: 8, 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 185

(5–7 min.)

(a) COMPUTATION OF PHYSICAL UNITS Beginning work in process 2,100 Started into production 17,150 Total units to be accounted for 19,250 Transferred out Ending work in process Total units accounted for

18,500 750 19,250

Process Costing a

Solution 185

16 - 65

(Cont.)

(b) COMPUTATION OF EQUIVALENT UNITS Units accounted for Physical Units Work in process, March 1 2,100 Started and completed 16,400 Work in process, March 30 750 Total equivalent units 19,250

Equivalent Units Materials Conversion Costs 0 840 (2,100 × .40) 16,400 16,400 750 675 (750 × .90) 17,150 17,915

Ex. 186

Taco Ranch uses a process cost system and the FIFO cost flow assumption. Production begins in the Crafting Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On November 1, the beginning work in process inventory consisted of 10,000 units, which were 60% complete and had a cost of $266,000, $140,000 of which were materials costs. During November, the following occurred: Materials added Conversion costs incurred Units completed and transferred out in November Units in ending work in process November 30 (20% complete)

$315,000 $66,000 45,000 25,000

Instructions Answer the following questions and show the computations that support your answers: (a) What are the equivalent units of production for materials and conversion costs in the Crafting Department for the month of November? (b) What are the costs assigned to the ending work in process inventory on November 30? (c) What are the costs assigned to units completed and transferred out during November? Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measuement, AICPA PC: Problem Solving, IMA: Cost management a

Solution 186

(10–12 min.)

(a) Equivalent units of production: Physical Units Work in process, November 1 10,000 Started and completed 35,000 Work in process, November 30 25,000 Total 70,000 (b) Materials unit cost Conversion unit cost Total unit cost

$5.25 1.50 $6.75

Costs to be accounted for Work in process, November 1 Started in production Total costs

Equivalent Units Materials Conversion Costs 0 4,000 (10,000 × .40) 35,000 35,000 25,000 5,000 (25,000 × .20) 60,000 44,000

($315,000 ÷ 60,000 units) ($66,000 ÷ 44,000 units)

$266,000 381,000 $647,000

16 - 66 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Solution 186

(cont.)

Costs assigned to work in process, November 30 Materials costs $131,250 (25,000 units × $5.25) Conversion costs 7,500 (5,000 units × $1.50) Total $138,750 (c) Costs assigned to units completed and transferred out: Transferred out Work in Process, November 1 $266,000 Cost to complete beginning work in process 6,000 Total costs $272,000 Units started and completed 236,250 Total costs transferred out $508,250

(4,000 × $1.50) (35,000 × $6.75)

COMPLETION STATEMENTS 187.

Process cost systems are used to apply costs to similar products that are ____________ in a ____________ fashion.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Cost Management

188.

Separate _________________ accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

189.

In a process cost system, manufacturing costs are summarized in a ________________ report for each department.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

190.

A primary driver of overhead costs in continuous manufacturing operations is _______________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

191.

Equivalent units of production measure the work done during the period, expressed in fully ________________ units.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

192.

Unit production costs are expressed in terms of _____________ units of production.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

193.

If a processing department has 27,000 units in process at the beginning of the period, completes and transfers out 90,000 and has 18,000 units in process at the end of the period, then the number of units started into production during the period was ______________ units.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Process Costing 194.

16 - 67

A cost reconciliation schedule is prepared to assign total costs to units ______________, and to the units in the _________________ work in process.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

195.

The production cost report is an internal document that shows production quantity and ______________ for a production department.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 187. 188. 189. 190. 191.

mass-produced, continuous work in process production cost machine hours completed

192. 193. 194. 195.

equivalent 81,000 transferred out, ending cost data

MATCHING 196. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D.

Total manufacturing cost per unit Equivalent units of production Total units accounted for Production cost report

E. F. G. H.

Cost reconciliation schedule Units transferred out Unit production costs Physical units

____

A summary of both production quantity and cost data for a production department.

____

Shows that the total costs accounted for equal the total costs to be accounted for.

____

Work done during a period expressed in fully completed units.

____

Costs expressed in terms of equivalent units of production.

____

Actual units to be accounted for during a period, irrespective of any work performed.

____

Units transferred out during the period plus units in ending work in process.

____

Unit materials costs plus unit conversion costs.

____

Total units accounted for minus units in ending work in process.

Ans: N/A, LO: 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.

D E B G

5. 6. 7. 8.

H C A F

16 - 68 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 197 Why do some companies need a cost accounting system while others do not? What are the determining characteristics or factors that influence the type of cost accounting system that is appropriate for a company? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Solution 197 Companies need a cost accounting system only if they need to measure, record, and report the costs of manufacturing products. The two basic types of cost accounting systems are job order costing and process costing. A job order cost system is appropriate when production consists of batches of unique products (jobs). A process cost system is used to apply costs to similar products that are mass-produced in a continuous fashion. S-A E 198 The production cost report summarizes the activities that have taken place in a department or process over a period of time. Identify the major types of information found on a production cost report, and indicate who in the business organization uses this type of information and for what purpose the information is used. Ans: N/A, LO: 6, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 198 The types of information found in a production cost report are units to be accounted for and units accounted for, unit costs, and costs to be accounted for and costs accounted for. Production cost reports provide a basis for evaluating the productivity of a department and so are used by production managers. In addition, the cost data can be used by middle management to assess whether unit costs and total costs are reasonable. When the quantity and cost data are compared with predetermined goals, top management can also ascertain whether current performance is meeting planned objectives. Of course, the information in the report is also used for recordkeeping and income determination by the accounting department. S-A E 199 Your roommate is curious about the features of process cost accounting. Identify and explain the distinctive features for your roommate. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Solution 199 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.

Process Costing

16 - 69

S-A E 200 What purposes are served by a production cost report? Ans: N/A, LO: 6, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Solution 200 The production cost report provides the basis for evaluating: (1) the productivity of a department, (2) whether unit and total costs are reasonable, and (3) whether management's predetermined production and cost goals are being met. S-A E 201 (Ethics) Dolly's Dream Homes, Inc. manufactures doll houses in a continuous process. Various customizing features and furnishings are added at the end of the process to create the various models that are sold. The basic design and floor plans of all the houses are identical, however. During the most recent month, the lumber used in trimming the houses was inadvertently recorded as direct materials. At month end, when the error was discovered, Susie Rief, the accountant, was told by the accounting manager, Karen Tate, not to bother with correcting the error, because the dollar amount of the error was not "worth it." Susie believes that the dollar amount is not as important as the quality of the reports. She wonders whether she would be committing an unethical act if she were to make the changes anyway, despite her superior's telling her not to. Required: 1. Who are the stakeholders in this situation? 2. Was it unethical for the company to ask that the error not be corrected? Explain briefly. 3. Would it be unethical for Susie to correct the error? Explain briefly. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Professional Demeanor, IMA: Business Economics

Solution 201 1. The stakeholders include: • Susie Rief and Karen Tate • Dolly's Dream Homes • possibly the present customer, or future customers 2. The company was not unethical in asking that the error not be corrected because it was too small in dollar amount to be considered material. In fact, ignoring small errors improves efficiency. 3. Susie would be failing in the obedience due to her superior if she went ahead and corrected the error. Whether it would be a serious fault depends upon how easily the error could be corrected. The superior probably would not care, either way, if the dollar amount is small and the correction procedure is minor. However, just letting the matter drop would be better.

CHAPTER 17 ACTIVITY-BASED COSTING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

6 6 6 8 8 8

K K C K K K

25. 26. a 27. a 28. a 29. a 30.

7 7 9 9 9 9

K K K C K K

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. 137. 138.

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 8

K K K K K C C C C K K C C C C C K K K K K K K K K K K

139. 140. 141. 142. 143. 144. 145. 146. 147. 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.

8 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9

K K K AP AP AP AP AP AP K K K C K K K K K K K K C K K

169. 170.

4 6

AP C

171.

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.

4 4 4 5 5 5

C K C K K K

13. 14. 15. 16. 17. 18.

5 5 5 6 6 6

K C K K K K

19. 20. 21. 22. 23. 24.

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. 53. 54. 55. 56. 57.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 3 3 3 3 3 4 4

K K K C K K K C K K K K AP AP AP AP AP AP K K K K K AP K AP K

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.

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 4 4

K K K K K K K K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C K AP

85. 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.

4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6

AP AP AP AP AP AP AP AP AP AP AP AP K C K C K K C K K K K K C K K

Brief Exercises 163. 164.

1 4

AP AP

165. 166.

4 4

AP AP

167. 168.

4 4

AP K

17 - 2

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Exercises 172. 173. 174. 175.

1,4 1,4 4 3

AP AP AP K

176. 177. 178.

4 4 4

C C AP

179. 180. 181

4 4 4

E AP C

182. 183. 184.

4,5 6 6

AP C C

9 9

K K

185. 186. 187.

7 7 8

C C AP

Completion Statements 188. 189. 190. a

1 1 2

K K K

191. 192. 193.

4 5 5

K K K

194. 195. 196.

6 7 7

K K K

197. 198.

This question covers a topic in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 2. 3. 4.

TF TF TF TF

5. 31. 32. 33.

TF MC MC MC

34. 35. 36. 37.

48.

49.

51.

52.

53.

7. 8. 9. 56. 57. 58. 59. 60. 61.

TF TF TF MC MC MC MC MC MC

62. 63. 64. 65. 66. 67. 68. 69. 70.

MC MC MC MC MC MC MC MC MC

71. 72. 73. 74. 75. 76. 77. 78. 79.

10. 11. 12. 13.

TF TF TF TF

14. 15. 97. 98.

TF TF MC MC

99. 100. 101. 102.

16. 17. 18. 19.

TF TF TF TF

20. 21. 110. 111.

TF TF MC MC

112. 113. 114. 115.

25. 26. 123.

TF TF MC

124. 125. 126.

MC MC MC

127. 128. 129.

Type

Item

Type

Item

Learning Objective 1 MC 38. MC 42. MC 39. MC 43. MC 40. MC 44. MC 41. MC 45. Learning Objective 2 MC 50. MC 190. Learning Objective 3 MC 54. MC 55. Learning Objective 4 MC 80. MC 89. MC 81. MC 90. MC 82. MC 91. MC 83. MC 92. MC 84. MC 93. MC 85. MC 94. MC 86. MC 95. MC 87. MC 96. MC 88. MC 164. Learning Objective 5 MC 103. MC 107. MC 104. MC 108. MC 105. MC 109. MC 106. MC 182. Learning Objective 6 MC 116. MC 120. MC 117. MC 121. MC 118. MC 122. MC 119. MC 170. Learning Objective 7 MC 130. MC 133. MC 131. MC 134. MC 132. MC 135.

Type

Item

Type

Item

Type

MC MC MC MC

46. 47. 163. 172.

MC MC BE Ex

173. 188. 189.

Ex C C

175.

MC MC MC MC MC MC MC MC BE

165. 166. 167. 168. 169. 172. 173. 174. 176.

BE BE BE BE BE Ex Ex Ex Ex

177. 178. 179. 180. 181. 182. 191.

Ex Ex Ex Ex Ex Ex C

MC MC MC Ex

192. 193.

C C

MC MC MC BE

171. 183. 184. 194.

BE Ex Ex C

MC MC MC

136. 137. 185.

MC MC Ex

186. 195. 196.

Ex C C

FOR INSTUCTOR USE ONLY

Activity-Based Costing

22. 23. 24.

TF TF TF

138. 139. 140.

MC MC MC

141. 142. 143.

27. 28. 29.

TF TF TF

30. 152. 153.

TF MC MC

154. 155. 156.

Note: TF = True-False MC = Multiple Choice

Learning Objective 8 MC 144. MC 147. MC 145. MC 148. MC 146. MC 149. Learning Objective a9 MC 157. MC 160. MC 158. MC 161. MC 159. MC 162.

MC MC MC

150. 151. 187.

MC MC Ex

MC MC MC

197. 198.

C C

BE = Brief Exercise Ex = Exercise

17 - 3

C = Completion

The chapter also contains one set of ten Matching questions and three Short-Answer Essay questions.

CHAPTER LEARNING OBJECTIVES 1.

Recognize the difference between traditional costing and activity-based costing. A traditional costing system allocates overhead to products on the basis of predetermined plantwide or departmentwide rates such as direct labor or machine hours. An ABC system allocates overhead to identified activity cost pools, and then assigns costs to products using related cost drivers that measure the activities (resources) consumed.

Identify the steps in the development of an activity-based costing system. The development of an activity-based costing system involves four steps: (1) Identify and classify the major activities involved in the manufacture of specific products, and allocate manufacturing overhead costs to the appropriate cost pools. (2) Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool. (3) Compute the overhead rate per cost driver. (4) Assign manufacturing overhead costs for each cost pool to products or services using the overhead rates.

Know how companies identify the activity cost pools used in activity-based costing. To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction.

Know how companies identify and use cost drivers in activity-based costing. Cost drivers identified for assigning activity cost pools must (a) accurately measure the actual consumption of the activity by the various products and (b) have related data easily available. Understand the benefits and limitations of activity-based costing. Features of ABC that make it a more accurate product costing system include: (1) the increased number of cost pools used to assign overhead, (2) the enhanced control over overhead costs, and (3) the better management decisions it makes possible. The limitations of ABC are: (1) the higher analysis and measurement costs that accompany multiple activity centers and cost drivers, and (2) the necessity still to allocate some costs arbitrarily.

Differentiate between value-added and non-value-added activities. Value-added activities increase the worth of a product or service. Non-value-added activities simply add cost to or increase the time spent on a product or service without increasing its market value. Awareness of these classifications encourages managers to reduce or eliminate the time spent on the non-value-added activities. .

17 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Understand the value of using activity levels to activity-based costing. Activities may be classified as unit-level, batch-level, product-level, and facility-level. Companies control overhead costs at unit-, batch-, product-, and facility-levels by modifying unit-, batch-, product-, and facility-level activities, respectively. Failure to recognize this classification of levels can result in distorted product costing.

Apply activity-based costing to service industries. The overall objective of using ABC in service industries is no different than for manufacturing industries—that is, improved costing of services provided (by job, service, contract, or customer). The general approach to costing is the same: analyze operations, identify activities, accumulate overhead costs by activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

Explain just-in-time (JIT) processing. JIT is a processing system dedicated to having on hand the right materials and products just at the time they are needed, thereby reducing the amount of inventory and the time inventory is held. One of the principal accounting effects is that one account, Raw and In-Process Inventory, replaces both the raw materials and workin-process inventory accounts.

TRUE-FALSE STATEMENTS 1.

Traditional costing systems use multiple predetermined overhead rates.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Traditionally, overhead is allocated based on direct labor cost or direct labor hours.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Current trends in manufacturing include less direct labor and more overhead.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

A cost driver does not generally have a direct cause-effect relationship with the resources consumed.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Low-volume products often require more special handling than high-volume products.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 9.

17 - 5

When overhead is properly assigned in ABC, it will usually decrease the unit cost of highvolume products.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

10.

ABC leads to enhanced control over overhead costs.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

11.

ABC usually results in less appropriate management decisions.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

12.

ABC is generally more costly to implement than traditional costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

13.

ABC eliminates all arbitrary cost allocations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

14.

ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

15.

ABC is particularly useful when overhead costs are an insignificant portion of total costs.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

16.

Activity-based management focuses on reducing costs and improving processes.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17.

Any activity that increases the cost of producing a product is a value-added activity.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

18.

Engineering design is a value-added activity.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

19.

Non-value-added activities increase the cost of a product but not its perceived value.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

20.

Machining is a non-value-added activity.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

21.

Not all activities labeled non-value-added are totally wasteful, nor can they be totally eliminated.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

22.

The overall objective of installing ABC in service firms is no different than it is in a manufacturing company.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 6 23.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

24.

The general approach to identifying activities, activity cost pools, and cost drivers is used by a service company in the same manner as a manufacturing company.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

25.

Plant management is a batch-level activity.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

26.

Painting is a product-level activity.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

27.

Just-in-time strives to eliminate inventories by using a pull approach.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

28.

Quality control is less important in just-in-time than in traditional manufacturing philosophies.

Ans: F, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

29.

Inventory storage costs are reduced in just-in-time processing.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

30.

Rework costs typically increase in just-in-time processing.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3. 4. 5.

F T T T F

6. 7. 8. 9. 10.

F T T T T

11. 12. 13. 14. 15.

F T F T F

16. 17. 18. 19. 20.

T F T T F

21. 22. 23. 24. 25.

T T F T F

Item

Ans.

26. 27. a 28. a 29. a 30.

F T F T F

MULTIPLE CHOICE QUESTIONS 31.

Which of the following is not typical of traditional costing systems? a. Use of a single predetermined overhead rate. b. Use of direct labor hours or direct labor cost to assign overhead. c. Assumption of correlation between direct labor and incurrence of overhead cost. d. Use of multiple cost drivers to allocate overhead.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 32.

17 - 7

In traditional costing systems, overhead is generally applied based on a. direct labor. b. machine hours. c. direct material dollars. d. units of production.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

33.

An activity that has a direct cause-effect relationship with the resources consumed is a(n) a. cost driver. b. overhead rate. c. cost pool. d. product activity.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

34.

Which best describes the flow of overhead costs in an activity-based costing system? a. Overhead costs  direct labor cost or hours  products b. Overhead costs  products c. Overhead costs  activity cost pools  cost drivers  products d. Overhead costs  machine hours  products

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

35.

The costs that are easiest to trace directly to products are a. direct materials and direct labor. b. direct labor and overhead. c. direct materials and overhead. d. none of the above; all three costs are equally easy to trace to the product.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

36.

Often the most difficult part of computing accurate unit costs is determining the proper amount of _________ to assign to each product, service, or job. a. direct materials b. direct labor c. overhead d. direct materials and direct labor

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

37.

Predetermined overhead rates in traditional costing are often based on a. direct labor cost for job order costing and machine hours for process costing. b. machine hours for job order costing and direct labor cost for process costing. c. multiple bases for job order costing and direct labor cost for process costing. d. multiple bases for both job order costing and process costing.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 8 38.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true? (1) Direct labor constitutes a significant part of total product cost. (2) A high correlation exists between direct labor and changes in the amount of overhead costs. a. b. c. d.

(1) only (2) only Either (1) or (2) Both (1) and (2)

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

39.

Advances in computerized systems, technological innovation, global competition, and automation have changed the manufacturing environment drastically by a. increasing direct labor costs and increasing overhead costs. b. increasing direct labor costs and decreasing overhead costs. c. decreasing direct labor costs and decreasing overhead costs. d. decreasing direct labor costs and increasing overhead costs.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

40.

Activity-based costing a. allocates overhead to activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers. b. accumulates overhead in one cost pool, then assigns the overhead to products and services by means of a cost driver. c. assigns activity cost pools to products and services, then allocates overhead back to the activity cost pools. d. allocates overhead directly to products and services based on activity levels.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

41.

Ordering materials, setting up machines, assembling products, and inspecting products are examples of a. cost drivers. b. overhead cost pools. c. direct labor costs. d. nonmanufacturing activities.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

42.

An “Ordering and Receiving Materials” cost pool would most likely have as a cost driver: a. machine hours. b. number of setups. c. number of purchase orders. d. number of inspection tests.

Ans: c, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 43.

17 - 9

Daffodil Company produces two products, Flower and Planter. Flower is a high-volume item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units per year. Flower requires one hour of direct labor for completion, while each unit of Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 + 12,000). Expected annual manufacturing overhead costs are $800,000. Daffodil uses a traditional costing system and assigns overhead based on direct labor hours. Each unit of Planter would be assigned overhead of a. $25.00. b. $30.77. c. $50.00. d. need more information to compute.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: ($800,000  32,000) × 2 = $50

44.

Sitwell Corporation manufactures titanium and aluminum tennis racquets. Sitwell’s total overhead costs consist of assembly costs and inspection costs. The following information is available: Cost Assembly Inspections

Titanium 500 mach. hours 350 2,100 labor hours

Aluminum 500 mach. hours 150 1,900 labor hours

Total Cost $45,000 $75,000

Sitwell is considering switching from one overhead rate based on labor hours to activitybased costing. Total overhead costs assigned to titanium racquets, using a single overhead rate, are a. $60,000. b. $63,000. c. $75,000. d. $84,000. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($45,000 + $75,000)  ($2,100 + 1,900)] × 2,100 = $63,000

45.

Titanium 500 mach. hours 350 2,100 labor hours

Aluminum 500 mach. hours 150 1,900 labor hours

Total Cost $45,000 $75,000

Sitwell is considering switching from one overhead rate based on labor hours to activitybased costing. Using activity-based costing, how much assembly cost is assigned to titanium racquets? a. $15,750. b. $22,500. c. $23,625. d. $31,500. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($45,000)  (500 + 500)] × 500 = $22,500

17 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 46.

Titanium 500 mach. hours 350 2,100 labor hours

Aluminum 500 mach. hours 150 1,900 labor hours

Total Cost $45,000 $75,000

Sitwell is considering switching from one overhead rate based on labor hours to activitybased costing. Using activity-based costing, how much inspections cost is assigned to titanium racquets? a. $22,500. b. $35,625. c. $37,500. d. $52,500. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [$75,000  (350 + 150)] × 350 = $52,500

47.

Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year.

Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity Ordering and Receiving Orders $ 120,000 500 orders Machine Setup Setups 297,000 450 setups Machining Machine hours 1,500,000 125,000 MH Assembly Parts 1,200,000 1,000,000 parts Inspection Inspections 300,000 500 inspections If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is a. $9.60. b. $12.00. c. $15.00. d. $34.17. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: ($120,000 + $297,000 + $1,500,000 + $1,200,000 + $300,000)  100,000 = $34.17

48.

Sanborn Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year.

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 11 MC. 48

(cont.) a. b. c. d.

$1.20 per direct labor hour. $240 per order. $0.12 per part. $6,834 per order.

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: $120,000  500 = $240

49.

The last step in activity-based costing is to a. assign overhead costs to products, using overhead rates determined for each cost pool. b. compute the activity-based overhead rate per cost driver. c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools. d. identify the cost driver that has a strong correlation to the activity cost pool.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

50.

The first step in activity-based costing is to a. assign overhead costs to products, using overhead rates determined for each cost pool. b. compute the activity-based overhead rate per cost driver. c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools. d. identify the cost driver that has a strong correlation to the activity cost pool.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

51.

A well-designed activity-based costing system starts with a. identifying the activity-cost pools. b. computing the activity-based overhead rate. c. assigning overhead costs to products. d. analyzing the activities performed to manufacture a product.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

52.

Which of the following is not an example of an activity cost pool? a. Setting up machines b. Machining c. Inspecting d. Machine hours

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

53.

An example of an activity cost pool is a. machine hours. b. setting up machines. c. number of setups. d. number of inspections.

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 54.

Estimated costs for activity cost pools and other item(s) are as follows: Machining Assembling Advertising Inspecting and testing

$800,000 200,000 450,000 175,000

Total estimated overhead is a. $1,000,000. b. $1,175,000. c. $1,450,000. d. $1,625,000. Ans: b, LO: 3, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: $800,000 + $200,000 + $175,000 = $1,175,000

55.

An example of a cost which would not be assigned to an overhead cost pool is a. indirect salaries. b. freight-out. c. depreciation. d. supplies.

Ans: b, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

56.

One of Hartman Company's activity cost pools is inspecting, with estimated overhead of $140,000. Hartman produces throw rugs (700 inspections) and area rugs (1,300 inspections). How much of the inspecting cost pool should be assigned to throw rugs? a. $49,000. b. $70,000. c. $75,384. d. $140,000.

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [$140,000  (700 + 1,300)] × 700 = $49,000

57.

Which would be an appropriate cost driver for the machining activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

58.

Which would be an appropriate cost driver for the purchasing activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 13 59.

An activity-based overhead rate is computed as follows: a. actual overhead divided by actual use of cost drivers. b. estimated overhead divided by actual use of cost drivers. c. actual overhead divided by estimated use of cost drivers. d. estimated overhead divided by estimated use of cost drivers.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

60.

Use of activity-based costing will result in the development of a. one overhead rate based on direct labor hours. b. one plantwide activity-based overhead rate. c. multiple activity-based overhead rates. d. no overhead rates; overhead rates are not used in activity-based costing.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

61.

To use activity-based costing, it is necessary to know the a. cost driver for each activity cost pool. b. expected use of cost drivers per activity. c. expected use of cost drivers per product. d. all of the above.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

62.

To assign overhead costs to each product, the company a. multiplies the activity-based overhead rates per cost driver by the number of cost drivers expected to be used per product. b. multiplies the overhead rate by the number of direct labor hours used on each product. c. assigns the cost of each activity cost pool in total to one product line. d. multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated cost for each cost pool.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

63.

As compared to a low-volume product, a high-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively more machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

64.

Assigning overhead using ABC will usually a. decrease the cost per unit for low volume products as compared to a traditional overhead allocation. b. increase the cost per unit for low volume products as compared to a traditional overhead allocation. c. provide less accurate cost per unit for low volume products than will traditional costing. d. result in the same cost per unit for low volume products as does traditional costing.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 65.

Companies that switch to ABC often find they have a. been overpricing some products. b. possibly losing market share to competitors. c. been sacrificing profitability by underpricing some products. d. all of the above.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

66.

Comparing the U.S. to Japan, a. activity-based costing is used less than in the U.S. b. U.S. companies show a stronger preference to volume measures such as direct labor hours to assign overhead costs. c. labor cost reduction is less of a priority in the U.S. d. developing more accurate product costs is less of a priority in the U.S.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

67.

For its inspecting cost pool, Davidson, Inc. expected overhead cost of $300,000 and 4,000 inspections. The actual overhead cost for that cost pool was $360,000 for 5,000 inspections. The activity-based overhead rate used to assign the costs of the inspecting cost pool to products is a. $60 per inspection. b. $72 per inspection. c. $75 per inspection. d. $90 per inspection.

68.

Addison Company manufactures two products, Regular and Supreme. Addison’s overhead costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the two products is: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Regular using traditional costing using direct labor hours is a. $1,075,000. b. $1,500,000. c. $2,250,000. d. $2,675,000.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($2,500,000 + $1,250,000)  (10,000 + 15,000)] × 10,000 = $1,500,000

69.

Addison Company manufactures two products, Regular and Supreme. Addison’s overhead costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the two products is: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Supreme using traditional costing using direct labor hours is FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 15 MC. 69

(cont.) a. b. c. d.

$1,075,000. $1,500,000. $2,250,000. $2,675,000.

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($2,500,000 + $1,250,000)  (10,000 + 15,000)] × 15,000 = $2,250,000

70.

Addison Company manufactures two products, Regular and Supreme. Addison’s overhead costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the two products is: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Regular using activity-based costing is a. $1,075,000. b. $1,500,000. c. $2,250,000. d. $2,675,000.

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$2,500,000  (10,000 + 30,000)] × 10,000} + {[$1,250,000  (90,000 + 160,000)] × 90,000 = $1,075,000

71.

Addison Company manufactures two products, Regular and Supreme. Addison’s overhead costs consist of machining, $2,500,000; and assembling, $1,250,000. Information on the two products is: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Supreme using activity-based costing is a. $1,075,000. b. $1,500,000. c. $2,250,000. d. $2,675,000.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$2,500,000  (10,000 + 30,000)] × 30,000} + {[$1,250,000  (90,000 + 160,000)] × 160,000 = $2,675,000

72.

Teller, Inc. produces 3 products: P1, Q2, and R3. P1 requires 400 purchase orders, Q2 requires 600 purchase orders, and R3 requires 1,000 purchase orders. Teller has identified an ordering and receiving activity cost pool with allocated overhead of $180,000 for which the cost driver is purchase orders. Direct labor hours used on each product are 50,000 for P1, 40,000 for Q2, and 110,000 for R3. How much ordering and receiving overhead is assigned to each product? P1 Q2 R3 a. $60,000 $60,000 $60,000 b. $45,000 $36,000 $99,000

FOR INSTRUCTOR USE ONLY

17 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 72

(cont.) c. d.

$36,000 $40,500

$54,000 $45,000

$90,000 $94,500

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: $180,000  (400 + 600 + 1,000) = $90; 400 × $90 = $36,000; 600 × $90 = $54,000; 1,000 × $90 = $90,000

73.

Hagar Co. computed an overhead rate for machining costs ($1,500,000) of $15 per machine hour. Machining costs are driven by machine hours. If computed based on direct labor hours, the overhead rate for machining costs would be $30 per direct labor hour. The company produces two products, Cape and Chap. Cape requires 60,000 machine hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and 30,000 direct labor hours. Using activity-based costing, machining costs assigned to each product is Cape Chap a. $600,000 $900,000 b. $750,000 $750,000 c. $800,000 $700,000 d. $900,000 $600,000

Solution: $15 × 60,000 = $900,000; $15 × 40,000 = $600,000 Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

74.

Wilder Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct labor hours. The company produces 3,400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $84,600 of total inspecting costs this year. How much of the inspecting costs should be allocated to the Basic model using ABC costing? a. $21,150 b. $30,600 c. $42,300 d. $71,910

Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [$84,600  ((3,400  100) + (600  10))] × (3,400  100) = $30,600

75.

Ben Gordon, Inc. manufactures 2 products, wheels and seats. The company has estimated its overhead in the assembling department to be $330,000. The company produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and each seat uses 3 parts. How much of the assembly overhead should be allocated to wheels? a. $ 82,500. b. $110,000. c. $132,000 d. $141,428.

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [$330,000  ((300,000 × 2) + (600,000 × 3))] × (300,000 × 2) = $82,500

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 17 76.

Clemson Co. incurs $700,000 of overhead costs each year in its three main departments, machining ($400,000), inspections ($200,000) and packing ($100,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Clemson’s two products is as follows: Product X 1,000 100 350 1,700

Machining hours Inspections Orders packed Direct labor hours

Product Y 3,000 500 650 1,800

If traditional costing based on direct labor hours is used, how much overhead is assigned to Product X this year? a. $168,334 b. $242,308 c. $340,000 d. $350,000 Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: ($700,000  (1,700 + 1,800)) × 1,700 = $340,000

77.

Machining hours Inspections Orders packed Direct labor hours

Product Y 3,000 500 650 1,800

Using ABC, how much overhead is assigned to Product X this year? a. $168,334 b. $242,308 c. $340,000 d. $350,000 Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($400,000  (1,000 + 3,000)) × 1,000] + [($200,000  (100 + 500)) × 100] + [($100,000  (350 + 650))× 350] = $168,334

78.

A company incurs $2,700,000 of overhead each year in three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of Goo and 600,000 drums of Slime. The following data are available: Department Ordering and Receiving Mixing Testing

Expected use of Driver Cost 2,000 $ 800,000 50,000 1,000,000 1,500 900,000

Production information for Goo is as follows: .

17 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 78

(cont.) Department Ordering and Receiving Mixing Testing

Expected use of Driver 400 20,000 500

Compute the amount of overhead assigned to Goo using ABC. a. $ 675,000 b. $ 860,000 c. $1,054,764 d. $1,350,000 Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($800,000  2,000) × 400] + [($1,000,000  50,000) × 20,000] + [($900,000  1,500) × 500] = $860,000

79.

Expected use of Driver 2,000 50,000 1,500

Cost $ 800,000 1,000,000 900,000

Production information for Slime is as follows: Department Ordering and Receiving Mixing Testing

Expected use of Driver 1,600 30,000 1,000

Compute the amount of overhead assigned to Slime using ABC. a. $1,350,000 b. $1,645,234 c. $1,840,000 d. $2,025,000 Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($800,000  2,000) × 1,600] + [($1,000,000  50,000) × 30,000] + [(900,000  1,500) × 1,000] = $1,840,000

80.

One of Hatch Company’s activity cost pools is machine setups, with estimated overhead of $300,000. Hatch produces sparklers (400 setups) and lighters (600 setups). How much of the machine setup cost pool should be assigned to sparklers? a. $300,000 b. $120,000 c. $150,000 d. $180,000

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 19 81.

Which would be an appropriate cost driver for the ordering and receiving activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: b, LO: 4, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

82.

As compared to a high-volume product, a low-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively fewer machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

83.

In Japan, a. activity-based costing is used more than in the U.S. b. companies prefer volume measures such as direct labor hours to assign overhead costs. c. labor cost reduction is less of a priority. d. developing more accurate product costs is more of a priority.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

84.

Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and inspecting, $1,200,000. Information on the two products is: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead applied to Board 12 using traditional costing using direct labor hours is a. $2,400,000. b. $3,072,000. c. $3,340,000. d. $3,840,000.

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($1,600,000 + $3,600,000 + $1,200,000)  (15,000 + 25,000)] × 15,000 = $2,400,000

85.

17 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 85

(cont.) Overhead applied to Case 165 using traditional costing using direct labor hours is a. $2,560,000. b. $3,072,000. c. $3,340,000. d. $4,000,000.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($1,600,000 + $3,600,000 + $1,200,000)  (15,000 + 25,000)] × 25,000 = $4,000,000

86.

Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and inspecting, $1,200,000. Information on the two products is: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead applied to Board 12 using activity-based costing is a. $2,400,000. b. $3,072,000. c. $3,328,000. d. $3,840,000.

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$1,600,000  (600 + 400)] × 600} + {[$3,600,000  (24,000 + 26,000)] × 24,000} + {[$1,200,000  (800 + 700)] × 800} = $3,328,000

87.

Johnstone Company manufactures two products, Board 12 and Case 165. Johnstone's overhead costs consist of setting up machines, $1,600,000; machining, $3,600,000; and inspecting, $1,200,000. Information on the two products is: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead applied to Case 165 using activity-based costing is a. $2,560,000. b. $3,072,000. c. $3,328,000. d. $4,000,000.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$1,600,000  (600 + 400)] × 400} + {[$3,600,000  (24,000 + 26,000)] × 26,000} + {[$1,200,000  (800 + 700)] × 700} = $3,072,000

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 21 88. Wallace Computer Company produces three products: Earth, Wind, and Fire. Earth requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups. Wallace has identified an activity cost pool with allocated overhead of $720,000 for which the cost driver is machine setups. How much overhead is assigned to each product? a. b. c. d.

Earth $240,000 $150,000 $180,000 $135,000

Wind $240,000 $112,500 $135,000 $240,000

Fire $240,000 $337,500 $405,000 $345,000

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: $720,000  (80 + 60 + 180) = $2,250; 80 × $2,250 = $180,000; 60 × $2,250 = $135,000; 180 × $2,250 = $405,000

89.

Sofa Company manufactures two models of its couch, the Mini and the Maxi. The Mini model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi model each year. The company produces the Mini model in batch sizes of 200, while it produces the Maxi model in batch sizes of 100. The company expects to incur $240,000 of total setup costs this year. How much of the setup costs are allocated to the Mini model using ABC costing? a. $160,000 b. $120,000 c. $48,000 d. $200,000

Ans: a, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [$240,000  ((4000  200) + (1,000  100))] × (4,000  200) = $160,000

90.

Mask Company manufactures two products, pillows and comforters. The company has estimated its overhead in the order-processing department to be $480,000. The company produces 50,000 pillows and 80,000 comforters each year. Pillow production requires 25,000 machine hours, comforter production requires 50,000 machine hours. The company places raw materials orders 10 times per month, 2 times for raw materials for pillows and the remainder for raw materials for comforters. How much of the order processing overhead should be allocated to comforters? a. $240,000 b. $320,000 c. $295,386 d. $384,000

Ans: d, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: ($480,000  10) × 8 = $384,000

91.

Berg Company incurs $320,000 overhead costs each year in its three main departments, setup ($20,000), machining ($220,000), and packing ($80,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Berg’s two products is as follows:

Number of setups Machining hours Orders packed

Product A1 20 1,000 150

Product B1 20 4,000 350

FOR INSTRUCTOR USE ONLY

17 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 91

(cont.)

Number of products manufactured

600

400

If machining hours are used as a base, how much overhead is assigned to Product A1 each year? a. b. c. d.

$64,000 $160,000 $110,000 $96,000

92.

Number of setups Machining hours Orders packed Number of products manufactured

Product A1 20 1,000 150 600

Product B1 20 4,000 350 400

Using ABC, how much overhead is assigned to Product A1 each year? a. $160,000 b. $242,000 c. $ 64,000 d. $102,000 Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$20,000  (20 + 20)] × 20} + {[$220,000  (1,000 + 4,000)] × 1,000} + {[$80,000  (600 + 400)] × 600} = $102,000

93.

Number of setups Machining hours Orders packed Number of products manufactured

Product A1 20 1,000 150 600

Product B1 20 4,000 350 400

Using ABC, how much overhead is assigned to Product B1 each year? a. $160,000 b. $128,000 c. $218,000 d. $256,000 Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$20,000  (20 + 20)] × 20} + {[$220,000  (1,000 + 4,000)] × 4,000} + {[$80,000  (600 + 400)] × 400} = $218,000

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 23 94.

A company incurs $2,400,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of Oil and 600,000 drums of Sludge. The following data are available: Department Processing Packaging Testing

Expected Use of Driver Cost 800 $1,000,000 200,000 1,000,000 2,000 400,000

Production information for the two products is as follows: Department Processing Packaging Testing

Oil Expected Use of Driver 300 120,000 1,600

Sludge Expected Use of Driver 500 80,000 400

The amount of overhead assigned to Oil is a. $1,200,000. b. $1,295,000. c. $1,105,000. d. $ 920,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($1,000,000  800) × 300] + [(1,000,000  200,000) × 120,000] + [(400,000  2,000) × 1,600] = $1,295,000

95.

Expected Use of Driver Cost 800 $1,000,000 200,000 1,000,000 2,000 400,000

Production information for the two products is as follows: Department Processing Packaging Testing

Oil Expected Use of Driver 300 120,000 1,600

Sludge Expected Use of Driver 500 80,000 400

The amount of overhead assigned to Sludge is a. $1,200,000. b. $1,105,000. c. $1,295,000. d. $ 920,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($1,000,000  800) × 500] + [($1,000,000  200,000) × 80,000] + [($400,000  2,000) × 400] = $1,105,000

17 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 96.

Volcker, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager, and total overhead is $1,580,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company must perform 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company’s employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Volcker’s total material handling costs are $1,000,000 and its total processing costs are $580,000. Using ABC, how much overhead would be assigned to the Heater product? a. $ 790,000 b. $ 926,250 c. $ 653,750 d. $1,119,166

Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$1,000,000  (600 + 400)] × 600} + {[$580,000  (900 + 700)] × 900} = $926,250

97.

Which of the following is a limitation of activity-based costing? a. More cost pools b. Less control over overhead costs c. Poorer management decisions d. Some arbitrary allocations continue

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

98.

Which of the following factors would suggest a switch to activity-based costing? a. Product lines similar in volume and manufacturing complexity. b. Overhead costs constitute a significant portion of total costs. c. The manufacturing process has been stable. d. Production managers use data provided by the existing system.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

99.

Which of the following is true of activity-based costing? a. More cost pools b. Same base as traditional costing c. Less costly to use d. Eliminates arbitrary allocations

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

100.

The primary benefit of ABC is it provides a. better management decisions. b. enhanced control over overhead costs. c. more cost pools. d. more accurate product costing.

Ans: d, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 25 101.

Which of the following is not a benefit of activity-based costing? a. More accurate product costing b. Enhanced control over overhead costs c. Better management decisions d. Less costly to use

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

102.

Each of the following is a limitation of activity-based costing except that a. it can be expensive to use. b. it is more complex than traditional costing. c. more cost pools are used. d. some arbitrary allocations continue.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

103.

The presence of any of the following factors would suggest a switch to ABC except when a. product lines differ greatly in volume. b. overhead costs constitute a minor portion of total costs. c. the manufacturing process has changed significantly. d. production managers are ignoring data provided by the existing system.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

104.

Which of the following is a limitation of activity-based costing? a. More cost pools b. Less control over overhead costs c. ABC can be expensive to use d. Poorer management decisions

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

105.

Which of the following is true about activity-based costing? a. Less cost pools b. Same base as traditional costing c. More costly to use d. Eliminates arbitrary allocations

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

106.

Each of the following is a limitation of activity-based costing except that a. it can be expensive to use. b. it decreases control over overhead costs c. it is complex and can be difficult to understand d. some arbitrary allocations continue.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

107.

The presence of any of the following factors would suggest a switch to ABC except when a. product lines differ greatly in volume. b. overhead costs constitute a major portion of total costs. c. the manufacturing process has changed significantly. d. production managers are using data provided by the existing system

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 108.

Activity-based costing uses a. one plantwide pool and a single cost driver. b. departmental pools and a single cost driver. c. numerous cost pools and numerous cost drivers. d. one plantwide pool and numerous cost drivers

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

109.

Which of the following statements is false? a. ABC can weaken control over overhead costs. b. Under ABC, companies can trace many overhead costs directly to activities. c. ABC allows some indirect costs to be identified as direct costs. d. managers become more aware of their responsibility to control the activities that generate costs.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

110.

Which of the following is a value-added activity? a. Inventory storage b. Machining c. Building maintenance d. Bookkeeping

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

111.

Which of the following is a value-added activity? a. Inventory control b. Inspections c. Packaging d. Repair of machines

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

112.

Which of the following is a non-value-added activity? a. Inventory control b. Machining c. Assembly d. Painting

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

113.

Which of the following is a non-value-added activity? a. Painting b. Finishing c. Packaging d. Building maintenance

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 27 114.

A non-value-added activity in a service enterprise is a. providing legal research. b. delivering packages. c. consulting. d. bookkeeping.

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

115.

A value-added activity in a service enterprise is a. performing landscaping services. b. reception. c. billing. d. ordering supplies.

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

116.

Non-value-added activities a. should be minimized or eliminated. b. involve those activities that are essential to a company's operations. c. increase both the cost and perceived value of a product. d. cannot be differentiated from value-added activities.

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

117.

Value-added activities a. increase the perceived worth of a product or service to customers. b. involve those activities that are essential to a company's operations. c. include engineering design, machining, and assembly. d. all of the above.

Ans: d, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

118.

Which of the following is a value-added activity? a. Engineering design b. Machinery repair c. Inventory storage d. Inspections

Ans: a, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

119.

Which of the following is a non-value-added activity? a. Engineering design b. Machining c. Inspection d. Packaging

Ans: c, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

120.

A non-value-added activity in a service enterprise is a. taking appointments. b. traveling. c. advertising. d. all of these.

Ans: d, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 121.

Value-added activities a. should be minimized or eliminated. b. involve those activities that are essential to a company's operations. c. add cost to a product without affecting selling price. d. cannot be differentiated from non-value-added activities.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

122.

All of the following are examples of a value-added activity in a service company except a. delivering packages by a delivery service. b. ordering supplies. c. performing surgery. d. providing legal research for legal services.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

123.

Which of the following is not a facility-level activity? a. Plant management b. Product design c. Personnel administration d. Training

Ans: b, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

124.

Which of the following is not a product-level activity? a. Product design b. Engineering changes c. Inventory management d. Equipment setups

Ans: d, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

125.

Which of the following is not a batch-level activity? a. Engineering changes b. Equipment setups c. Inspection d. Materials handling

Ans: a, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

126.

Which of the following is not a unit-level activity? a. Purchase ordering b. Assembling c. Painting d. Sewing

Ans: a, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

127.

Which of the following is a batch-level activity? a. Plant management b. Product design c. Equipment setups d. Assembling

Ans: c, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 29 128.

Which of the following is not a facility-level activity? a. Plant depreciation b. Property taxes c. Engineering changes d. Utilities

Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

129.

Which of the following is not a product-level activity? a. Product design b. Engineering changes c. Material handling d. Inventory management

Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

130.

Which of the following is not a batch-level activity? a. Purchase ordering b. Equipment setups c. Inspection d. Assembling

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

131.

Which of the following is not a unit-level activity? a. Drilling b. Cutting c. Sanding d. Inspecting

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

132.

Which of the following is a unit-level activity? a. Painting b. Purchase ordering c. Inspection d. Material handling

Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

133.

Which of the following is a batch-level activity? a. Assembling b. Product design c. Engineering changes d. Purchase ordering

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

134.

Which of the following is a product-level activity? a. Equipment setups b. Product design c. Property taxes d. Utilities

Ans: b, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 135.

Which of the following is a facility-level activity? a. Engineering changes b. Product design c. Property taxes d. Inspection

Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

136.

Activities required to support or sustain an entire production process are called a. unit-level activities. b. batch-level activities. c. product-level activities. d. facility-level activities.

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

137.

Which would be a cost driver for a facility-level activity? a. Number of setups b. Number of product designs c. Square footage d. Number of purchase orders

Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

138.

Activity-based costing has been found to be useful in each of the following service industries except a. airlines. b. railroads. c. hotels. d. ABC has been useful in all of these industries.

Ans: d, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

139.

Activity-based costing is used in a. b. c. d.

Service industries Yes Yes No No

Manufacturing industries No Yes Yes No

Ans: b, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

140.

In service industries a. activities cannot be labeled as value-added or non-value-added. b. the overall objective of ABC is different than in manufacturing industries. c. a larger proportion of overhead costs are company-wide costs. d. activity cost pools cannot be identified.

Ans: c, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 31 141.

Activity-based costing is used by a. accounting firms. b. law firms. c. consulting firms. d. all of the above.

Ans: d, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

142.

Austin Accounting Services estimates for next year revenues of $2,000,000, direct labor of $400,000, and overhead of $700,000. Under traditional costing, overhead is applied to audit jobs using the rate of a. 35% of revenues. b. 20% of revenues. c. 56% of direct labor. d. 175% of direct labor.

Ans: d, LO: 8, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: ($700,000/$400,000) = 1.75 or 175%

143.

Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs consist of computer support, $240,000; and legal support, $120,000. Information on the two services is: Direct labor cost CPU minutes Legal hours used

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead applied to audit services using traditional costing is a. $120,000. b. $144,000. c. $216,000. d. $240,000. Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($240,000 + $120,000)  ($50,000 + $100,000)] × $50,000 = $120,000

144.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead applied to tax services using traditional costing is a. $120,000. b. $144,000. c. $216,000. d. $240,000. Ans: d, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: [($240,000 + $120,000)  ($50,000 + $100,000)] × $100,000 = $240,000

17 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 145.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead applied to audit services using activity-based costing is a. $120,000. b. $144,000. c. $216,000. d. $240,000. Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$240,000  (40,000 + 10,000)] × 40,000} + {[$120,000  (200 + 800)] × 200} = $216,000

146.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead applied to tax services using activity-based costing is a. $120,000. b. $144,000. c. $216,000. d. $240,000. Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt Solution: {[$240,000  (40,000 + 10,000)] × 10,000} + {[$120,000  (200 + 800)] × 800} = $144,000

147.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Port Accounting performs tax services for Cathy Kane. Direct labor cost is $1,200; 600 CPU minutes were used; and 1 legal hour was used. What is the total cost of the Kane job using activity-based costing? a. $2,880 b. $3,000 c. $4,080 d. $4,200 Ans: d, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 33 Solution: {[$240,000  (40,000 + 10,000)] × 600} + {[$120,000  (200 + 800)] × 1} + $1,200 = $4,200

148.

Activity-based costing has been found to be useful in each of the following service industries except a. banks. b. hospitals. c. telephone companies. d. ABC has been useful in any of these industries.

Ans: d, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

149.

What sometimes makes implementation of activity-based costing difficult in service industries is a. the labeling of activities as value-added. b. identifying activities, activity cost plus, and cost drivers. c. that a larger proportion of overhead costs are company-wide costs. d. attempting to reduce or eliminate non-value-added activities.

Ans: c, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

150.

All of the following statements are correct except that a. activity-based costing has been widely adopted in service industries. b. the objective of installing ABC in service firms is different than it is in a manufacturing firm. c. a larger proportion of overhead costs are company-wide costs in service industries. d. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

Ans: b, LO: 8, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

151.

The use of activity-based costing in service industries a. has the same objective as in manufacturing. b. results in improved costing of services provided. c. uses cost pools to assign overhead. d. all of these.

Ans: d, LO: 8, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

152. Just-in-time processing a. is based on a just-in-case philosophy. b. results in a push approach. c. minimizes inventory storage and waiting time. d. all of these.

Ans: c, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

153. An element of just-in-time processing is a. dependable suppliers who are willing to deliver on short notice. b. a multi-skilled workforce. c. a total quality control system. d. all of these.

Ans: d, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

154. Which of the following is not a benefit of just-in-time processing? a. Control of significant inventory balances b. Enhanced product quality c. Reduction of rework costs d. Production cost savings

Ans: a, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

155. Which account is used in just-in-time processing? a. Raw Materials Inventory b. Work-in-Process Inventory c. Merchandise Inventory d. Raw and In-Process Inventory

Ans: d, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

156. Under just-in-time processing, all of the following are received or completed “just in time” except a. finished goods. b. raw materials. c. subassembly parts. d. supplies.

Ans: d, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

157. Just-in-time processing a. is based on a just-in-case philosophy. b. results in higher inventory amounts. c. eliminates the push approach. d. all of the above.

Ans: c, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

158. Just-in-time processing a. results in the opposite of a just-in-case philosophy. b. results in a pull approach. c. minimizes inventory storage and waiting time. d. all of the above.

Ans: d, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

159. An important element of just-in-time processing is a. dependable suppliers who are willing to deliver on short notice. b. a specialized workforce. c. less emphasis on a quality control system. d. all of the above.

Ans: a, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 35 a

160. Which of the following is a limitation of just-in-time processing? a. Significant reduction of manufacturing inventories b. Less emphasis on product quality c. Higher production costs d. None of the above

Ans: d, LO: 9, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

161. Which account is not used in just-in-time processing? a. Accounts Payable b. Work-in-Process Inventory c. Finished Goods Inventory d. Raw and In-Process Inventory

Ans: b, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

162. In the pull approach a. subassembly parts are manufactured and stored just in case they are needed later in the manufacturing process. b. Finished goods are completed and stored just in case unexpected and rush customer orders are received. c. the manufacturing process begins with a customer placing an order. d. None of the above.

Ans: c, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Answers to Multiple Choice Questions Item

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31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

d a a c a c a d d a b c c b b d d b a

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

c d d b b b a c b d c d a a b d c c b

69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.

c a d c d b a c a b c b b b b a d c b

88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.

c a d a d c b b b d b a d d c b c c b

107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125.

d c a b c a d d a a d a c d b b b d a

126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144.

a c c c d d a d b c d c d b c d d a d

145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.

c b d d c b d c d a d d c d a d b c

17 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

BRIEF EXERCISES BE 163 Instant Access Services Inc. leases access to high-speed computers to small businesses. It provides the following information for the year: Budgeted $2,100,000 100,000 200,000

Overhead cost Computer hours Direct labor hours

Actual $1,900,000 90,000 180,000

Overhead is applied on the basis of computer hours. Instructions a. Compute the predetermined overhead rate. b. Determine the amount of overhead applied for the year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 163

(5 min.)

a. $2,100,000 ÷ 100,000 = $21 per computer hour. b. 90,000 computer hours X $21 per computer hour = $1,890,000 overhead applied BE 164 Bark Manufacturing has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $90,000, $162,500, and $28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500 machine hours, and 875 inspections. Instructions Compute the overhead rate for each activity. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 164 Machine setups Machining Inspections

(5 min.) $90,000 ÷ 1,000 = $90 per setup $162,500 ÷ 12,500 = $13 per machine hour $28,000 ÷ 875 = $32 per inspection

BE 165 Gail Industries uses activity-based costing to assist management in setting prices for the company’s three major product lines. The following information is available: Activity Cost Pool Cutting Stitching Inspections Packing

Estimated Overhead $1,000,000 8,000,000 2,800,000 960,000

Expected Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished goods units

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 37 BE 165.

(Cont.)

Instructions Compute the activity-based overhead rates. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 165

(5 min.)

Estimated Activity Cost Pool Overhead Cutting $1,000,000 Stitching 8,000,000 Inspections 2,800,000 Packing 960,000

Expected Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished units

Activity-Based Overhead Rates $40.00 per labor hour $25.00 per machine hour $17.50 per labor hour $15.00 per finished unit

BE 166 Tunes & More, Inc. manufactures speakers and receivers and uses activity-based costing. The following information is available: Activity Cost Pool Ordering Soldering Inspecting Packing

Estimated Overhead $216,000 192,000 960,000 840,000

Expected Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes

Solution 166

(5 min.)

Activity Cost Pool Ordering Soldering Inspecting Packing

Estimated Overhead $216,000 192,000 960,000 840,000

Expected Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes

Activity-Based Overhead Rates $ 9.00 per order $ 3.00 per machine hour $ 8.00 per labor hour $15.00 per box

BE 167 Dolan Tires manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $167,000 of overhead costs. The following information is available: Activity Materials handling Machine setups Quality inspections

Total Cost $60,000 50,000 57,000

Cost Driver Number of requisitions Number of setups Number of inspections

FOR INSTRUCTOR USE ONLY

17 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 167

(Cont.)

For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The smooth tires require 600 requisitions, 300 setups, and 400 inspections. Instructions Determine the overhead rate for each activity. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 5-10, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 167

(5 – 10 min.)

The overhead rates are: Activity Materials handling Machine setups Quality inspections

Overhead $60,000 50,000 57,000

Expected Use of Cost Drivers 1,000 500 600

Overhead Rate $ 60/req. $100/setup $ 95/insp.

BE 168 The legal firm of West, Green, and Ink uses ABC to allocate its overhead costs. The firm has identified the following activity cost pools: A. Direct labor fringe benefits. B. Printing and photocopying. C. Secretarial support. D. Client support. E. Recruiting and training. F. Computer support. G. Liability insurance Instructions Match these cost pools with the appropriate cost driver listed below. ______ ______ ______ ______ ______ ______ ______

1. Revenue billed. 2. CPU minutes. 3. Number of pages. 4. Direct labor cost. 5. Number of clients. 6. Number of recruits. 7. Direct professional hours.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 168 (3 min.) 1. G 2. F 3. B 4. A

5. D 6. E 7. C

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 39 BE 169 Rhode Company provides architectural services for mall development companies. The following data are available for 2013

Activity Cost Pool Secretarial support Direct labor fringe benefits Printing and copying Computer support Liability insurance

Estimated Overhead $ 220,000 200,000 30,000 250,000 140,000

Expected Use of Cost Driver per Activity 27,500 professional hours $500,000 direct labor cost 20,000 pages 62,500 minutes $2,800,000 billed revenue

Instructions Compute the activity-based overhead rates. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 169 (4 min.)

Activity Cost Pool Secretarial support Direct labor fringe benefits Printing and copying Computer support Liability insurance

Estimated Overhead $ 220,000 200,000 30,000 250,000 140,000

Expected Use of Activity-Based Cost Driver per Activity = Overhead Rates 27,500 professional hours $8/prof. hour $500,000 direct labor cost $.40/DL Dollar 20,000 pages $1.50/page 62,500 minutes $4/minute $2,800,000 billed revenue $.05/Rev. $ Billed

BE 170 Hops, Inc. manufactures several types of microbrew beers. Hops has identified the following activities: a. Inventory control e. Machine setups b. Purchasing f. Brewing c. Receiving g. Packing and shipping d. Employee training Instructions Classify each activity as value-added or non-value-added. Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 170 a. b. c. d. e. f. g.

(5 min.)

Activity Inventory control Purchasing Receiving Employee training Machine setups Brewing Packing and shipping

Classification Non-value-added Non-value-added Non-value-added Non-value-added Non-value-added Value-added Value-added .

17 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 171 Laredo Services is considering the installation of activity-based costing. The following activities are performed daily by staff consultants: (1) consulting with clients, (2) staff meetings, (3) on-site supervision, (4) meals, (5) entertaining prospective clients, and (6) training client personnel. Instructions Classify these activities as value-added or non-value-added. Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 171

(3 min.)

Value-Added Activities: (1) Consulting with clients, (3) On-site supervision, and (6) Training client personnel. Non-Value-Added Activities: (2) Staff meetings, (4) Meals, and (5) Entertaining prospective clients.

EXERCISES Ex. 172 Hayward Industries manufactures dining chairs and tables. The following information is available: Dining Chairs Tables Total Cost Machine setups 200 600 $48,000 Inspections 250 470 $72,000 Labor hours 2,600 2,400 Hayward is considering switching from one overhead rate based on labor hours to activity-based costing. Instructions Perform the following analyses for these two components of overhead: a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate. b. Compute total machine setups and inspection costs assigned to each product, using activitybased costing. c. Comment on your findings. Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Hard, Min: 8-12, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 172

(8 – 12 min.)

a. Single overhead rate ($48,000 + $72,000) ÷ 5,000 = $24 per labor hour Dining chairs: Tables:

2,600 × $24 = $62,400 2,400 × $24 = 57,600 $120,000

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 41 Solution 172

(cont.)

b. Activity-based costing Machine setups: $48,000 ÷ 800 = $60 per setup Inspections:

$72,000 ÷ 720 = $100 per inspection

Dining chairs: (200 × $60) + (250 × $100) = $37,000 Tables: (600 × $60) + (470 × $100) = 83,000 $120,000 c. The use of activity-based costing resulted in the allocation of less cost to dining chairs and more cost to tables. The change in cost allocation reflects a more accurate allocation based on cause and effect. Ex. 173 Sonoma Manufacturing has five activity cost pools and two products (a budget tape vacuum and a deluxe tape vacuum). Information is presented below:

Activity Cost Pool Ordering and Receiving Machine Setup Machining Assembly Inspection

Cost Driver Est. Overhead Orders $ 120,000 Setups 297,000 Machine hours 1,000,000 Parts 1,400,000 Inspections 300,000

Cost Drivers by Product Budget Deluxe 600 400 500 400 150,000 100,000 1,200,000 800,000 550 450

Instructions Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent. Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Hard, Min: 15-20, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 173

(15 – 20 min.)

Activity Cost Pool Ordering & Receiving Machine Setup Machining Assembly Inspection

Est. Overhead ÷ $ 120,000 297,000 1,000,000 1,400,000 300,000

Total Est. Activity = 1,000 orders 900 setups 250,000 mach. hours 2,000,000 parts 1,000 inspections

Budget Cost Activity Cost Pool Driver × Ordering & Receiving 600 Machine Setup 500 Machining 150,000 Assembly 1,200,000 Inspection 550

Rate $120 330 4 .70 300

Cost = Assigned $ 72,000 165,000 600,000 840,000 165,000 $1,842,000 ÷ 700,000 $2.63 per unit .

Overhead Rate $120/order $330/setup $4/machine hour $.70/part $300/inspection

Deluxe Cost Cost Driver × Rate = Assigned 400 $120 $ 48,000 400 330 132,000 100,000 4 400,000 800,000 .70 560,000 450 300 135,000 $1,275,000 ÷ 200,000 $6.38 per unit

17 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 174 Morgan, Player, and Associates, a law firm, employs ABC. The following budgeted data for each of the activity cost pools is provided for the year 2013.

Activity Cost Pools Researching legal issues Meeting with clients Preparing legal documents

Estimated Expected Use of Overhead Cost Drivers per Activity $ 31,500 900 research hours 1,760,000 8,800 professional hours 480,000 30,000 pages

During 2013 the firm experienced 660 research hours, prepared 25,000 document pages, and 10,000 professional hours. Instructions Compute the total overhead applied during 2013. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 174

(3 min.)

Estimated Expected Use of Activity-Based Activity Cost Pool Overhead Cost Drivers per Activity Overhead Rates Researching legal issues $ 31,500 900 research hours $35 per res. hour Preparing legal documents 480,000 30,000 pages $16 per page Meeting with clients 1,760,000 8,800 prof. hours $200 per prof. hour

Cost Drivers 660 research hours 25,000 document pages 10,000 professional hours

Overhead Rates $35/research hour $16/page $200/professional hour

Total Overhead Applied $ 23,100 400,000 2,000,000 $2,423,100

Ex. 175 Betsy Rose owns a small department store in a metropolitan area. For twenty years, the accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours worked. Betsy Rose's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Betsy Rose and her daughter have identified the following activities. Instructions Determine a cost driver for each of the activities listed below. Cost Pool

Cost Driver

a. Placing orders

______________________________

b. Stocking merchandise

______________________________

c. Waiting on customers

______________________________

d. Janitorial and Maintenance

______________________________ FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 43 Ex 175

(Cont.)

e. Training employees

______________________________

Administrative

g. Advertising and Marketing

______________________________

h. Accounting and Legal Services

______________________________

Wrapping packages

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 6-9, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 175

(6 – 9 min.)

Cost Pool

Cost Driver

a. Placing orders

number of orders; volume of individual orders

b. Stocking merchandise

number of orders; dollar volume of orders

c. Waiting on customers

number of customers; dollar volume of sales

d. Janitorial and Maintenance

square feet occupied; traffic through area

e. Training employees

total number of employees; number of new employees

number of employees; dollar volume of business

Administrative

g. Advertising and Marketing

number of ad campaigns

h. Accounting and Legal Services dollar volume of sales i.

Wrapping packages

number of packages

Ex. 176 A list of possible cost drivers is presented below: Code A Engineering hours B Setups C Machine hours

Code D Number of subassemblies E Boxes F Orders

Instructions For each of the following activity cost pools, select the most appropriate cost driver: Code

Cost Pool

_____ 1. Machine setup _____ 2. Ordering and receiving _____ 3. Packaging and shipping _____ 4. Engineering design

17 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex 176

(Cont.)

_____ 5. Machining _____ 6. Assembly Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 176

(4 – 6 min.)

1. B 2. F 3. E

4. A 5. C 6. D

Ex. 177 Identify appropriate cost drivers for the following activity cost pools: 1. Human resources 2. Security 3. Receiving 4. Data processing Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 177 1. 2. 3. 4.

(3 – 5 min.)

Number of employees, number of hires Square footage Shipments received; pounds received Lines printed, CPU minutes, storage units

Ex. 178 Two of the activity cost pools for Kinney Company are (a) machining ($325,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200). Instructions Compute the overhead rate for each activity. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 4-6, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 178

(4 – 6 min.)

(a)

Machining:

$325,000 12,500 machine hours

= $26 per machine hour

(b)

Inspections:

$42,000 200 inspections

= $210 per inspection

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 45 Ex. 179 Holmes Industries produces two models of televisions, Standard and Luxury. It sells 100,000 Standard televisions and 15,000 Luxury televisions annually. Holmes switched from traditional costing to activity-based costing and discovered that the cost allocated to Luxury televisions increased so dramatically that the Luxury was now only marginally profitable. Instructions Give a probable explanation for this shift. Ans: N/A, LO: 4, Bloom: E, Difficulty: Easy, Min: 4-6, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Mgmt

Solution 179

(4 – 6 min.)

Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Also, the overhead costs incurred by the low-volume product are often disproportionate to a traditional allocation base such as direct labor hours. Ex. 180 Compute activity-based costing rates from the following budgeted data for Hart Golf Co.: Activity Cost Pool Designing Machining Packing

Budgeted Cost $2,550,000 525,000 620,000

Budgeted Cost Driver 75,000 designer hours 21,000 machine hours 31,000 labor hours

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3-5, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 180

(3 – 5 min.)

Designing Machining Packing

($2,550,000 ÷ 75,000) ($525,000 ÷ 21,000) ($620,000 ÷ 31,000)

= $34 per designer hour = $25 per machine hour = $20 per labor hour

EX. 181 We Store It Company rents storage units of various sizes to individuals and companies. The following activities have been identified as cost pools for accumulating overhead and assigning it to rental services provided. (a) repairs, (b) customer setups, (c) employee training, (d) supplies ordering, (e) temperature/humidity control, (f) security, and (g) cleaning. Identify a cost driver appropriate for each cost pool. Instructions For each activity, name a cost driver that might be used to assign overhead costs. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 2-4, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 181

(2–4 min.)

(a) Number of repairs (b) Number of customer setups (c) Number of employees (d) Number of supply orders (e) Number of kilowatt hours of electricity (f) Square footage (g) Number of units cleaned .

17 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 182 Seasonal Delights manufactures a wide variety of holiday and seasonal decorative items. Seasonal’s activity-based costing overhead rates are: Purchasing Storing Machining Supervision

$380 per order $2 per square foot/days $100 per machine hour $5 per direct labor hour

The Snow Man project involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 40 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour. Instructions Determine the total cost of the Snow Man project. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5-7, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 182

(5 – 7 min.)

Direct materials Direct labor (40 × $30) Factory overhead Purchasing (3 × $380) Storing (4,000 × $2) Machining (60 × $100) Supervision (40 × $5) Total cost

$19,000 1,200 $1,140 8,000 6,000 200

15,340 $35,540

Ex. 183 Label the following costs as value-adding (VA) or non-value-adding (NVA): ____

1. Engineering design

____

2. Machine repair

____

3. Inventory storage

____

4. Machining

____

5. Assembly

____

6. Painting

____

7. Inspections

____

8. Packaging

Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 183 1. 2. 3. 4.

VA NVA NVA VA

(3 – 5 min.) 5. 6. 7. 8.

VA VA NVA VA

FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 47 Ex. 184 Parton and Sons is a law firm that uses activity-based costing. Classify these activities as valueadded or non-value-added: ______________

1. Taking appointments

______________

2. Reception

______________

3. Meeting with clients

______________

4. Bookkeeping

______________

5. Court time

______________

6. Meeting with opposing attorneys

______________

7. Billing

______________

8. Advertising

Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 184 1. 2. 3. 4.

(3 – 5 min.)

Non-value-added Non-value-added Value-added Non-value-added

5. 6. 7. 8.

Value-added Value-added Non-value-added Non-value-added

Ex. 185 Novotna Manufacturing Company manufactures small tools. Classify each of the following activity costs of the tool company as either unit-level, batch-level, product-level, or facility-level: ______________

1. Plant management

______________

2. Drilling

______________

3. Painting

______________

4. Machine setups

______________

5. Product design

______________

6. Cutting

______________

7. Inspection

______________

8. Inventory management

Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 185 1. 2. 3. 4.

Facility Unit Unit Batch

(4 – 6 min.) 5. 6. 7. 8.

Product Unit Batch Product

17 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 186 Castleman, Inc. designs, prints, and delivers advertising copy for companies throughout the tristate area. Sometimes this entails designing and printing a single copy and other times multiple copies of the same advertisement. Listed below are typical activity costs: (a) Printer ink. (b) Paper (c) Depreciation on equipment (d) Machine setup costs (e) Designing (f) Supervisory salaries (g) Ordering materials (h) Delivery (i) Building insurance (j) Printing Instructions Classify each of these activities as either unit-level, batch-level, product-level, or facility-level. Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 186

(3–5 min.)

(a) Unit- or batch-level (b) Unit- or batch-level (c) Unit-level (d) Batch-level (e) Unit- or batch-level (f) Facility-level (g) Batch- or product-level (h) Unit- or batch-level (i) Facility-level (j) Unit- or batch-level Ex. 187 Norton Brooks, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Norton Brooks are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs: Salaries and wages Travel expense Plan reproduction expense Total

Salaries and wages Travel expense Plan reproduction expense

$390,000 100,000 120,000 $610,000 Activity Cost Pools Project Business Assignment Development 60% 30% 40% 40% 35% 40% FOR INSTUCTOR USE ONLY

Other 10% 20% 25%

Activity-Based Costing 17 - 49 Ex 187

(Cont.)

Instructions Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development, and (c) Other activity cost pools. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 6-9, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Solution 187

(6 – 9 min.)

Activity Cost Pools (a) (b) (c) Project Business Assignment Development Other Salaries and wages $234,000 $117,000 $39,000 Travel expense 40,000 40,000 20,000 Plan reproduction expense 42,000 48,000 30,000 Total $316,000 $205,000 $89,000

Total $390,000 100,000 120,000 $610,000

COMPLETION STATEMENTS 188.

In traditional costing systems, direct labor cost is often used for the assignment of all ____________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

189.

A __________________ is any activity that has a direct cause-effect relationship with the resources consumed.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

190.

In activity-based costing, overhead costs are allocated to ____________________, then assigned to products.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

191.

The number of ___________________ is an appropriate cost driver for the ordering and receiving activity cost pool.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

192.

The primary benefit of activity-based costing is ___________________ product costing.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

193.

When product lines differ greatly in volume and manufacturing complexity, a switch from traditional costing to ___________________ is indicated.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

194.

Some ______________________ increase the perceived worth of a product or service to customers.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

17 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 195.

In the hierarchy of activity levels, the four levels are __________, ___________, ____________, and _____________.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

196.

Equipment setups are a ______________-level activity.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

197. A primary objective of __________________ processing is to eliminate all manufacturing inventories.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt a

198. Dependable suppliers, a multi-skilled workforce, and a __________________________ are necessary elements of just-in-time processing.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

Answers to Completion Statements 188. 189. 190. 191. 192. 193. 194. 195. 196. a 197. a 198.

overhead costs cost driver activity cost pools purchase orders more accurate activity-based costing value-added activities unit, batch, product, facility batch just-in-time total quality control system

MATCHING 199. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Pull approach Cost driver Facility-level activity Unit-level activity Activity-based costing

F. G. H. I. J.

Just-in-time processing Batch-level activity Product-level activity Non-value-added activity Value-added activity

_____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools to products. _____ 2. An activity that has a direct cause-effect relationship with the resources consumed. _____ 3. Increases the worth of a product or service to customers. _____ 4. Should be eliminated or reduced. _____ 5. Plant management. FOR INSTUCTOR USE ONLY

Activity-Based Costing 17 - 51

_____ 6. Engineering changes. _____ 7. Equipment setups. _____ 8. Assembling. _____ 9. Primary objective is to eliminate all manufacturing inventories. _____ 10. Used to initiate manufacturing under JIT processing. Ans: N/A, LO: 1-9, Bloom: K, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Mgmt

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

E B J I C

6. 7. 8. 9. 10.

H G D F A

SHORT-ANSWER ESSAY QUESTIONS S-A E 200 Delany Company uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Delany take in initiating an activity-based costing system? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2-5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Mgmt

Solution 200 Delany Company must first identify the major activities that pertain to the manufacture of specific products, then allocate manufacturing overhead to activity cost pools. Next, Delany must identify the cost drivers that accurately measure each activity's contribution to the finished product and compute activity-level overhead rates for each pool. Finally, the manufacturing overhead costs for each activity pool must be allocated to products, using the activity-based overhead rates. S-A E 201 Feather, Inc. produces phasers (sales of 200,000 units per year) and force field enhancers (sales of 25,000 units per year). If Feather switches from traditional costing to activity-based costing, what is the likely effect on overhead assigned to the two products? Ans: N/A, LO: 5, Bloom: E, Difficulty: Medium, Min: 3-6, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Mgmt

Solution 201 When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume products like the force field enhancers. This is because low-volume products often require more special handling, such as machine setups and inspections, than high-volume products. Also, overhead costs incurred by low-volume products often are disproportionate to a traditional allocation base.

17 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition S-A E 202 What are the conditions that would indicate to the management of a firm that they should switch from traditional costing to activity-based costing? Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 3-6, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Mgmt

Solution 202 The presence of one or more of the following conditions indicates ABC as the superior costing system: 1) Product lines differ greatly in volume and manufacturing complexity. 2) Product lines are numerous and diverse, and they require differing degrees of support services. 3) Overhead costs constitute a significant portion of total costs. 4) The manufacturing process or the number of products has changed significantly. 5) Production or marketing managers are ignoring data provided by the existing system and are instead using alternative data when pricing or making other product decisions. S-A E 203 Describe how the application of ABC to service companies is the same as its application to manufacturing companies. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 2-5, AACSB: Communication, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Mgmt

Solution 203 The overall objective of ABC in service companies is the same as that for manufacturing companies; improved costing of services provided. The general approach to costing is the same: analyze operations, identify activities, assign overhead costs to activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

FOR INSTUCTOR USE ONLY

CHAPTER 18 COST-VOLUME-PROFIT SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

6 6 7 7 8 8 1 1

K AP K K K K K K

33. 34. sg 35. sg 36. sg 37.

3 5 6 7 8

K C K AP K

6 6 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7

C K AP AP AP AP AP AP AP AP AP AP AP C AP AP AP AP AP AP AP AP AP AP

134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. sg 145. st 146. sg 147. st 148. sg 149. st 150. sg 151. st 152. sg 153. st 154. sg 155. sg 156.

7 7 7 7 7 7 8 8 8 8 8 2 3 3 4 5 5 5 6 6 7 7 8

AP AP AP AP AP AP AP AP AP K C K K AP K C K AP AP K AP K AP

157. 3 AP 159. 5 AP 161. 6 AP 163. 6 AP 158. 5 AP 160. 5 AP 162. 6 AP 164. 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.

165. 166.

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 5 6 6

K K K K K K K K

25. 26. 27. 28. 29. 30. sg 31. sg 32.

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.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 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

62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

C C AP K AP AP C C K C AP AP AP K K C AP AP K K C K C C

86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6

AP K AP C AP AP AP AP AP AP AP AP AP C K K AP AP AP K C C AP AP

110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133.

Brief Exercises

18 - 2

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Exercises 16 1,3 16 7. 1,3,6,8, 8. 16 1,3,5,6, 9. 17 3 0. 17 3 1. 17 3 2. 19 19 19 20 20 20

1 14 . 15 . 6 . 1 5 . 4 56 7 . .

AP AP

173. 174.

4 4

AN 179. 5,6,7 AN 185. E 180. 5,6 AP 186.

AN AP AP AP

175. 4,6,7 AN 176. 5 AP 177. 5 AP 178. 5,6,7 AN

181. 5,6,8 182. 5,6 183. 5,6,8 184. 5,6,8

AP AP AP AP

5,7 6

AP AP

191. 192.

6,7 7

AP AP

187. 6,7,8 AP 188. 6,7 AP 189. 6,7 C 190. 6,7 AP

193.

203. 204.

6 8

K K

Completion Statements K K K

197. 198.

1 1

K K

199. 200.

2 3

K K

201. 202.

5 6

K K

Matching Statements K

Short-Answer Essay S S

208. 209.

1 3

S S

210. 211.

3 1

S S

SUMMARY OF LEARNING 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. 22. 34.

TF TF TF TF TF TF

86. 87. 88. 89. 90. 91.

MC MC MC MC MC MC

92. 93. 94. 95. 96. 97.

Type Item Type Item Type Learning Objective 1 MC 48. MC 54. MC MC 49. MC 55. MC MC 50. MC 167. Ex MC 51. MC 168. Ex MC 52. MC 169. Ex MC 53. MC 194. C Learning Objective 2 MC 59. MC 61. MC MC 60. MC 62. MC Learning Objective 3 MC 72. MC 77. MC MC 73. MC 78. MC MC 74. MC 79. MC MC 75. MC 146. MC MC 76. MC 147. MC Learning Objective 4 MC 84. MC 148. MC MC 85. MC 173. Ex Learning Objective 5 MC 98. MC 150. MC MC 99. MC 151. MC MC 100. MC 158. BE MC 101. MC 159. BE MC 102. MC 160. BE MC 149. MC 176. Ex .

Item

Type

Item

Type

195. 196. 197. 198. 205. 208.

C C C C MA SA

211.

63. 145.

MC MC

199.

157. 167. 168. 169. 170.

BE Ex Ex Ex Ex

171. 172. 200. 209. 210.

Ex Ex C SA SA

174. 175.

Ex Ex

206.

177. 178. 179. 180. 181. 182.

Ex Ex Ex Ex Ex Ex

183. 184. 185. 201. 207.

Ex Ex Ex C SA

Cost-Volume-Profit

22. 23. 24. 25. 26. 35. 98. 99.

TF TF TF TF TF TF MC MC

100. 101. 102. 103. 104. 105. 106. 107.

MC MC MC MC MC MC MC MC

108. 109. 110. 111. 112. 113. 114. 115.

27. 28. 36. 124. 125.

TF TF TF MC MC

126. 127. 128. 129. 130.

MC MC MC MC MC

131. 132. 133. 134. 135.

29. 30. 37.

TF TF TF

140. 141. 142.

MC MC MC

143. 144. 156.

Note: TF = True-False MC = Multiple Choice SA = Short-Answer Essay

Learning Objective 6 MC 116. MC 152. MC 117. MC 153. MC 118. MC 161. MC 119. MC 162. MC 120. MC 163. MC 121. MC 168. MC 122. MC 169. MC 123. MC 175. Learning Objective 7 MC 136. MC 155. MC 137. MC 175. MC 138. MC 178. MC 139. MC 179. MC 154. MC 185. Learning Objective 8 MC 164. BE 168. MC 165. BE 181. MC 166. BE 183. BE = Brief Exercise Ex = Exercise

18 - 3

MC MC BE BE BE Ex Ex Ex

178. 179. 180. 181. 182. 183. 184. 186.

Ex Ex Ex Ex Ex Ex Ex Ex

187. 188. 189. 190. 191. 202. 203.

Ex Ex Ex Ex Ex C C

MC Ex Ex Ex Ex

187. 188. 189. 190. 191.

Ex Ex Ex Ex Ex

192.

Ex Ex Ex

184. 187. 193.

Ex Ex Ex

204.

C = Completion MA = Matching

CHAPTER LEARNING 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. 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 is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a total amount, as a per unit amount, or as a ratio.

18 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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 for required sales 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.

TRUE-FALSE STATEMENTS 1.

An activity index identifies the activity that has a causal relationship with a particular cost.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A variable cost remains constant per unit at various levels of activity.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A fixed cost remains constant in total and on a per unit basis at various levels of activity.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If volume increases, all costs will increase.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If the activity index decreases, total variable costs will decrease proportionately.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The relevant range of activity is the activity level where the firm will earn income.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Costs will not change in total within the relevant range of activity.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 10.

18 - 5

The high-low method is used in classifying a mixed cost into its variable and fixed elements.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18.

Contribution margin is the amount of revenues remaining after deducting cost of goods sold.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 6 22.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition A CVP income statement shows contribution margin instead of gross profit.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23.

The break-even point is where total sales equal total variable costs.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

The break-even point is where total sales equal total variable costs.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

25.

The break-even point is equal to the fixed costs plus net income.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26.

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, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics Solution: ($1) (10,000) = $10,000

27.

A target net income is calculated by taking actual sales minus the margin of safety.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28.

Target net income is the income objective for an individual product line.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

The margin of safety is the difference between sales at breakeven and sales at a determined activity level.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

The margin of safety is the difference between contribution margin and fixed costs.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31.

The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 35.

18 - 7

A cost-volume-profit graph shows the amount of net income or loss at each level of sales.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

36.

If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.

Ans: T, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: ($29,000 + $70,000) / (1 − .70) = $1,200,000

37.

The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or (expected) sales.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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 T F F

25. 26. 27. 28. 29. 30.

F T F T T F

31. 32. 33. 34. 35. 36.

T F T F T T

37.

MULTIPLE CHOICE QUESTIONS 38.

For an activity base to be useful in cost behavior analysis, a. the activity should always be stated in dollars. b. there should be a correlation between changes in the level of activity and changes in costs. c. the activity should always be stated in terms of units. d. the activity level should be constant over a period of time.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

39.

A variable cost is a cost that a. varies per unit at every level of activity. b. occurs at various times during the year. c. varies in total in proportion to changes in the level of activity. d. may or may not be incurred, depending on management's discretion.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 8 41.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Two costs at Bradshaw Company appear below for specific months of operation. Delivery costs Utilities

Month September October

Amount $ 40,000 55,000

Units Produced 40,000 60,000

September October

$ 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, LO: 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

44.

Fixed costs normally will not include a. property taxes. b. direct labor. c. supervisory salaries. d. depreciation on buildings and equipment.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 46.

18 - 9

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, LO: 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, LO: 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

50.

Cost activity indexes might help classify costs as a. temporary. b. permanent. c. variable. d. transient.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 53.

Which of the following costs are variable? Cost 10,000 Units 30,000 Units 1. $100,000 $300,000 2. 40,000 240,000 3. 90,000 90,000 4. 50,000 150,000 a. 1 and 2 b. 1 and 4 c. only 1 d. only 2

Ans: B, LO: 1, Bloom: 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, LO: 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, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56.

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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 59.

18 - 11

Firms operating at 100% capacity a. are common. b. are the exception rather than the rule. c. have no fixed costs. d. have no variable costs.

Ans: B, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

64.

Frazier Manufacturing Company collected the following production data for the past month: Units Produced 1,600 1,300 1,500 1,100

Total Cost $44,000 38,000 45,000 33,000

If the high-low method is used, what is the monthly total cost equation? a. Total cost = $8,800 + $22/unit b. Total cost = $11,000 + $20/unit c. Total cost = $0 + $30/unit d. Total cost = $6,600 + $24/unit Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($44,000 − $33,000) / (1,600 − 1,100) = $22; $33,000 − ($22) (1,100) = $8,800

18 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($16,000 − $8,000) / (7,000 − 2,000) = $1.60; $8,000 − ($1.60) (2,000) = $4,800

67.

Gribble 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($104,000 − $40,000) / (60,000 − 20,000) = $1.60; $40,000 − ($1.60) (20,000) = $8,000; $8,000 + ($1.60) (45,000) = $80,000

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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 70.

18 - 13

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, LO: 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 Qualls Quality Airline 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, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

72.

In applying the high-low method, which months are relevant? Month Miles Total Cost January 80,000 $144,000 February 50,000 120,000 March 70,000 141,000 April 90,000 195,000 a. b. c. d.

January and February January and April February and April February and March

Ans: C, LO: 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($195,000 − $120,000) / (90,000 − 50,000) = $1.88

18 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($195,000 − $120,000) / (90,000 − 50,000) = $1.875; $195,000 −($1.875) (90,000) = $26,250

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

76.

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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

78.

Portman Company's activity for the first three months of 2013 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($4,800 − $3,600) / (2,900 − 2,100) = $1.50

Cost-Volume-Profit 79.

18 - 15

Ponszko Nursery 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 Ponszko’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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($48,000 – (2,000 * $18) = $12,000; $12,000 + ($18 * 2,300) = $53,400.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 85.

To which function of management is CVP analysis most applicable? a. Planning b. Motivating c. Directing d. Controlling

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

86.

Hollis Industries produces flash drives for computers, which it sells for $20 each. Each flash drive costs $12 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. 30% b. 40% c. 60% d. 70%

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($20 − $12)  $20 = 40%

87.

Contribution margin a. is always the same as gross profit margin. b. excludes variable selling costs from its calculation. c. is calculated by subtracting total manufacturing costs per unit from sales revenue per unit. d. equals sales revenue minus variable costs.

Ans: D, LO: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $750,000  .4 = $1,875,000; $1,875,000 − $750,000 = $1,125,000

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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 90.

18 - 17

A company has contribution margin per unit of $90 and a contribution margin ratio of 40%. What is the unit selling price? a. $150 b. $225 c. $36 d. Cannot be determined.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $90  .4 = $225

91.

Sales are $500,000 and variable costs are $350,000. What is the contribution margin ratio? a. 43% b. 30% c. 70% d. Cannot be determined because amounts are not expressed per unit.

92.

Dunbar Manufacturing’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $44,000. If sales are expected to increase $80,000, by how much will the company's net income increase? a. $36,000 b. $56,000 c. $24,000 d. $12,000

93.

Weatherspoon Company 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 Weatherspoon’s contribution margin ratio? a. 55% b. 45% c. 150% d. 222%

94.

Armstrong Industries 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

18 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 95.

Zehms, Inc. 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $21  .6 = $35

96.

A division sold 100,000 calculators during 2013: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($2,000,000 − $700,000)  100,000 = $13

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

98.

The following information is available for Wade Corp.: 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $550,000 − $360,000 = $190,000

Cost-Volume-Profit 99.

18 - 19

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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

100.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

101.

The CVP income statement a. is distributed internally and externally. b. classifies costs by functions. c. discloses contribution margin in the body of the statement. d. will reflect a different net income than the traditional income statement.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102.

O’Malley 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.

103.

A company has total fixed costs of $200,000 and a contribution margin ratio of 20%. The total sales necessary to break even are a. $800,000. b. $1,000,000. c. $250,000. d. $240,000.

Ans: B, LO: 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: $200,000  .2 = $1,000,000

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, LO: 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: $180,000  ($5 − $3) = 90,000

18 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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, LO: 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, LO: 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, LO: 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: $600,000  (1 − .75) = $2,400,000

109.

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, LO: 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: $2,400,000  $150 = 16,000

Cost-Volume-Profit 110.

18 - 21

Nelson Manufacturing 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, LO: 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, LO: 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’s contribution margin ratio? a. 68%. b. 45%. c. 32%. d. 55%.

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’s break-even point in units? a. 24,546. b. 30,000. c. 38,334. d. 42,188.

114.

Walters Corporation 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

18 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 115.

Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $90,000. What sales are needed by Cunningham to break even? a. $120,000. b. $225,000. c. $270,000. d. $360,000.

116.

Cunningham, Inc. sells MP3 players for $60 each. Variable costs are $40 per unit, and fixed costs total $90,000. How many MP3 players must Cunningham sell to earn net income of $210,000? a. 15,000. b. 5,250. c. 3,750. d. 4,500.

117.

Gall Manufacturing 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.

118.

Pascal, Inc. is planning to sell 800,000 units for $1.50 per unit. The contribution margin ratio is 20%. If Pascal 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.

119.

April Industries 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 April’s break-even point? a. 9,200 units b. $51,200 c. 12,400 units d. 4,267 units

Cost-Volume-Profit 120.

18 - 23

Kaplan, Inc. 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 breakeven level of sales in dollars for Kaplan? a. $200 b. $4,000 c. $14,000 d. $8,400

121.

Vintage Wines 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 Vintage need to break even per year? a. $12,000 b. $3,000 c. $18,750 d. $75,000

122.

Bruno & Court 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 each. Bruno & Court is funded by a local philanthropy in the amount of $48,000 for 2013. How many deer can Bruno & Court capture during 2013? a. 3,300 b. 4,800 c. 6,300 d. 3,000

123.

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, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($55,000 + $32,000) / $2,000 = $43.50

124.

Variable costs for Abbey, Inc. are 25% of sales. Its selling price is $80 per unit. If Abbey sells one unit more than break-even units, how much will profit increase? a. $60 b. $20 c. $25 d. $320

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($80) (1 − .25) = $60

18 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $1,360,000 − ($1,360,000) (1 − .30) − $240.000 = $168,000

126.

Montoya Manufacturing has fixed costs of $2,500,000 and variable costs are 40% of sales. What are the required sales if Montoya desires net income of $250,000? a. $4,583,333 b. $4,166,667 c. $6,875,000 d. $6,250,000

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($2,500,000 + $250,000) / (1 − .40) = 4,583,333

127.

Aero, Inc. 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($2,000,000 − $400,000 − $500,000) / $2,000,000 = 55%

128.

Lansbury Manufacturing 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 Lansbury sells 25 more units beyond breakeven, how much does profit increase as a result? a. $300 b. $500 c. $200 d. $1,000

129.

Hayduke Corporation 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 Hayduke 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.

Cost-Volume-Profit 130.

18 - 25

Keene, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $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 Keene? 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $4,900/ ($20-$6) = 350; $4,900 / ($20 – ($6)(.90)) = 336; 350 -336 = 14.

131.

Reliable Manufacturing wants to sell a sufficient quantity of products to earn a profit of $80,000. If the unit sales price is $10, unit variable cost is $8, and total fixed costs are $160,000, how many units must be sold to earn income of $80,000? a. 120,000 units b. 80,000 units c. 30,000 units d. 1,200,000 units

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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($160,000 + $200,000) / .4 = $900,000

133.

Farmers’ Industries has fixed costs of $400,000 and variable costs are 60% of sales. How much will Farmers report as sales when its net income equals $40,000? a. $1,100,000 b. $733,333 c. $1,040,000 d. $264,000

134.

Murphy 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 Murphy’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.

18 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 135.

Greg’s Golf Carts 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, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (100) ($50) = $5,000

136.

Wendy Industries 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 income? a. $25,000 b. $37,000 c. $0 d. $13,000

137.

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

138.

Stephanie, Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs. Which of the following is true about the 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.

Cost-Volume-Profit 139.

18 - 27

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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($160,000 + $200,000) / .4 = $900,000

140.

The following monthly data are available for Lumberyard Company. 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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $84,000 / ($42 − 14) = 3000; 3000  $42 = $126,000; 4,000  $42 = $168,000; $168,000 − $126,000 = $42,000

141.

Danny’s Lawn Equipment has actual sales of $800,000 and a break-even point of $600,000. How much is its margin of safety ratio? a. 25% b. 33% c. 67% d. 75%

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($800,000 - $600,000) / $800,000 = 25%

142.

The following monthly data are available for Seasons Company 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, 5,000 units. How much is the margin of safety for the company for June? a. $56,000 b. $84,000 c. $126,000 d. $2,000

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $84,000 / ($42 − $14) = 3,000; 3000  $42 = $126,000; $126,000 − (5000  $42) = $84,000

143.

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, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 144.

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, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

145.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

146.

An example of a mixed cost is a. direct materials. b. supervisory salaries. c. utility costs. d. property taxes.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

147.

In the Restin 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 $2.75

Total Fixed Cost $268 $500 $220 $400

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($1,100 − $600) / (400 − 160) = $2.08; $1,100 − (400 − $2.08) = $268

148.

Cost-volume-profit analysis includes all of the following assumptions except a. the behavior of costs is curvilinear throughout the relevant range. b. costs can be classified accurately as either variable or fixed. c. changes in activity are the only factors that affect costs. d. all units produced are sold.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

149.

The contribution margin ratio increases when a. fixed costs increase. b. fixed costs decrease. c. variable costs as a percentage of sales decrease. d. variable costs as a percentage of sales increase.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cost-Volume-Profit 150.

18 - 29

Contribution margin is a. the amount of revenue remaining after deducting fixed costs. b. available to cover fixed costs and contribute to income for the company. c. sales less fixed costs. d. unit selling price less unit fixed costs.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

151.

Chung, Inc. 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (100,000  $18) − $525,000 − $375,000 = $900,000

152.

Sweet Manufacturing is planning to sell 400,000 hammers for $3 per unit. The contribution margin ratio is 20%. If Sweet 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

153.

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

154.

Wilton Co. 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 Wilton 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 / 5,000 = $40 x 1.10 = $44; $120,000 / 5,000 = $24; ($60,000 + $20,000) / ($44-$24) = 4,000 units

18 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 155.

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

156.

Bolton Industries had actual sales of $750,000 when break-even sales were $600,000. What is the margin of safety ratio? a. 20% b. 25% c. 75% d. 80%

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.

b c a d d d b b c d d a c b d b c

55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.

a b c c b a d d a a a c d d c d d

72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.

c b a a c b a d c b b c a a b d a

89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.

b b b d a b a d a d c d c b b a b

106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.

c d c d b a b b b c a b a c b d a

123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139.

a a d a b a a b a c a a a d b c c

140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156.

b a b c b b c a a c b b a c a c a

Cost-Volume-Profit

18 - 31

BRIEF EXERCISES BE 157 Dollywood Corporation accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost Miles Driven Total Cost January 10,000 $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, LO: 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 157

(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

18 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 158 Sandel 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 Sandel has unlimited demand for both products. Therefore, which product should Sandel tell his sales people to emphasize? Ans: N/A, LO: 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 158

(5 min.)

Contribution margin per unit: [$60,000 – $36,000] ÷ 4,000 = $6 [$25,000 – $7,000] ÷ 2,500 = $7.20

Footballs: Baseballs:

Sandel should tell his sales people to sell more baseballs due to the higher contribution margin per unit. BE 159 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 159

(6 min.)

A. $300 – $195 = $105 B. $120 ÷ $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

Cost-Volume-Profit

18 - 33

BE 160 Kipling Company has sales of $1,500,000 for the first quarter of 2013. 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 2013. Ans: N/A, LO: 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 160

(4 min.)

$1,500,000 − [$500,000 + $100,000 + $80,000] − [$550,000 + $75,000 + $67,000] = $128,000 BE 161 Hurly Co. 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, LO: 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 161

(3 min.)

$1.50X – $132,000 = 0 X = 88,000 units BE 162 Salem Bakery 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 Salem needs to break even per year. Ans: N/A, LO: 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 162

(3 min.)

Contribution margin ratio = 100% – 35% = 65% .65x – $54,600 = 0 X = $84,000 of sales dollars

18 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 163 Cannon Co. has a unit selling price of $500, variable cost per unit $300, and fixed costs of $210,000. Instructions Compute the break-even point in units and in sales dollars. Ans: N/A, LO: 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 163

(4 min.)

$500X − $300X − $210,000 = 0 BEP in units = X = 1,050 units BEP in dollars = 1,050 units × $500 = $525,000 BE 164 Oakbrook, Inc. 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, LO: 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 164

(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 165 The following monthly data are available for Fortner Industries 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 dollars for the company for May. Ans: N/A, LO: 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 165

(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

Cost-Volume-Profit

18 - 35

BE 166 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 166

(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, LO: 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. 167 Sandburg Manufacturing manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The Utilities and Maintenance are mixed costs. The fixed portions of these costs are $300 and $200, respectively. Costs Incurred Production in Units Production Costs a. Direct Materials b. Direct Labor c. Utilities d. Rent e. Indirect Labor f. Supervisory Salaries g. Maintenance h. Depreciation

2,000

4,000

$ 4,000 16,000 1,000 3,000 4,200 1,500 900 2,500

? ? ? ? ? ? ? ?

Instructions Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge of cost behavior to determine which of the other costs are fixed or variable. Ans: N/A, LO: 1,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

18 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 167

(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

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. 168 Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, 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 Fast ‘n Clean Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to 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

Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each. Instructions (a) Using the high-low method, determine 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 $20,000, assuming fixed costs are $32,000 and the contribution margin per unit is $8. Ans: N/A, LO: 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

Cost-Volume-Profit Solution 168 (a)

18 - 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

Fixed costs: Rent Depreciation Wages Utility costs Total

$10.00 3.00 1.10 .90 $15.00

$ 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 15 $10 40% =

$32,000 + $20,000 $8

= 6,500 oil changes

Ex. 169 Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $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 per person per night and the cost of food which is $5 per person per night.

18 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 169

(Cont.)

Instructions (a) Determine the number of rentals and the sales revenue Jane 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 Jane has to worry about having a net loss? (c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $66 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made. Ans: N/A, LO: 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 169 (a)

(22–27 min.)

Variable costs per person per night: Laundry and cleaning $10 Breakfast 5 Total variable $15

Fixed costs: Depreciation Maintenance Cleaning Real estate tax Total fixed

Break-even 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 15 $45

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%

$ 60,000 32,000 24,000 10,000 $126,000

Cost-Volume-Profit Solution 169

(c)

18 - 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. 170 Corris Co. accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost January 10,000 $17,000 February 8,000 13,500 March 9,000 14,400 April 7,000 12,500 Instructions Compute the variable and fixed cost elements using the high-low method. Ans: N/A, LO: 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 170

(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

18 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 171 Moresan Co. 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, LO: 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 171 (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 8,580 $ 6,320

$ 6,320

Estimated total power costs for July: Variable cost (10,000 × $1.30) Fixed cost Total estimated power cost

$13,000 6,320 $19,320

Cost-Volume-Profit

18 - 41

Ex. 172 The Bradshaw Law Office has the following monthly telephone records and costs: Calls 2,000 1,500 2,200 2,500 2,300 1,700

Costs $2,400 2,000 2,600 2,800 2,700 2,200

Instructions Identify the fixed and variable cost elements using the high-low method. Ans: N/A, LO: 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 172

(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 1,200 $ 800

$ 800

Ex. 173 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, LO: 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 173 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

18 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 174 Henderson Farms reports the following results for the month of November: Sales (10,000 units) Variable costs Contribution margin Fixed costs Net income

$600,000 420,000 180,000 110,000 $ 70,000

Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 5% with no change in total variable costs. 2. Reduce variable costs to 66 2 3 % of sales. 3. Reduce fixed costs by $10,000. Instructions If maximizing net income is the objective, which is the best course of action? Ans: N/A, LO: 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 174

(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.

Cost-Volume-Profit

18 - 43

Ex. 175 Marvin Co. 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 Marvin Co. 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, LO: 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 175

(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

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. 176 In the month of September, Matlock Industries 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

18 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 176 (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. 177 In 2012, Stallman Co. had a break-even point of $800,000 based on a selling price of $10 per unit and fixed costs of $240,000. In 2013, the selling price and variable costs per unit did not change, but the break-even point increased to $850,000. 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, LO: 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 177

(15–20 min.)

(a) Unit contribution margin =

Fixed Costs Break-even Sales in units $240,000 80,000

(b)

$240,000 ($800,000 ÷ $10)

= $3

Variable cost per unit Contribution margin ratio

= =

$10 – $3 = $7 $3 ÷ $10 = 30%

Fixed costs

= =

Break-even Sales × CM Ratio $850,000 × 30% = $255,000

Therefore, fixed costs increased $15,000 ($255,000 – $240,000).

Cost-Volume-Profit

18 - 45

Ex. 178 The income statement for Bradford Machine Company for 2012 appears below. BRADFORD MACHINE 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 .......................................................................................... 360,000 Net income (loss) ....................................................................................... $ (60,000) Instructions Answer the following independent questions and show computations using the contribution margin technique to support your answers: 1. What was the company's break-even point in sales dollars in 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, LO: 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 178

(15–20 min.)

$360,000 30%

$360,000 + $45,000 30% $1,350,000 $25

= $1,200,000

= $1,350,000 Total sales needed.

= 54,000 total units to be sold

40,000 actual units sold 14,000 additional units to be sold Note: Required sales in units can be obtained directly by dividing fixed costs plus profit by contribution margin per unit: ($360,000 + $45,000) ÷ ($25 – $17.50) = 54,000 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) $360,000 + $45,000 $10

= 40,500 units .

18 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 179 Webber, Inc. 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, LO: 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 179

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 break-even point.

Cost-Volume-Profit

18 - 47

Ex. 180 Werth & Garza Manufacturing's sales slumped badly in 2013 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 2013. (b) Compute the break-even point in dollars under the alternative course of action. Ans: N/A, LO: 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 180

(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 – $3X – $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. 181 Henning Co. estimates that variable costs will be 60% of sales and fixed costs will total $2,160,000. 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, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

18 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 181 (a)

(15–20 min.)

Break-even sales in units $10X = $6X + $2,160,000 $4X = $2,160,000 X = 540,000 units Break-even point in dollars X = .4X + $2,160,000 .4X = $2,160,000 X = $5,400,000

(b) Margin of safety in dollars $6,000,000 – $5,400,000 = $600,000 Margin of safety ratio $600,000 ÷ $6,000,000 = 10% (c)

Net Income Sales Variable Costs Fixed Costs Net Income

$6,000,000 (3,600,000) (2,160,000) $ 240,000

Ex. 182 Norton, Inc. has the following information available for September 2013. 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 Norton's breakeven in units. Ans: N/A, LO: 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 182

(10 min.)

(a)

NORTON, INC. COMPANY CVP Income Statement For the Month Ended September 30, 2013 _____________________________________________________________________________ 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

Cost-Volume-Profit Solution 182 (b)

18 - 49

(Cont.)

Sales = Variable costs + Fixed costs $400X = $280X + $48,000 $120X = 48,000 X = 400 units

Ex. 183 In the month of April, Avante 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, LO: 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 183 (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% $21,000 = $70,000. 30% $21,000 =1,750 units. $12

$100,000 – $70,000 = $30,000. $30,000  $100,000 = 30%

Ex. 184 Taveras Industries developed the following information for the product it sells: Sales price Variable cost of goods sold Fixed cost of goods sold Variable selling expense Variable administrative expense Fixed selling expense Fixed administrative expense

$50 per unit $28 per unit $650,000 10% of sales price $2.00 per unit $400,000 $300,000

$100,000 70,000 $ 30,000

18 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 184

(cont.)

For the year ended December 31, 2013, Taveras produced and sold 100,000 units of product. Instructions (a)

Prepare a CVP income statement using the contribution margin format for Taveras Industries for 2013.

(b)

What was the company's break-even point in units in 2013? Use the contribution margin technique.

(c)

What was the company's margin of safety in dollars in 2013?

Ans: N/A, LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 184

(20–25 min.)

(a)

TAVERAS INDUSTRIES Income Statement For the Year Ended December 31, 2013 ——————————————————————————————————————————— 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 2013. Variable costs per unit Cost of goods sold $28 Administrative 2 Selling 5 $35

Contribution margin per unit Sales price Variable cost Contribution margin

$1,600,000 ÷ $15 = 90,000 units to break even. (c)

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

$50 35 $15

Cost-Volume-Profit

18 - 51

Ex. 185 Gordon Manufacturing 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 $126,000, 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, LO: 5,7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185

(6–8 min.)

(a) 70%X – $126,000 = $140,000 Required sales = $380,000 ($266,000 ÷ .70) (b) Sales revenue Variable costs ($380,000 ×.30) Contribution margin Fixed costs Net income

$380,000 114,000 266,000 126,000 $140,000

Ex. 186 Ferris, Inc. 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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 186

(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

18 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 187 Erickson, Inc. 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, LO: 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 187

(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

Cost-Volume-Profit

18 - 53

Ex. 188 Melody Manufacturing 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 Melody Manufacturing will have to sell in order to break even. (c) Compute how many CDs Melody Manufacturing will have to sell in order to make a target net income of $16,200. Ans: N/A, LO: 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 188

(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) Solution 188

(Cont.)

(c) $20X – $12X – $9,200 = $16,200 X = 3,175 units ($25,400 ÷ $8) Ex. 189 Usher, Inc. has prepared the following cost-volume-profit graph: I B

E A F

Instructions For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item. ____

1. Activity base

____

2. Break-even point

____

3. Dollars

____

4. Fixed costs

____

5. Loss .

18 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 189

(cont.)

____

6. Profit

____

7. Revenues

____

8. Total costs

____

9. Variable costs

Ans: N/A, LO: 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 189 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. 190 Holder Manufacturing 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 Holder Manufacturing 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 Holder Manufacturing 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, LO: 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

Cost-Volume-Profit Solution 190 (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

Units sold in 2012 =

$475,000 + $125,000 $100 - $70

= 20,000 units

$475,000 + $185,000* $100 - $70 *$125,000 + $60,000 = $185,000

(b) Units sold in 2012 =

(c)

18 - 55

$475,000 + $185,000 X - $70

= 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. 191 Englehart, Inc. 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, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

18 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 191

(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.

(3)

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. 192 Kreter, Inc. earned net income of $300,000 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 192 (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. 193 Cunningham Industries 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, LO: 8, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Cost-Volume-Profit Solution 193

18 - 57

(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%

COMPLETION STATEMENTS 194. Knowledge of cost behavior is important in ______________________ analysis. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

195. A _________________ cost remains constant per unit at every level of activity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

196. Unit fixed costs __________________ with the changes in the level of activity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

197. Total fixed costs are ___________ over various levels of activities, whereas total variable costs __________________ directly and ________________ with changes in the activity level. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

198. An assumption of CVP analysis is that variable and fixed costs have a _______________ relationship with an activity base. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

199. The range over which a company expects to operate is referred to as the _____________ range. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

200. A cost that has both variable and fixed elements is referred to as a _________________ cost. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

201. The amount of revenue remaining after deducting total variable costs is called the _________________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

202. The _______________ point is when total revenues equal total costs. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

203. _________________ divided by the contribution margin ratio will give the amount of _________________ to break even. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

204. The difference between actual or expected sales and break-even sales is called the __________________________. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

18 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Answers to Completion Statements 194. 195. 196. 197. 198. 199.

cost-volume-profit (CVP) variable vary inversely constant, vary, proportionately linear relevant

200. 201. 202. 203. 204.

mixed contribution margin break-even Fixed costs, sales (in dollars) margin of safety

MATCHING 205. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Activity index Variable costs Fixed costs High-low method Relevant range

F. G. H. I. J.

Mixed costs Break-even point Contribution margin Margin of safety Contribution margin ratio

____ 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. ____ 10. A method that uses the total costs incurred at the high and low levels of activity. Ans: N/A, LO: 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.

H F J A I

6. 7. 8. 9. 10.

B G E C D

Cost-Volume-Profit

18 - 59

SHORT-ANSWER ESSAY QUESTIONS S-A E 206 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, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 206 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 207 A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. Ans: N/A, LO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 207 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 208 (a) (b)

Matt Sampson asks your help in understanding the term "activity index." Explain the meaning and importance of this term for Matt. State the two ways that variable costs may be defined.

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 208 (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. .

18 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition S-A E 209 How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 209 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 210 (Ethics) Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line. Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a 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 Patti Patterson, another manager. Patti strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable, since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable. Required: 1. Who are the stakeholders in this decision? 2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain. 3. What should Nancy do? Ans: N/A, LO: 1, 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 210 1. The stakeholders include: Nancy Stephens Hanson, Inc. Hanson’s customers 2. It is ethical to revise the costs, certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels, such as those anticipated for this project, the project is likely to be less profitable than forecast. To the extent that Nancy is submitting misleading figures in order to get her project approved, she is behaving unethically. 3. Nancy should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination.

Cost-Volume-Profit S-A E 211

18 - 61

(Communication)

For two years, Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future. The fixed costs for the department are $50,000, with $1 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, Ms. Larson is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000. Required: Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option. Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Quantitative Methods

Solution 211 The variable costs should be reduced to $0.75 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 × 80,000) – $50,000 = $240,000 – $80,000 – $50,000 = $110,000 Plan #1: Reduce Variable Costs to $0.75 Profit = ($3 × 80,000) – ($0.75 × 80,000) – $50,000 = $240,000 – $60,000 – $50,000 = $130,000 Plan #2: Reduce Fixed Costs to $35,000 Profit = ($3 × 80,000) – ($1 × 80,000) – $35,000 = $240,000 – $80,000 – $35,000 = $125,000

CHAPTER 19 COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

5 5 6 6 6 7

C K K K K AP

25. 26. a 27. a 28. a 29. a 30.

7 7 7 8 8 8

C K K K K K

88. 89. 90. 91. 92. a 93. a 94. a 95. a 96. a 97. a 98. a 99. a 100. a 101. a 102. a 103. a 104. a 105. a 106.

5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 7 7 7 7

C K K K K K K K K K K K K K K AP AP AP AP

107. 108. a 109. a 110. a 111. a 112. a 113. a 114. a 115. a 116. a 117. a 118. a 119. a 120. a 121. a 122. a 123. a 124. a 125.

7 7 7 7 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8

AP K K C K K K AP AP AP AP C C C K K C K K

132. 133.

6 6

AP AP

134. 135.

7 7

AP AP

6 7 7 7

AP AP AP AP

8 8

AP AP

7 7 8

K K K

True-False Statements 1. 2. 3. 4. 5. 6.

1 1 2 2 3 3

K K K K K K

7. 8. 9. 10. 11. 12.

3 3 3 3 3 4

K AP AP K K K

13. 14. 15. 16. 17. 18.

4 4 4 5 5 5

C C K K K K

19. 20. a 21. a 22. a 23. a 24.

Multiple Choice Questions 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2

K K K AP AP AP AP K K AP AP AP K AP AP AP AP AP AP

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3

AP K AP AP AP K K AP AP AP K C AP AP AP AP AP AP AP

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 4 4 4 4 4 5 5 5 5 5 5 5

AP AP C C AP AP AP C C K AP AP K C C K AP AP C

Brief Exercises 126. 127.

3 3

AP AP

128. 129.

4 4

AP AP

130. 131.

5 5

AP AP

Exercises 136. 137. 138. 139.

2, 5 3 3 3

AP AP AP AP

140. 141. 142. 143.

3 4 4 4

AP AN AN AN

144. 145. 146. a 147.

5 5 5 6

AN AP AP K

148. 149. a 150. a 151. a

Completion Statements 154. 155. 156.

1 2 3

K K K

157. 158. 159.

3 4 5

K K K

160. 161. a 162. a

5 6 6

This topic is dealt with in an Appendix to the chapter. .

K K K

163. 164. a 165. a

152. 153.

19 - 2

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

1. 2. 31.

TF TF MC

32. 33. 34.

MC MC MC

3. 4. 43.

TF TF MC

44. 45. 46.

MC MC MC

5. 6. 7. 8. 9.

TF TF TF TF TF

10. 11. 60. 61. 62.

TF TF MC MC MC

12. 13. 14.

TF TF TF

15. 76. 77.

TF MC MC

16. 17. 18. 19.

TF TF TF TF

20. 81. 82. 83.

TF MC MC MC

21. 22. 23.

TF TF TF

93. 94. 95.

MC MC MC

24. 25. 26. 27. 103.

TF TF TF TF MC

104. 105. 106. 107. 108.

MC MC MC MC MC

28. 29.

TF TF

30. 121.

TF MC

Item

Type

Item

Type

Item

Learning Objective 1 35. MC 38. MC 41. 36. MC 39. MC 42. 37. MC 40. MC 154. Learning Objective 2 47. MC 50. MC 53. 48. MC 51. MC 54. 49. MC 52. MC 55. Learning Objective 3 63. MC 68. MC 73. 64. MC 69. MC 74. 65. MC 70. MC 75. 66. MC 71. MC 126. 67. MC 72. MC 127. Learning Objective 4 78. MC 128. BE 142. 79. MC 129. BE 143. 80. MC 141. Ex 158. Learning Objective 5 84. MC 88. MC 92. 85. MC 89. MC 130. 86. MC 90. MC 131. 87. MC 91. MC 144. Learning Objective 6a 96. MC 99. MC 102. 97. MC 100. MC 132. 98. MC 101. MC 133. Learning Objective 7a 109. MC 114. MC 119. 110. MC 115. MC 120. 111. MC 116. MC 134. 112. MC 117. MC 135. 113. MC 118. MC 149. Learning Objective 8a 122. MC 124. MC 152. 123. MC 125. MC 153.

Note: TF = True-False MC = Multiple Choice

C = Completion BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

Type

Item

Type

Item

Type

MC MC MC

56. 57. 58.

MC MC MC

59. 136. 155.

MC Ex C

MC MC MC BE BE

137. 138. 139. 140. 156.

Ex Ex Ex Ex C

157.

145. 146. 159. 160.

Ex Ex C C

MC BE BE

147. 148. 161.

Ex Ex C

162.

MC MC BE BE Ex

150. 151. 163. 164.

Ex Ex C C

Ex Ex

165.

MC MC C

Ex Ex C MC BE BE Ex

Ex = Exercise

Cost-Volume-Profit Analysis: Additional Issues

19 - 3

CHAPTER LEARNING OBJECTIVES 1. 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. 2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The breakeven point in units is fixed costs divided by contribution margin per unit. The break-even point in dollars is fixed costs divided by the contribution margin ratio. These formulas can also be used to determine units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage. 3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars is calculated using the weighted-average contribution margin ratio. 4 Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income. 5. Understand how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage will experience a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage can be measured by dividing contribution margin by net income. a

6. 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.

7. Discuss net income effects under absorption costing versus variable costing. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period.

8. Discuss the merits of absorption versus variable costing for management decisionmaking. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

19 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

TRUE-FALSE STATEMENTS 1.

The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

When a company is in its early stages of operation, its primary goal is to generate a target net income.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

The margin of safety tells a company how far sales can drop before it will be operating at a loss.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

Sales mix is a measure of the percentage increase in sales from period to period.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Sales mix is not important to managers when different products have substantially different contribution margins.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics Solution: (.75) ($80) + (.25) ($240) = $120

If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

10.

Net income can be increased or decreased by changing the sales mix.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

11.

The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 12.

19 - 5

When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

13.

When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14.

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

15.

According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

16.

Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

17.

Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

18.

The degree of operating leverage provides a measure of a company’s earnings volatility.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

19.

If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

20.

A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics a

21.

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

22.

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

19 - 6 a

23.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

24.

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Ans: F, LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

25.

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

26.

When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

27.

When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

28.

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

29.

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics a

30.

The use of absorption costing facilitates cost-volume-profit analysis.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements Item

1. 2. 3. 4. 5.

Ans.

T F F T F

Item

6. 7. 8. 9. 10.

Ans.

F T T T T

Item

11. 12. 13. 14. 15.

Ans.

F T F T T

Item

Ans.

16. 17. 18. 19. 20.

T F T T F

Item a

21. 22. a 23. a 24. a 25. a

Ans.

F T T F F

Item a

26. 27. a 28. a 29. a 30. a

Ans.

T F T T F

Cost-Volume-Profit Analysis: Additional Issues

19 - 7

MULTIPLE CHOICE QUESTIONS 31.

Cost-volume-profit analysis is the study of the effects of a. changes in costs and volume on a company’s profit. b. cost, volume, and profit on the cash budget. c. cost, volume, and profit on various ratios. d. changes in costs and volume on a company’s profitability ratios.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

32.

The CVP income statement classifies costs a. as variable or fixed and computes contribution margin. b. by function and computes a contribution margin. c. as variable or fixed and computes gross margin. d. by function and computes a gross margin.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

33.

Contribution margin is the amount of revenue remaining after deducting a. cost of goods sold. b. fixed costs. c. variable costs. d. contra-revenue.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

34.

Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $88,000. Contribution margin is a. $400,000. b. $240,000. c. $160,000. d. $72,000.

Ans: c, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (4,000) ($100 − $60) = $160,000

35.

Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $88,000. Net income is a. $400,000. b. $160,000. c. $152,000. d. $72,000.

Ans: d, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (4,000) ($100 − $60) − $88,000 = $72,000

19 - 8 36.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition For Buffalo Co., at a sales level of 5,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit? a. $4.20 b. $5.00 c. $10.00 d. $15.00

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($75,000 − $50,000) / 5,000 = $5.00

37.

If contribution margin is $120,000, sales is $300,000, and net income is $40,000, then variable and fixed expenses are a. b. c. d.

Variable $180,000 $180,000 $80,000 $420,000

Fixed $260,000 $80,000 $180,000 $260,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $300,000 − $120,000 = $180,000; $120,000 − $40,000 = $80,000

38.

In a CVP income statement, cost of goods sold is generally a. completely a variable cost. b. completely a fixed cost. c. neither a variable cost nor a fixed cost. d. partly a variable cost and partly a fixed cost.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

39. In a CVP income statement, a selling expense is generally a. completely a variable cost. b. completely a fixed cost. c. neither a variable cost nor a fixed cost. d. partly a variable cost and partly a fixed cost. Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

40.

Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,480,000, what is its contribution margin? a. $160,000 b. $760,000 c. $820,000 d. $880,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA Solution: $1,480,000 − $420,000 − $300,000 = $760,000

Cost-Volume-Profit Analysis: Additional Issues

19 - 9

41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,480,000, what is its net income? a. $160,000 b. $760,000 c. $820,000 d. $880,000 Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $1,480,000 − $420,000 − $240,000 − $300,000 − $360,000 = $160,000

42.

Woolford’s CVP income statement included sales of 4,000 units, a selling price of $50, variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are a. $55,000. b. $80,000. c. $120,000. d. $200,000.

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (4,000) ($50 − $30) − $25,000 = $55,000

43.

The contribution margin ratio is a. sales divided by contribution margin. b. sales divided by fixed expenses. c. sales divided by variable expenses. d. contribution margin divided by sales.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

44.

For Pierce Company, sales is $500,000, variable expenses are $330,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is a. 10%. b. 28%. c. 34%. d. 66%.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($500,000 − $330,000)  $500,000 = 34%

45.

For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution margin per unit is $48. What is the break-even point? a. $2,083,334 sales dollars b. $625,000 sales dollars c. 20,834 units d. 6,250 units

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $300,000 / $48 = 6,250

19 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 46.

For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution margin ratio is 36%. What is net income? a. $90,000 b. $162,000 c. $378,000 d. $540,000

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (.36) ($1,500,000) – $450,000 = $90,000

47.

For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution margin ratio is 36%. What are the total variable expenses? a. $288,000 b. $540,000 c. $960,000 d. $1,500,000

48.

In 2013, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $160,000. What was Teller’s 2013 net income? a. $200,000 b. $360,000 c. $840,000 d. $1,200,000

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (3,000) ($400 − $280) − $160,000 = $200,000

49.

In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $180,000. The same selling price, variable expenses, and fixed expenses are expected for 2013. What is Teller’s break-even point in sales dollars for 2013? a. $600,000 b. $1,200,000 c. $1,200,000 d. $1,714,286

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $180,000 / [($400 − $280) / $400] = $600,000

50.

In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $180,000. The same selling price, variable expenses, and fixed expenses are expected for 2013. What is Teller’s break-even point in units for 2013? a. 1,500 b. 3,375 c. 4,500 d. 7,500

Cost-Volume-Profit Analysis: Additional Issues 19 - 11 51.

The required sales in units to achieve a target net income is a. (sales + target net income) divided by contribution margin per unit. b. (sales + target net income) divided by contribution margin ratio. c. (fixed cost + target net income) divided by contribution margin per unit. d. (fixed cost + target net income) divided by contribution margin ratio.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

52.

For Wickham Co., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $400,000? a. $1,111,111 b. $1,666,666 c. $2,777,778 d. $5,555,556

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($600,000 + $400,000) / .36 = $2,777,778

53.

Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each), when the break-even point was 75,000 units. Warner’s margin of safety ratio is a. 25%. b. 33%. c. 75%. d. 125%.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (100,000 − 75,000) / 100,000 = 25%

54.

For Wilder Corporation, sales is $1,200,000 (6,000 units), fixed expenses are $360,000, and the contribution margin per unit is $80. What is the margin of safety in dollars? a. $60,000 b. $300,000 c. $540,000 d. $840,000

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $360,000 / $80 = 4,500; $1,200,000 / 6,000 = $200; $200 (6,000 − 4,500) = $300,000

55.

Margin of safety in dollars is a. expected sales divided by break-even sales. b. expected sales less break-even sales. c. actual sales less expected sales. d. expected sales less actual sales.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

56.

The margin of safety ratio is a. expected sales divided by break-even sales. b. expected sales less break-even sales. c. margin of safety in dollars divided by expected sales. d. margin of safety in dollars divided by break-even sales.

19 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 57.

In 2012, Hagar Corp. sold 3,000 units at $500 each. Variable expenses were $350 per unit, and fixed expenses were $455,000. The same variable expenses per unit and fixed expenses are expected for 2013. If Hagar cuts selling price by 4%, what is Hagar’s breakeven point in units for 2013? a. 3,033 b. 3,159 c. 3,360 d. 3,500

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $455,000 / [($500) (1 − .04) − $350] = 3,500

58.

In 2012, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $250,000. The same selling price is expected for 2013. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow’s break-even point in units for 2013? a. 1,000 b. 1,200 c. 1,250 d. 1,500

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($250,000) (1.20) / [$500 − ($250) (1 − .20)] = 1,000

59.

In 2012, Raleigh sold 1,000 units at $500 each, and earned net income of $50,000. Variable expenses were $300 per unit, and fixed expenses were $150,000. The same selling price is expected for 2013. Raleigh’s variable cost per unit will rise by 10% in 2013 due to increasing material costs, so they are tentatively planning to cut fixed costs by $15,000. How many units must Raleigh sell in 2013 to maintain the same income level as 2012? a. 794 b. 971 c. 1,176 d. 1,088

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($150,000 − $15,000 + $50,000) / [$500 − ($300) (1.10)] = 1,088

60.

Sales mix is a. the relative percentage in which a company sells its multiple products. b. the trend of sales over recent periods. c. the mix of variable and fixed expenses in relation to sales. d. a measure of leverage used by the company.

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

61.

In a sales mix situation, at any level of units sold, net income will be higher if a. more higher contribution margin units are sold than lower contribution margin units. b. more lower contribution margin units are sold than higher contribution margin units. c. more fixed expenses are incurred. d. weighted-average unit contribution margin decreases.

Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 13 62.

Ramirez Corporation sells two types of computer chips. The sales mix is 30% (Q-Chip) and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $60 and a selling price of $100. Q-Chip Plus has variable costs per unit of $70 and a selling price of $130. The weighted-average unit contribution margin for Ramirez is a. $46. b. $50. c. $54. d. $100.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: (.3) ($100 − $60) + (.7) ($130 − $70) = $54

63.

Capitol Manufacturing sells 3,000 units of Product A annually, and 7,000 units of Product B annually. The sales mix for Product A is a. 30%. b. 43%. c. 70%. d. Cannot determine from information given.

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: 3,000 / (3,000 + 7,000) = 30%

64.

Ramirez Corporation sells two types of computer chips. The sales mix is 30% (Q-Chip) and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $60 and a selling price of $100. Q-Chip Plus has variable costs per unit of $70 and a selling price of $130. Ramirez’s fixed costs are $540,000. How many units of Q-Chip would be sold at the break-even point? a. 3,000 b. 3,522 c. 5,000 d. 7,000

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $540,000 / [(.3) ($100 − $60) + (.7) ($130 − $70)] = 10,000; 10,000 × 30% = 3,000

65.

Roosevelt Corporation has a weighted-average unit contribution margin of $40 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. How many Standards would Roosevelt sell at the break-even point? a. 18,000 b. 27,000 c. 30,000 d. 45,000

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($1,800,000 / $40) × [40,000 / (60,000 + 40,000)] = 18,000

19 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 66.

Roosevelt Corporation has a weighted-average unit contribution margin of $40 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. At the expected sales level, Roosevelt’s net income will be a. $(200,000). b. $ - 0 -. c. $2,200,000. d. $4,000,000.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ($40) (40,000 + 60,000) − $1,800,000 = $2,200,000

67.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The weighted-average contribution margin ratio is a. 37%. b. 40%. c. 43%. d. 50%.

68.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The break-even point in dollars is a. $1,642,800. b. $10,325,582. c. $11,100,000. d. $12,000,000.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $4,440,000 / [(.65) (.30) + (.35) (.50)] = $12,000,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 15 69.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will sales be for the Sporting Goods Division at the break-even point? a. $3,600,000 b. $4,200,000 c. $6,711,628 d. $7,800,000

70.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $4,440,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will be the total contribution margin at the break-even point? a. $3,820,466 b. $4,440,000 c. $4,480,000 d. $5,160,000

Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $4,440,000 / [(.65) (.30) + (.35) (.50)] = $12,000,000; ($12,000,000) × [(.65) (.30) + (.35) (.50)] = $4,440,000

71.

A shift from low-margin sales to high-margin sales a. may increase net income, even though there is a decline in total units sold. b. will always increase net income. c. will always decrease net income. d. will always decrease units sold.

Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

72.

A shift from high-margin sales to low-margin sales a. may decrease net income, even though there is an increase in total units sold. b. will always decrease net income. c. will always increase net income. d. will always increase units sold.

Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

19 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

73.

MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available: Sales Variable costs Contribution margin Total fixed costs

Standard Division $400,000 280,000 $120,000

Premium Division $600,000 360,000 $240,000

Total $1,000,000

$320,000

What is the weighted-average contribution margin ratio? a. 34% b. 35% c. 36% d. 50% Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($120,000 + $240,000) / $1,000,000 = 36%

74.

Standard Division $400,000 280,000 $120,000

Premium Division $600,000 360,000 $240,000

Total $1,000,000

$320,000

What is the break-even point in dollars? a. $115,200 b. $888,889 c. $914,286 d. $941,117 Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $320,000 / [($120,000 + $240,000) / $1,000,000] = $888,889

75.

The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%. The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are $1,110,000. What is Novotna’s break-even point in dollars? a. $388,500 b. $3,000,000 c. $3,171,428 d. $3,363,636

Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $1,110,000 / [(.70) (.40) + (.30) (.30)] = $3,000,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 17 76. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 3,000 machine hours available to manufacture a product, income will be a. $6,000 more if Product A is made. b. $6,000 less if Product B is made. c. $6,000 less if Product A is made. d. the same if either product is made. Ans: c, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: [($16 / 2) – ($30 / 3)] × 3,000 = $6,000

77.

Brooks Corporation can sell all the units it can produce of either Plain or Fancy but not both. Plain has a unit contribution margin of $120 and takes two machine hours to make and Fancy has a unit contribution margin of $150 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Brooks do? a. Make Fancy which creates $30 more profit per unit than Plain does. b. Make Plain which creates $10 more profit per machine hour than Fancy does. c. Make Plain because more units can be made and sold than Fancy. d. The same total profits exist regardless of which product is made.

Ans: b, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($120 / 2) – ($150 / 3) = $10

78.

What is the key factor in determining sales mix if a company has limited resources? a. Contribution margin per unit of limited resource b. The amount of fixed costs per unit c. Total contribution margin d. The cost of limited resources

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

79.

Greg’s Breads can produce and sell only one of the following two products: Oven Hours Required Muffins 0.2 Coffee Cakes 0.3

Contribution Margin Per Unit $3 $4

The company has oven capacity of 1,200 hours. How much will contribution margin be if it produces only the most profitable product? a. $12,000 b. $16,000 c. $18,000 d. $24,000 Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $3 / .2 = $15; $4 / .3 = $13.30; ($15) (1,200) = $18,000

19 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 80.

Curtis Corporation’s contribution margin is $20 per unit for Product A and $24 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 a. $10.00 $6.00 b. $10.00 $6.66 c. $8.00 $6.00 d. $8.00 $6.66

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $20 / 2 = $10; $24 / 4 = $6

81.

Cost structure a. refers to the relative proportion of fixed versus variable costs that a company incurs. b. generally has little impact on profitability. c. cannot be significantly changed by companies. d. refers to the relative proportion of operating versus nonoperating costs that a company incurs.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

82.

Outsourcing production will a. reduce fixed costs and increase variable costs. b. reduce variable costs and increase fixed costs. c. have no effect on the relative proportion of fixed and variable costs. d. make the company more susceptible to economic swings.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

83.

Reducing reliance on human workers and instead investing heavily in computers and online technology will a. reduce fixed costs and increase variable costs. b. reduce variable costs and increase fixed costs. c. have no effect on the relative proportion of fixed and variable costs. d. make the company less susceptible to economic swings.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

84.

Cost structure refers to the relative proportion of a. selling expenses versus administrative expenses. b. selling and administrative expenses versus cost of goods sold. c. contribution margin versus sales. d. none of the above.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

Cost-Volume-Profit Analysis: Additional Issues 19 - 19

85.

Mercantile Corporation has sales of $2,000,000, variable costs of $1,100,000, and fixed costs of $750,000. Mercantile’s degree of operating leverage is a. 1.22. b. 1.47. c. 1.20. d. 6.00.

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($2,000,000 – $1,100,000) / ($2,000,000 – $1,100,000 – $750,000)

86.

Mercantile Corporation has sales of $2,000,000, variable costs of $1,100,000, and fixed costs of $750,000. Mercantile’s margin of safety ratio is a. .08. b. .17. c. .20. d. .83.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $750,000 / (($2,000,000-$1,100,000)/$2,000,000) = 1,666,667; (($2,000,000-1,666,667)/$2,000,000 = .17

87.

Which of the following statements is not true? a. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales. b. Companies that have higher fixed costs relative to variable costs have higher operating leverage. c. When a company’s sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly. d. When a company’s sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

Ans: d, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

88.

Miller Manufacturing’s degree of operating leverage is 1.5. Warren Corporation’s degree of operating leverage is 6. Warren’s earnings would go up (or down) by ________ as much as Miller’s with an equal increase (or decrease) in sales. a. 1/4 b. 4.5 times c. 4 times d. 7.5 times

Ans: c, LO: 5, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: 6 / 1.5 = 4

19 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

89.

The margin of safety ratio a. is computed as actual sales divided by break-even sales. b. indicates what percent decline in sales could be sustained before the company would operate at a loss. c. measures the ratio of fixed costs to variable costs. d. is used to determine the break-even point.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

90.

A cost structure which relies more heavily on fixed costs makes the company a. more sensitive to changes in sales revenue. b. less sensitive to changes in sales revenue. c. either more or less sensitive to changes in sales revenue, depending on other factors. d. have a lower break-even point.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

91.

A company with a higher contribution margin ratio is a. more sensitive to changes in sales revenue. b. less sensitive to changes in sales revenue. c. either more or less sensitive to changes in sales revenue, depending on other factors. d. likely to have a lower breakeven point.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

92.

The degree of operating leverage a. does not provide a reliable measure of a company’s earnings volatility. b. cannot be used to compare companies. c. is computed by dividing total contribution margin by net income. d. measures how much of each sales dollar is available to cover fixed expenses.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

93.

Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using a. full costing. b. absorption costing. c. variable costing. d. product costing.

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

94.

When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using a. operations costing. b. absorption costing. c. variable costing. d. product costing.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Cost-Volume-Profit Analysis: Additional Issues 19 - 21 a

95.

Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using a. full costing. b. absorption costing. c. product costing. d. variable costing.

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

96.

Under absorption costing and variable costing, how are fixed manufacturing costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

97.

Under absorption costing and variable costing, how are variable manufacturing costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

98.

Under absorption costing and variable costing, how are direct labor costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

99.

Fixed selling expenses are period costs a. under both absorption and variable costing. b. under neither absorption nor variable costing. c. under absorption costing, but not under variable costing. d. under variable costing, but not under absorption costing.

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

100. Which cost is not charged to the product under variable costing? a. Direct materials b. Direct labor c. Variable manufacturing overhead d. Fixed manufacturing overhead

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

19 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

101. Which cost is charged to the product under variable costing? a. Variable manufacturing overhead b. Fixed manufacturing overhead c. Variable administrative expenses d. Fixed administrative expenses

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

102. Variable costing a. is used for external reporting purposes. b. is required under GAAP. c. treats fixed manufacturing overhead as a period cost. d. is also known as full costing.

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

103. Sprinkle Co. sells its product for $20 per unit. During 2013, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $5, direct labor $3, and variable overhead $1. Fixed costs are: $240,000 manufacturing overhead, and $30,000 selling and administrative expenses. The per unit manufacturing cost under absorption costing is a. $8. b. $9. c. $13. d. $14.

Ans: c, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: $5 + $3 + $1 + ($240,000 / 60,000) = $13 a

104. Sprinkle Co. sells its product for $20 per unit. During 2013, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $5, direct labor $3, and variable overhead $1. Fixed costs are: $240,000 manufacturing overhead, and $30,000 selling and administrative expenses. The per unit manufacturing cost under variable costing is a. $8. b. $9. c. $13. d. $14.

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: $5 + $3 + $1 = $9

Cost-Volume-Profit Analysis: Additional Issues 19 - 23

105. Sprinkle Co. sells its product for $20 per unit. During 2013, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $5, direct labor $3, and variable overhead $1. Fixed costs are: $240,000 manufacturing overhead, and $30,000 selling and administrative expenses. Cost of goods sold under absorption costing is a. $450,000. b. $540,000. c. $650,000. d. $520,000.

Ans: c, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: [$5 + $3 + $1 + ($240,000 / 60,000)] × 50,000 = $650,000 a

106. Sprinkle Co. sells its product for $20 per unit. During 2013, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $5, direct labor $3, and variable overhead $1. Fixed costs are: $240,000 manufacturing overhead, and $30,000 selling and administrative expenses. Ending inventory under variable costing is a. $90,000. b. $130,000. c. $200,000. d. $450,000.

Ans: a, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ($5 + $3 + $1) (10,000) = $90,000 a

107. Sprinkle Co. sells its product for $20 per unit. During 2013, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $5, direct labor $3, and variable overhead $1. Fixed costs are: $240,000 manufacturing overhead, and $30,000 selling and administrative expenses. Under absorption costing, what amount of fixed overhead is deferred to a future period? a. $10,000 b. $40,000 c. $50,000 d. $240,000

108. Net income under absorption costing is gross profit less a. cost of goods sold. b. fixed manufacturing overhead and fixed selling and administrative expenses. c. fixed manufacturing overhead and variable manufacturing overhead. d. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

19 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

109. Net income under variable costing is contribution margin less a. cost of goods sold. b. fixed manufacturing overhead and fixed selling and administrative expenses. c. fixed manufacturing overhead and variable manufacturing overhead. d. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: b, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics a

110. The manufacturing cost per unit for absorption costing is a. usually, but not always, higher than manufacturing cost per unit for variable costing. b. usually, but not always, lower than manufacturing cost per unit for variable costing. c. always higher than manufacturing cost per unit for variable costing. d. always lower than manufacturing cost per unit for variable costing.

Ans: c, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

111. The one primary difference between variable and absorption costing is that under a. variable costing, companies charge the fixed manufacturing overhead as an expense in the current period. b. absorption costing, companies charge the fixed manufacturing overhead as an expense in the current period. c. variable costing, companies charge the variable manufacturing overhead as an expense in the current period. d. absorption costing, companies charge the variable manufacturing overhead as an expense in the current period.

Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

112. Net income under absorption costing is higher than net income under variable costing a. when units produced exceed units sold. b. when units produced equal units sold. c. when units produced are less than units sold. d. regardless of the relationship between units produced and units sold.

Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

113. Some fixed manufacturing overhead costs of the current period are deferred to future periods under a. absorption costing. b. variable costing. c. both absorption and variable costing. d. neither absorption nor variable costing.

Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Cost-Volume-Profit Analysis: Additional Issues 19 - 25 a

114. Nielson Corp. sells its product for $8,800 per unit. Variable costs per unit are: manufacturing, $4,800, and selling and administrative, $100. Fixed costs are: $24,000 manufacturing overhead, and $32,000 selling and administrative. There was no beginning inventory at 1/1/12. Production was 20 units per year in 2012 –2014. Sales was 20 units in 2012, 16 units in 2013, and 24 units in 2014. Income under absorption costing for 2013 is a. $6,400. b. $11,200. c. $12,800. d. $17,600.

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (16) [$8,800 – $4,800 – $100 – ($24,000 / 20)] – $32,000 = $11,200 a

115. Nielson Corp. sells its product for $8,800 per unit. Variable costs per unit are: manufacturing, $4,800, and selling and administrative, $100. Fixed costs are: $24,000 manufacturing overhead, and $32,000 selling and administrative. There was no beginning inventory at 1/1/12. Production was 20 units per year in 2012 –2014. Sales was 20 units in 2012, 16 units in 2013, and 24 units in 2014. Income under absorption costing for 2014 is a. $26,400. b. $31,200. c. $32,800. d. $37,600.

Ans: c, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (24) [$8,800 – $4,800 – $100 – ($24,000 / 20)] – $32,000 = $32,800 a

116. Nielson Corp. sells its product for $8,800 per unit. Variable costs per unit are: manufacturing, $4,800, and selling and administrative, $100. Fixed costs are: $24,000 manufacturing overhead, and $32,000 selling and administrative. There was no beginning inventory at 1/1/12. Production was 20 units per year in 2012 –2014. Sales was 20 units in 2012, 16 units in 2013, and 24 units in 2014. Income under variable costing for 2013 is a. $6,400. b. $11,200. c. $12,800. d. $17,600.

19 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

117.

Nielson Corp. sells its product for $8,800 per unit. Variable costs per unit are: manufacturing, $4,800, and selling and administrative, $100. Fixed costs are: $24,000 manufacturing overhead, and $32,000 selling and administrative. There was no beginning inventory at 1/1/12. Production was 20 units per year in 2012 –2014. Sales was 20 units in 2012, 16 units in 2013, and 24 units in 2014. Income under variable costing for 2014 is a. $26,400. b. $31,200. c. $32,800. d. $37,600.

Ans: d, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: (24) ($8,800 – $4,800 – $100) – $24,000 – $32,000 = $37,600 a

118. Nielson Corp. sells its product for $8,800 per unit. Variable costs per unit are: manufacturing, $4,800, and selling and administrative, $100. Fixed costs are: $24,000 manufacturing overhead, and $32,000 selling and administrative. There was no beginning inventory at 1/1/12. Production was 20 units per year in 2012 –2014. Sales was 20 units in 2012, 16 units in 2013, and 24 units in 2014. For the three years 2012–2014, a. absorption costing income exceeds variable costing income by $8,000. b. absorption costing income equals variable costing income. c. variable costing income exceeds absorption costing income by $8,000. d. absorption costing income may be greater than, equal to, or less than variable costing income, depending on the situation.

Ans: b, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

119. When production exceeds sales, a. some fixed manufacturing overhead costs are deferred until a future period under absorption costing. b. some fixed manufacturing overhead costs are deferred until a future period under variable costing. c. variable and fixed manufacturing overhead costs are deferred until a future period under absorption costing. b. variable and fixed manufacturing overhead costs are deferred until a future period under variable costing.

Ans: a, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting a

120. When production exceeds sales, a. ending inventory under variable costing will exceed ending inventory under absorption costing. b. ending inventory under absorption costing will exceed ending inventory under variable costing. c. ending inventory under absorption costing will be equal to ending inventory under variable costing. d. ending inventory under absorption costing may exceed, be equal to, or be less than ending inventory under variable costing.

Ans: b, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Cost-Volume-Profit Analysis: Additional Issues 19 - 27 a

121. Management may be tempted to overproduce when using a. variable costing, in order to increase net income. b. variable costing, in order to decrease net income. c. absorption costing, in order to increase net income. d. absorption costing, in order to decrease net income.

Ans: c, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

122. If a division manager’s compensation is based upon the division’s net income, the manager may decide to meet the net income targets by increasing production when using a. variable costing, in order to increase net income. b. variable costing, in order to decrease net income. c. absorption costing, in order to increase net income. d. absorption costing, in order to decrease net income.

123. Expected sales for next year for the Beresford Company is 150,000 units. Curt Planters, manager of the Beresford Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 150,000 units or 180,000 units. The Beresford Company will have higher net income if Curt Planters decides to produce a. 180,000 units if income is measured under absorption costing. b. 180,000 units if income is measured under variable costing. c. 150,000 units if income is measured under absorption costing. d. 150,000 units if income is measured under variable costing.

Ans: a, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

124. Which of the following is a potential advantage of variable costing relative to absorption costing? a. Net income is affected by changes in production levels. b. The use of variable costing is consistent with cost-volume-profit analysis. c. Net income computed under variable costing is not closely tied to changes in sales levels. d. More than one of the above.

Ans: b, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics a

125. Companies that use just-in-time processing techniques will a. have greater differences between absorption and variable costing net income. b. have smaller differences between absorption and variable costing net income. c. not be able to use absorption costing. d. not be able to use variable costing.

Ans: b, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

19 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Answers to Multiple Choice Questions Item

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Ans.

a a c c d b b d d b a a d c

Item

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.

Ans.

d a c a a a c c a b b c d a

Item

59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

Ans.

d a a c a a a c a d d b a a

Item

Ans.

73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

c b b c b a c a a a b d d b

Item

87. 88. 89. 90. 91. 92. a 93. a 94. a 95. a 96. a 97. a 98. a 99. a 100.

Ans.

d c b a a c c b d b a a a d

Item a

101. 102. a 103. a 104. a 105. a 106. a 107. a 108. a 109. a 110. a 111. a 112. a 113. a 114. a

Ans.

a c c b c a b d b c a a a b

Item a

115. 116. a 117. a 118. a 119. a 120. a 121. a 122. a 123. a 124. a 125. a

Ans.

c a d b a b c c a b b

Cost-Volume-Profit Analysis: Additional Issues 19 - 29

BRIEF EXERCISES BE 126 Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $70 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%. Instructions What is the weighted-average unit contribution margin? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 126

(6–8 min.)

Sleek: 50% × ($30 – $18) = Smooth: 30% × ($50 – $30) = Potent: 20% × ($70 – $45) = Weighted-average unit contribution margin

$ 6 6 5 $17

BE 127 Lazaro Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 40%; and Deluxe, 45%. Lazaro’s fixed costs are $1,995,000. Instructions What is the dollar amount of Deluxe sales at the break-even point? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 127

(6–8 min.)

Standard: 60% × 40% = Deluxe: 40% × 45% = Weighted-average contribution margin ratio

24% 18% 42%

$1,995,000 ÷ 42% = $4,750,000 break-even point in dollars Dollar amount of Deluxe sales at the break-even point: $4,750,000 × 40% = $1,900,000.

BE 128 Hunt, Inc. provided the following information concerning two products: Product 12 $22 2 hours

Contribution margin per unit Machine hours required for one unit

Product 43 $18 1.5 hours

Instructions Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

19 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 128

(3–5 min.)

Product 12: $22 ÷ 2.0 hours = $11 Product 43: $18 ÷ 1.5 hours = $12 Sales personnel should push Product 43.

BE 129 Gallery Corporation makes two products, footballs and baseballs. Additional information follows: Units Sales Variable costs Fixed costs Net income Yards of leather per unit Profit per unit Contribution margin per unit

Footballs 2,000 $60,000 24,000 10,000 $26,000 1.25 $13.00 $18.00

Baseballs 2,500 $25,000 13,750 5,250 $ 6,000 0.25 $2.40 $4.50

Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 400 of each product are necessary for sales. Instructions How many units of each must be produced? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 129

(5–7 min.)

Contribution margin per yard

Footballs $18 ÷ 1.25 = $14.40

Baseballs $4.50 ÷ .25 = $18

Produce more baseballs since CM per constraint is more. Minimum for footballs: 400 × 1.25 yd. = 500 yd. Material remaining for baseballs: 2,500 – 500 = 2,000 yd. # of baseballs: 2,000 ÷ .25 = 8,000 baseballs

BE 130 Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000. Instructions Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 31 Solution 130 Before: After

(4–6 min.) Contribution margin $250,000 $300,000

÷ ÷ ÷

Net Income $100,000 $100,000

= = =

Degree of operating leverage 2.50 3.00

After the new equipment is purchased, Marina’s earnings would go up (or down) by 1.2 times (3.00 ÷ 2.50) as much as it would have before the purchase, with an equal increase (or decrease) in sales.

BE 131 The degree of operating leverage for Gurney, Inc.. and Dough Company are 2.4 and 5.6 respectively. Both have net incomes of $60,000. Determine their respective contribution margins. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 131

(4–6 min.)

Degree of operating leverage = Contribution margin ÷ Net Income Gurney Inc. Contribution margin

2.4 = Contribution margin ÷ $60,000 = $60,000  2.4 = $144,000

Dough Company Contribution margin

5.6 = Contribution margin ÷ 60,000 = $60,000  5.6 = $336,000

BE 132

Swift Co. produces footballs. It incurred the following costs this year: Direct materials Direct labor Fixed manufacturing overhead Variable manufacturing overhead Fixed selling and administrative expenses Variable selling and administrative expenses

$35,000 31,000 22,000 38,000 23,000 14,000

Instructions What are the total product costs for the company under variable costing? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

Solution 132

(3–5 min.)

Direct materials Direct labor Variable manufacturing overhead Total product costs under variable costing

$ 35,000 31,000 38,000 $104,000

19 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

BE 133

$35,000 31,000 22,000 38,000 23,000 14,000

Instructions What are the total product costs for the company under absorption costing? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

Solution 133

(3–5 min.)

Direct materials Direct labor Fixed manufacturing overhead Variable manufacturing overhead Total product costs under absorption costing

$ 35,000 31,000 22,000 38,000 $126,000

BE 134

During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000. Instructions Prepare a variable costing income statement. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 134

(5–7 min.)

Sales (55,000 × $10) Variable cost of goods sold (55,000 × $4) Variable selling and administrative expenses (55,000 × $1) Contribution margin Fixed manufacturing overhead Fixed selling and administrative expenses Net income

$550,000 $220,000 55,000 120,000 30,000

275,000 275,000 150,000 $125,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 33 a

BE 135

During 2013, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000. Instructions Prepare an absorption costing income statement. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 135

(5–7 min.)

Sales (55,000 × $10) Cost of goods sold (55,000 × $6) Gross margin Variable selling and administrative expenses (55,000 × $1) Fixed selling and administrative expenses Net income

$550,000 330,000 220,000 $55,000 30,000

85,000 $135,000

EXERCISES Ex. 136 Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2013, is as follow. KINDLE, INC. Income Statement Year Ending December 31, 2013 Sales $130,000 Cost of goods sold Variable $58,500 Fixed 14,350 72,850 Gross margin 57,150 Selling and marketing expenses Commissions $16,250 Fixed costs 17,100 33,350 Operating income $ 23,800 The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million. Instructions (a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.'s breakeven point in sales dollars for the year 2013. (b) Calculate the company's break-even point in sales dollars for the year 2013 if it hires its own sales force to replace the network of agents. (c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff. Ans: N/A, LO: 2, 5, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

19 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Solution 136

(15–18 min.)

(a)

Reformat the income statement to CVP format All amount are in $000s. Sales ........................................................................... $130,000 Variable costs (58,500 + 16,250) ................................. 74,750 Contribution margin ..................................................... 55,250 Less: Fixed costs (14,350 + 17,100)............................ 31,450 Operating income ........................................................ 23,800 Contribution margin ratio = $55,250 + $130,000 = 42.5% Break-even point = $31,450 + 42.5% = 74,000

(b)

If a hired workforce replaces sales agents, commissions will be reduced to 10% of sales, or $13,000, but fixed costs will increase by $13,000. Sales ........................................................................... $130,000 Variable costs (58,500 + 13,000) ................................. 71,500 Contribution margin ..................................................... 58,500 Less: Fixed costs (31,450 + 13,000)............................ 44,450 Operating income ........................................................ 14,050

Contribution margin ratio = 58,500  130,000 = 45% Break-even point = 44,450  45% = 98,778 (c)

Operating leverage = contribution margin  operating income Current situation: from part (a) 55,250  23,800 = 2.32 Proposed situation: from part (b) 58,500  14,050 = 4.16

Ex. 137 Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $12,000,000 (that is, $60,000 per service outlet). Instructions (a) Calculate the dollar amount of each type of service that the company must provide in order to break even. (b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 35 Solution 137

(12–15 min.)

(a) Weighted-Average Contribution Margin Ratio Oil changes × .15 Brake repair × .15 .30 Total break-even sales in dollars = $12,000,000  .30 = $40,000,000

Oil changes Brake repair Total sales

Sales Mix Percentage 75% 25%

Contribution Margin Ratio 20% 60%

Sales Mix Percentage 75% 25%

Total Break-even Sales in Dollars $40,000,000 $40,000,000

× ×

Sales Dollars Needed Per Product $30,000,000 $10,000,000 $40,000,000

(b) Sales to achieve target net income = ($60,000 + $45,000)  .30 = $350,000 Sales Dollars Sales Mix Total Needed Per Product Percentage Sales Needed Per Store Oil changes 75% × $350,000 $262,500 Brake repair 25% × $350,000 $ 87,500 Total sales $350,000

Ex. 138 Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows: Sales Mix 25% 45% 30%

Green Brown Blue

Contribution Margin $120 $ 60 $ 40

Instructions Compute the number of each type of bike that the company would need to sell in order to break even under this product mix. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 138

Green Brown Blue

(8–12 min.) Sales Mix 25% 45% 30%

× × × ×

Contribution Margin $120 $ 60 $ 40

Total break-even sales = $4,140,000 ÷ $69 = 60,000 bikes .

Weighted-Average Contribution Margin $30 $27 $12 $69

19 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 138 Green Brown Blue

(cont.) Sales Mix 25% 45% 30%

× × ×

60,000 60,000 60,000

= = =

15,000 bikes 27,000 bikes 18,000 bikes

Ex. 139 DeMont Tax Services provides primarily two lines of service: accounting and tax. Accountingrelated services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $4,250,000. Instructions (a) Calculate the revenue from each type of service that the company must achieve to break even. (b) The company has a desired net income of $1,700,000. What amount of revenue would DeMont earn from tax services if it achieves this goal with the current sales mix? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 139

(10–15 min.)

(a) Accounting Tax

Contribution Margin Ratio 30% 40%

Sales Mix 60% 40%

Weighted-Average Contribution Margin Ratio 18% 16% 34%

Total break-even sales = $4,250,000 ÷ .34 = $12,500,000

Accounting Tax

Sales Mix 60% × 40% ×

$12,500,000 = $7,500,000 $12,500,000 = $5,000,000

(b) Sales to achieve target net income = ($4,250,000 + $1,700,000) ÷ .34 = $17,500,000 Tax

Sales Mix 40% ×

$17,500,000 = $7,000,000

Ex. 140 Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below: Computers VG Systems Total Sales $700,000 $300,000 $1,000,000 Variable costs 420,000 210,000 630,000 Contribution margin $280,000 $ 90,000 370,000 Fixed costs 296,000 Net income $ 74,000

FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 19 - 37 Ex 140

(cont.)

Instructions (a) Determine the sales mix and contribution margin ratio for each division. (b) Calculate the company’s weighted-average contribution margin ratio. (c) Calculate the company’s break-even point in dollars. (d) Determine the sales level, in dollars, for each division at the break-even point. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 140

(15–20 min.)

(a) Sales mix: Computers: VG Systems Contribution margin ratio: Computers: VG Systems:

$700,000 ÷ ($700,000 + $300,000) = 70% $300,000 ÷ ($700,000 + $300,000) = 30% $280,000 ÷ $700,000 = 40% $ 90,000 ÷ $300,000 = 30%

(b) Weighted-average contribution margin ratio = (70% × 40%) + (30% × 30%) = 37% (c) Break-even point in dollars = $296,000 ÷ .37 = $800,000 (d) Sales dollars at break-even point: Computers: $800,000 × .70 = $560,000 VG Systems: $800,000 × .30 = $240,000

Ex. 141 Hewitt Co. has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product: Product 22 Product 44 Sales price $25 $50 Direct materials 6 8 Direct labor 3 2 Variable manufacturing overhead 4 5 Fixed manufacturing overhead 3 5 Machine time required 15 minutes 60 minutes Instructions Management wants to know which product to produce in order to maximize the company’s income. Taking into consideration the constraints under which the company operates, prepare a report to show which product should be produced and sold. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

19 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 141

(10–12 min.)

Contribution margin per unit Sales price Variable costs Direct material Direct labor Variable overhead Contribution margin Machine hours required:

Product 22 $25 $6 3 4

13 $ 12

Product 44 $50 $8 2 5

15 $35

1/4 hr

1 hr

Contribution margin per unit of limited resource: ($12 ÷ .25) $ 48 ($25 ÷ 1) Machine hours available × 4,000 Contribution margin $192,000

$ 35 × 4,000 $140,000

The company should produce and sell Product 22. Ex. 142 Reynolds, Inc. manufactures and sells two products. Relevant per unit data concerning each product are given below: Product Standard Deluxe Selling price $50 $75 Variable costs $26 $33 Machine hours 2 3 Instructions (a) Compute the contribution margin per unit of limited resource for each product. (b) If 1,000 additional machine hours are available, which product should be manufactured? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 142

(6–8 min.)

(a)

Product Contribution margin per unit Machine hours required Contribution margin per unit of limited resource

Standard $24 ÷2 $12

Deluxe $42 ÷3 $14

(b) The Deluxe product should be manufactured because it results in the highest contribution margin per machine hour: $14 × 1,000 = $14,000. Ex. 143 Oscar Corporation produces and sells three products. Unit data concerning each product is shown below. Product X Y Z Selling price $200 $300 $250 Direct labor costs 45 75 60 Other variable costs 110 130 106 FOR INSTRUCTOR USE ONLY

Cost-Volume-Profit Analysis: Additional Issues 19 - 39 Ex 143

(cont.)

The company has 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15. Instructions (a) Determine the number of direct labor hours per unit. (b) Determine the contribution margin per direct labor hour. (c) Determine which product should be produced and the total contribution margin for that product. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 143

(10–12 min.)

(a) Product X: $45  $15 = 3 hours per unit Product Y: $75  $15 = 5 hours per unit Product Z: $60  $15 = 4 hours per unit (b) Selling price Variable costs Contribution margin Direct labor hours per unit Contribution margin per direct labor hour

X $200 155 45 3 $ 15

Product Y $300 205 95 5 $ 19

Z $250 166 84 4 $ 21

(c) Product Z should be produced because it generates the highest contribution margin per direct labor hour. Product X Total direct labor hours available 2,000 Contribution margin per direct labor hour 21 Total contribution margin $42,000

Ex. 144 Shanahan Co. of Dublin, Ireland is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Mike Shanahan the owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Mike would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative. Manual System Computerized System Sales $1,500,000 $1,500,000 Variable costs 1,200,000 900,000 Contribution margin 300,000 600,000 Fixed costs 150,000 450,000 Net income $150,000 $150,000

FOR INSTRUCTOR USE ONLY

19 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 144

(cont.)

Instructions (a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $300,000? Ans: N/A, LO: 5, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 144

(10–12 min.)

(a) Manual system Computerized system

Contribution Margin

Net Income

$300,000 $600,000

÷ ÷

$150,000 $150,000

= =

Degree of Operating Leverage 2.0 4.0

(b) The computerized system would produce profits that are 2.0 times (4.0 ÷ 2.0) as much as the manual system. With a $300,000 increase in sales, net income would increase $60,000 ($210,000 - $150,000) under the manual system and $120,000 ($270,000 - $150,000) under the computerized system Manual System Computerized System Sales $1,800,000 $1,800,000 Variable costs 1,440,000* 1,080,000** Contribution margin 360,000 720,000 Fixed costs 150,000 450,000 Net income $210,000 $270,000 *($1,200,000 ÷ $1,500,000) × $1,800,000 **($900,000 ÷ $1,500,000) × $1,800,000

Ex. 145 The following CVP income statements are available for Chantal Corp. and Mantle, Inc. Chantal Corp. Mantle, Inc. Sales revenue $700,000 $700,000 Variable costs 350,000 210,000 Contribution margin 350,000 490,000 Fixed costs 175,000 315,000 Net income $175,000 $175,000 Instructions (a) Compute the degree of operating leverage for each company. (b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each company. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 145 (a) Chantal Mantle

(15–20 min.) Contribution Margin $350,000 $490,000

÷ ÷ ÷

Net Income $175,000 $175,000

= = =

Degree of Operating Leverage 2.0 2.8

Cost-Volume-Profit Analysis: Additional Issues 19 - 41 Solution 145 (cont.) (b) Sales revenue Variable costs Contribution margin Fixed costs Net income

Chantal Corp. $560,000* 280,000** 280,000 175,000 $105,000

Mantle, Inc. $560,000* 168,000*** 392,000 315,000 $77,000

*$700,000 × .8 **($350,000 ÷ $700,000) × $560,000 ***($210,000 ÷ $700,000) × $560,000 Ex. 146 An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Roasted Beans Co. uses a labor-intensive approach and Monat Industries uses a mechanized system. Variable costing income statements for the two companies are shown below: Roasted Beans $1,000,000 650,000 350,000 175,000 $ 175,000

Sales Variable costs Contribution margin Fixed costs Net Income

Monat Industries $1,000,000 300,000 700,000 525,000 $ 175,000

The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability. Instructions (a) Calculate each company’s degree of operating leverage. (b) Determine the effect on each company’s net income if sales decrease by 10% and if sales increase by 15%. Do not prepare income statements. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 146 (a)

(8–10 min.)

Contribution Margin Roasted Beans $350,000 Monat $700,000

÷ ÷ ÷

(b)

Net Income $175,000 $175,000

= = =

% Change in Sales Roasted Beans (10%) Monat (10%)

× × ×

Degree of Operating Leverage 2.0 4.0

Roasted Beans Monat

× ×

2.0 4.0

15% 15%

Degree of Operating Leverage 2.0 4.0

= = =

% Change in Net Income (20) (40)

= =

30.0% 60.0%

19 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Ex. 147

Indicate with a check mark whether each of the following would be a product cost or a period cost under an absorption or a variable system for Sour Industries. Absorption Product Period

Variable Product Period

a. Direct materials

________

_______

b. Direct labor

________

_______

c. Factory utilities

________

_______

d. Factory rent

________

_______

e. Indirect labor

________

_______

Factory supervisor salaries

________

_______

g. Factory maintenance (variable)

________

_______

h. Factory depreciation

________

_______

Sales salaries

________

_______

Sales commissions

________

_______

Ans: N/A, LO: 6, Bloom: K, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

Solution 147

a. b. c. d. e. f. g. h. i. j.

(10–15 min.)

Direct materials Direct labor Factory utilities Factory rent Indirect labor Factory supervisor salaries Factory maintenance (variable) Factory depreciation Sales salaries Sales commissions

Absorption Product Period ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ___  __ ____ ___ ____ ___ ___  ___ ____ ___ ___  ___

Variable Product Period ___  ___ __ ____ ___  ___ __ ____ ___  ___ __ ____ ___ ____ __  ___ ___  ___ __ ____ ___ ____ __  ___ ___  ___ __ ____ ___ ____ __  ___ ___ ____ __  ___ ___ ____ __  ___

Cost-Volume-Profit Analysis: Additional Issues 19 - 43 a

Ex. 148

Nimble Corp. manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below: Manufacturing Costs Fixed Overhead Variable overhead Direct labor Direct material

$140,000 $3 per unit $12 per unit $30 per unit

Beginning inventory Units produced Units sold

0 units 10,000 9,000

Selling and Administrative Costs Fixed Variable

$200,000 $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement. Instructions Assume the company uses absorption costing. Calculate the production cost per unit and prepare an income statement for the month of June, 2013. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 148

(8–12 min.)

Direct materials Direct labor Variable overhead Fixed overhead ($140,000 ÷ 10,000) Total cost

Per Unit $30 12 3 14 $59

Nimble Corp. Income Statement (Absorption Costing) For the Month Ending June 30, 2013 Sales (9,000 × $110) Less: Cost of goods sold (9,000 × $59) Gross profit Less: Selling and administrative costs Variable (9,000 × $4) Fixed Net income

$990,000 531,000 459,000 $ 36,000 200,000

236,000 $ 223,000

19 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Ex. 149

On-Road Wheels, Inc. manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory): Variable production costs Fixed production costs Variable selling and administrative costs Fixed selling and administrative costs Selling price Production Sales

$90 per bike $400,000 $22 per bike $550,000 $200 per bike 20,000 bikes 18,000 bikes

Instructions (a) Prepare a brief income statement using absorption costing. (b) Compute the amount to be reported for inventory in the year-end absorption costing balance sheet. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 149

(a)

(b)

(8–12 min.)

Sales (18,000 × $200) Less: Cost of goods sold (18,000 × $110*) Gross profit Less: selling and administrative costs [(18,000 × $22) + $550,000] Net income

$3,600,000 1,980,000 1,620,000

*Variable production costs Fixed production costs ($400,000 ÷ 20,000) Total cost of goods sold per unit

$ 90 per bike 20 per bike $110 per bike

946,000 $ 674,000

(20,000 – 18,000) × $110 = $220,000

Ex. 150

$95 per bike $400,000 $22 per bike $550,000 $200 per bike 20,000 bikes 16,000 bikes

Instructions (a) Prepare a brief income statement using variable costing. (b) Compute the amount to be reported for inventory in the year-end variable costing balance sheet. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Cost-Volume-Profit Analysis: Additional Issues 19 - 45 a

Solution 150

(a)

(b)

(8–12 min.)

Sales (16,000 × $200) Less: Variable costs Variable cost of goods sold (16,000 × $95) Variable selling and admin. costs (16,000 × $22) Contribution margin Less: Fixed costs Fixed production costs Fixed selling and administrative costs Net income

$3,200,000 $1,520,000 352,000

400,000 550,000

1,872,000 1,328,000

950,000 $ 378,000

(20,000 – 16,000) × $95 = $380,000

Ex. 151

Cutting Edge Corp. produces sporting equipment. In 2012, the first year of operations, Cutting Edge produced 25,000 units and sold 20,000 units. In 2013, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000. Instructions (a) Compute the net income under variable costing for each year. (b) Compute the net income under absorption costing for each year. (c) Reconcile the differences each year in income from operations under the two costing approaches. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 151

(20–25 min.)

(a) 2012: [20,000 × ($100 – $40 – $8)] – ($540,000 + $200,000)] = $300,000 2013: [25,000 × ($100 – $40 – $8)] – ($540,000 + $200,000)] = $560,000 (b) 2012: [20,000 × ($100 – $40 – $21.60)] – ($200,000 + ($20,000 × $8)] = $408,000 2013: {[25,000 × $100) – [5,000 × ($40 + $21.60)] – [(20,000 × $40) + (20,000 × $540,000/20,000)]} – [$200,000 + (25,000 × $8)] = $452,000 (c) The variable costing and the absorption costing income can be recorded as follows: 2012 variable costing income Fixed manufacturing costs deferred at 12/31/12 under absorption costing (5,000 × $21.60) 2012 absorption costing income

$300,000

2013 variable costing income Fixed manufacturing costs expensed in 2013 under absorption costing 5,000 × $21.60) 2013 absorption costing income

$560,000

108,000 $408,000

(108,000) $452,000

19 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Ex. 152

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. Steve Moss, division manager, is considering producing either 30,000 or 35,000 units during the period. Other information is presented in the schedule below: Division Information – 2013 Beginning inventory 0 Expected sales in units 30,000 Selling price per unit $25 Variable manufacturing cost per unit $7 Fixed manufacturing overhead costs (total) $420,000 Fixed manufacturing overhead costs per unit Based on 30,000 units ($420,000 ÷ 30,000) $14 Based on 35,000 units ($420,000 ÷ 35,000) $12 Manufacturing cost per unit Based on 30,000 units ($7 variable + $14 fixed) $21 Based on 35,000 units ($7 variable + $12 fixed) $19 Selling and administrative expenses (all fixed) $25,000 Instructions (a) Prepare an absorption costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 35,000 units are produced. (b) Why is income different for the two production levels when sales is 30,000 units either way? Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 152

(a)

(15–20 min.) Graham Division Income Statement (Absorption Costing) For the Year Ended 2013

30,000 Produced 35,000 Produced Sales (30,000 units × $25) $750,000 $750,000 Cost of goods sold 630,000 (30,000 × $21) 570,000 (30,000 × $19) Gross profit 120,000 180,000 Fixed selling and admin. expenses 25,000 25,000 Net income $ 95,000 $155,000 (b) Net income is $60,000 higher when 35,000 units are produced because under absorption costing, $60,000 of fixed manufacturing costs (5,000 × $12) are deferred to the next year.

Cost-Volume-Profit Analysis: Additional Issues 19 - 47 a

Ex. 153

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $20 per unit. Steve Moss, division manager, is considering producing either 30,000 or 40,000 units during the period. Other information is presented in the schedule below: Division Information – 2013 Beginning inventory 0 Expected sales in units 30,000 Selling price per unit $20 Variable manufacturing cost per unit $7 Fixed manufacturing overhead costs (total) $360,000 Fixed manufacturing overhead costs per unit Based on 30,000 units ($360,000 ÷ 30,000) $12 Based on 40,000 units ($360,000 ÷ 40,000) $9 Manufacturing cost per unit Based on 30,000 units ($7 variable + $12 fixed) $19 Based on 40,000 units ($7 variable + $9 fixed) $16 Selling and administrative expenses (all fixed) $25,000 Instructions Prepare a variable costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 40,000 units are produced. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

Solution 153

(15–20 min.) Graham Division Income Statement (Variable Costing) For the Year Ended 2013 30,000 Produced $600,000 210,000 390,000 360,000 25,000 $ 5,000

Sales (30,000 units × $20) Variable cost of goods sold (30,000 × $7) Contribution margin Fixed manufacturing overhead Fixed selling and administrative expenses Net income

40,000 Produced $600,000 210,000 390,000 360,000 25,000 $ 5,000

19 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

COMPLETION STATEMENTS 154. The ______________ income statement classifies cost as variable or fixed and computes a contribution margin. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

155. _________________ tells a company how far sales can drop before it will be operating at a loss. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

156. ___________________ is the relative percentage in which a company sells its multiple products. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

157. When more than one product is sold, the break-even point can be determined by dividing fixed expenses by _______________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

158. When a company has ________________, management must decide which products to make and sell in order to maximize net income. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

159. ___________________ refers to the relative proportion of fixed versus variable costs that a company incurs. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

160. The _________________________ provides a measure of a company’s earnings volatility and can be used to compare companies. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

161. Under _____________________ all manufacturing costs are charged to, or absorbed by, the product.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

162. Fixed manufacturing costs are treated as period costs under ______________________.

Cost-Volume-Profit Analysis: Additional Issues 19 - 49 a

163. When production exceeds sales, a portion of the _____________________ is deferred to a future period as part of the cost of ending inventory under absorption costing, but not under variable costing.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

164. When units produced exceed units sold, income under absorption costing is ___________ than income under variable costing.

165. Management may be tempted to overproduce in a given period in order to increase net income if _______________ is used for internal decision making.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Completion Statements 154. 155. 156. 157. 158. 159.

CVP Margin of safety Sales mix weighted-average unit contribution limited resources Cost structure

160. 161. a 162. a 163. a 164. a 165. a

degree of operating leverage absorption costing variable costing fixed manufacturing overhead higher absorption costing

SHORT-ANSWER ESSAY QUESTIONS S-A E 166 A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 166 Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs. Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs. S-A E 167 Nancy Sound, president of Crosley Corp., has heard about operating leverage and asks you to explain this term. What is operating leverage? How does a company increase its operating leverage? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

19 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 167 Operating leverage refers to the change in net income that a company experiences when there is a change in net sales revenue. Companies that have higher fixed costs relative to variable costs have higher operating leverage. In that case, the company’s profits will increase rapidly when sales revenue increases, but decrease rapidly when sales revenue decreases. A company can increase its operating leverage by increasing its reliance on fixed costs, with a corresponding decrease in variable costs. a

S-A E 168

Define variable costing and absorption costing. What are some of the benefits to a manager from using variable costing instead of absorption costing for internal decision making? Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Cost Management a

Solution 168

Variable costing is a system for determining product costs that is used primarily for making managerial decisions. This system determines product costs by considering only direct materials, direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by some managers and also for external reporting. Under absorption costing, product costs include direct materials, direct labor, and both fixed and variable manufacturing overhead costs. Some of the benefits to a manager from using variable costing instead of absorption costing for internal decision-making include: variable costing already has to be used when constructing a contribution margin income statement, variable costing puts greater focus on cost behaviors, fixed expenses do not get tied up in inventory under variable costing, variable costing is better suited for cost-volume-profit analysis, variable costing produces income statements that are closer to net cash flows than absorption costing, and the method ties in with standard costing and flexible budgeting more effectively. sa

S-A E 169

How do differences in production and sales levels affect income under absorption and variable costing? Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics a

Solution 169

If production equals sales in any given period, the net incomes under both absorption and variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ, because the direct cost expense under variable costing will be equal to the product cost component of fixed overhead under absorption costing. If production exceeds sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold, whereas under variable costing, all fixed manufacturing overhead costs will be expensed. If sales exceed production, absorption costing net income will be less than variable costing net income. Absorption costing net income is less because some fixed manufacturing overhead costs from the previous period will now be expensed when the older product is sold, whereas under variable costing, only fixed manufacturing overhead costs of the current period will be expensed. .

CHAPTER 20 INCREMENTAL ANALYSIS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

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

1 2 2 2 2 2

K K C K K C

7. 8. 9. 10. 11. 12.

2 3 3 3 3 4

C C C C C C

Item

6 6 6 6 7 7

C C C C C C

25. 26. sg 27. sg 28. sg 29. sg 30.

7 1 2 3 5 7

C K K C K C

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.

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 6 6 6

C AN AP C AN AP K K K K AP K AP K K AP AP C K C AP AP C C C C C C

143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. st 160. sg 161. st 162. sg 163. sg 164. sg 165. st 166.

6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 1 3 4 4 6 7 7

C C C C C AP AP AN AN C AN C AN AN AN C C K AN K C K C K

176. 177. 178.

7 7 7

AP AP AP

179.

True-False Statements 13. 14. 15. 16. 17. 18.

4 4 4 5 5 5

C K C C C K

19. 20. 21. 22. 23. 24.

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. 53. 54. 55. 56. 57. 58.

1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3

K K K K K K K K AP K K K C K C C K K C C C C AN AN C C C C

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. 86.

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4

C C AP AP C C C AP K C AP AP AP AP C K C AP AP AP AP AP K AP AN C C AN

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.

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5

AN AN AN AN AN AN K K C C C C AN AN AN AN AN AN AN AN AN AP AN AN AN AN AP AN

Brief Exercises 167. 168. 169. sg st

2 3 4

AP AP AP

170. 171. 172.

4 4 4

AP AP AP

173. 174. 175.

4 5 6

AP AN AN

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, Tools for Business Decision Making Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Exercises 180. 181. 182. 183.

2, 7 3 3 3

AN AN AN E

184. 185. 186. 187.

3 3,4 4 4

E AP E AP

188. 189. 190. 191.

4 4 5 5

AN AN AN E

192. 193. 194. 195.

5 5 6 6

AP E AN E

196. 197. 198. 199.

7 7 7 7

AP E AP E

Completion Statements 200. 201.

1 2

K K

202. 203.

3 4

K K

204. 205.

5 6

K K

Matching 206.

207.

Short-Answer Essay 208.

209.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 26.

TF TF

31. 32.

MC MC

33. 34.

2. 3. 4. 5.

TF TF TF TF

6. 7. 27. 36.

TF TF TF MC

37. 38. 39. 40.

8. 9. 10. 11. 28.

TF TF TF TF TF

53. 54. 55. 56. 57.

MC MC MC MC MC

58. 59. 60. 61. 62.

12. 13. 14. 15. 74. 75. 76. 77.

TF TF TF TF MC MC MC MC

78. 79. 80. 81. 82. 83. 84. 85.

MC MC MC MC MC MC MC MC

86. 87. 88. 89. 90. 91. 92. 93.

16. 17. 18. 29. 109.

TF TF TF TF MC

110. 111. 112. 113. 114.

MC MC MC MC MC

115. 116. 117. 118. 119.

Type

Item

Type

Item

Learning Objective 1 MC 35. MC 200. MC 160. MC Learning Objective 2 MC 41. MC 45. MC 42. MC 46. MC 43. MC 47. MC 44. MC 48. Learning Objective 3 MC 63. MC 68. MC 64. MC 69. MC 65. MC 70. MC 66. MC 71. MC 67. MC 72. Learning Objective 4 MC 94. MC 102. MC 95. MC 103. MC 96. MC 104. MC 97. MC 105. MC 98. MC 106. MC 99. MC 107. MC 100. MC 108. MC 101. MC 162. Learning Objective 5 MC 120. MC 125. MC 121. MC 126. MC 122. MC 127. MC 123. MC 128. MC 124. MC 129.

Type

Item

Type

Item

Type

MC MC MC MC

49. 50. 51. 52.

MC MC MC MC

167. 180. 201.

BE Ex C

MC MC MC MC MC

73. 161. 168. 181. 182.

MC MC BE Ex Ex

183. 184. 185. 202.

Ex Ex Ex C

MC MC MC MC MC MC MC MC

163. 169. 170. 171. 172. 173. 185. 186.

MC BE BE BE BE BE Ex Ex

187. 188. 189. 203. 207. 208.

Ex Ex Ex C SA SA

MC MC MC MC MC

130. 131. 174. 190. 191.

MC MC BE Ex Ex

192. 193. 204.

Ex Ex C

Incremental Analysis

19. 20. 21. 22. 132.

TF TF TF TF MC

133. 134. 135. 136. 137.

MC MC MC MC MC

138. 139. 140. 141. 142.

23. 24. 25. 30.

TF TF TF TF

150. 151. 152. 153.

MC MC MC MC

154. 155. 156. 157.

Note: TF = True-False MC = Multiple Choice MA = Matching

Learning Objective 6 MC 143. MC 148. MC 144. MC 149. MC 145. MC 164. MC 146. MC 175. MC 147. MC 194. Learning Objective 7 MC 158. MC 176. MC 159. MC 177. MC 165. MC 178. MC 166. MC 179. BE = Brief Exercise Ex = Exercise

MC MC MC BE Ex

195. 205. 206. 209.

Ex C MA SA

BE BE BE BE

196. 197. 198. 199.

Ex Ex Ex Ex

20 - 3

C = Completion SA = Short-Answer

CHAPTER LEARNING OBJECTIVES 1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem and assigning responsibility for the decision, (b) determining and evaluating possible courses of action, (c) making the decision, and (d) reviewing the results of the decision. 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 costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. Any changes in fixed costs, opportunity costs, or other incremental costs or savings (such as additional shipping) should be considered. 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 as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity costs. 5. Identify the relevant costs in determining whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 6. Identify the relevant costs to be considered in repairing, retaining, or replacing equipment. The relevant costs to be considered 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 or product. In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Disposition of the segment's or product's fixed expenses and opportunity costs must also be considered.

20 - 4

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

TRUE-FALSE STATEMENTS 1.

An important step in management's decision-making process is to determine and evaluate possible courses of action.

Ans: T, LO: 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

In making decisions, management ordinarily considers both financial and nonfinancial information.

Ans: T, LO: 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

In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Decision Analysis

Decision-making involves choosing among alternative courses of action.

Ans: T, LO: 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

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, LO: 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

In incremental analysis, total fixed costs will always remain constant under alternative courses of action.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Decision Analysis

A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

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, LO: 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 company should never accept an order for its product at less than its regular sales price.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

11.

If a company is operating at less than capacity, the incremental costs of a special order will likely include variable manufacturing costs, but not fixed costs.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Incremental Analysis 12.

20 - 5

An incremental make-or-buy decision depends solely on which alternative is the lowest cost alternative.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

13.

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Ans: T, LO: 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

14.

An opportunity cost is the potential benefit obtained by using resources in an alternative course of action.

Ans: T, LO: 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

15.

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, LO: 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

16.

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Ans: F, LO: 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

17.

It is always better to sell now rather than process further because of the time value of money.

Ans: F, LO: 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

18.

The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Ans: T, LO: 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

19.

In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered an opportunity cost.

Ans: F, LO: 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

20.

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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

21.

In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

22.

It is better not to replace old equipment if it is not fully depreciated.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

20 - 6 23.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 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, LO: 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

24.

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Ans: T, LO: 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

25.

Many of the decisions involving incremental analysis have qualitative features, but since they are not easily measured they should be ignored.

Ans: F, LO: 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

26.

Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

27.

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis

28.

If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

Ans: T, LO: 3, 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 basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Ans: F, LO: 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

30.

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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, 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.

T T F F T

6. 7. 8. 9. 10.

F F T F F

11. 12. 13. 14. 15.

T F T T F

16. 17. 18. 19. 20.

F F T F T

21. 22. 23. 24. 25.

T F T T F

26. 27. 28. 29. 30.

T F T F T

Item

Ans.

Incremental Analysis

20 - 7

MULTIPLE CHOICE QUESTIONS 31.

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, LO: 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

32.

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, LO: 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

33.

Internal reports that review the actual impact of decisions are prepared by a. department heads. b. the controller. c. management accountants. d. factory workers.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

34.

Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. Determine possible courses of action b. Make the appropriate decision based on relevant data c. Prepare internal reports that review the impact of decisions d. None of these

Ans: B, LO: 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

35.

Which is the first step in the management decision-making process? a. Determine and evaluate possible courses of action. b. Review results of the decision. c. Identify the problem and assign responsibility. d. Make a decision.

Ans: C, LO: 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

36.

Which of the following will always be a relevant cost? a. Sunk cost b. Fixed cost c. Variable cost d. Opportunity cost

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

20 - 8

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

37.

Costs that will differ between alternatives and influence the outcome of a decision are a. sunk costs. b. unavoidable costs. c. relevant costs. d. product costs.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

38.

A revenue that differs between alternatives and makes a difference in decision-making is called a(n) a. sales revenue. b. incremental revenue. c. unavoidable revenue. d. irrelevant revenue.

Ans: B, LO: 2, 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.

Alvarez Company is considering the following alternatives: Revenues Variable costs Fixed costs

Alternative A $50,000 30,000 10,000

Alternative B $60,000 30,000 16,000

What is the incremental profit? a. $10,000 b. $0 c. $6,000 d. $4,000 Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis Solution: ($50,000 – $30,000 – $10,000) – ($60,000 – $30,000 – $16,000) = $4,000

40.

Which of the following is an irrelevant cost? a. An avoidable cost b. An incremental cost c. A sunk cost d. An opportunity cost

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

41.

Relevant costs are always a. fixed costs. b. variable costs. c. avoidable costs. d. sunk costs.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

Incremental Analysis 42.

20 - 9

The process of evaluating financial data that change under alternative courses of action is called a. double entry analysis. b. contribution margin analysis. c. incremental analysis. d. cost-benefit analysis.

Ans: C, LO: 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, LO: 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, LO: 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, LO: 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 capital budgeting methods. c. in evaluating the master budget. d. as a replacement technique for variance analysis.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

47.

The source of data to serve as inputs in incremental analysis is generated by a. market analysts. b. engineers. c. accountants. d. all of these.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Information Management

20 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 48.

Which of the following is not a true statement? a. Incremental analysis might also be referred to as differential analysis. b. Incremental analysis is the same as CVP analysis. c. Incremental analysis is useful in making decisions. d. Incremental analysis focuses on decisions that involve a choice among alternative courses of action.

Ans: B, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

52.

A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120,000 $120,000 Variable costs 60,000 70,000 Fixed costs 35,000 35,000 Which of the following are relevant in choosing between the alternatives? a. Variable costs b. Revenues c. Fixed costs d. Variable costs and fixed costs

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

Incremental Analysis 53.

20 - 11

It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income? a. $6,000 increase b. $6,000 decrease c. $9,000 decrease d. $45,000 increase

Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis Solution: (3,000) ($15 – $12 – $1) = $6,000

54.

Baden Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows: a. Income would decrease by $8,000. b. Income would increase by $8,000. c. Income would increase by $140,000. d. Income would increase by $40,000.

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis Solution: (1,000) ($140 – $100) = $40,000

55.

In incremental analysis, a. costs are not relevant if they change between alternatives. b. all costs are relevant if they change between alternatives. c. only fixed costs are relevant. d. only variable costs are relevant.

Ans: B, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

57.

Miley, 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

20 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 58.

If a company must expand capacity to accept a special order, it is likely that there will be a. an increase in unit variable costs. b. no increase in fixed costs. c. an increase in variable and fixed costs per unit. d. an increase in fixed costs.

Ans: D, LO: 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, LO: 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, LO: 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.

Martin Company incurred the following costs for 70,000 units: Variable costs $420,000 Fixed costs 392,000 Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to break even on the order, what should the unit sales price be? a. $6.00 b. $8.10 c. $11.60 d. $13.70

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($420,000 / 70,000) + ($6,300 / 3,000) = $8.10

62.

Incremental Analysis MC. 62

20 - 13

(cont.) If Martin wants to earn $6,000 on the order, what should the unit price be? a. $9.70 b. $15.70 c. $8.00 d. $10.10

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($420,000 / 70,000) + [($6,300 + $6,000) / 3,000] = $10.10

63.

Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely? a. Unit variable costs will increase. b. Fixed costs will not be relevant. c. Both variable and fixed costs will be relevant. d. The company should accept the order.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

64.

A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts the special order, what will occur? a. Incremental costs will not be affected. b. Net income will increase if the special sales price per unit exceeds the unit variable costs. c. There are no incremental revenues. d. Both fixed and variable costs will increase.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

65.

Argus Company anticipates that other sales will be affected by the acceptance of a special order. What should the company do? a. Reject the order. b. Consider the opportunity cost of lost sales in the incremental analysis. c. Accept the order. d. Accept the order if the plant is below capacity.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

66.

It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at $36 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income? a. Decrease $12,000 b. Increase $12,000 c. Increase $108,000 d. Increase $24,000

20 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 67.

A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product? a. Variable selling expenses b. Fixed factory overhead c. Direct labor d. Contribution margin of additional units

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

68.

A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer’s name on the product. Which of the following is likely? a. Total variable costs will be irrelevant. b. Only variable costs will be relevant. c. Only fixed costs will be relevant. d. Both variable and fixed costs will be relevant.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

69.

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$ 4 10 8 6

A foreign company wants to purchase 2,000 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,000 in order to stamp the foreign company’s name on the product. The incremental income (loss) from accepting the order is a. $6,000. b. $2,000. c. $(6,000). d. $(2,000). Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: (2,000) ($25 – $4 – $10 – $8) – $4,000 = $2,000

Incremental Analysis

20 - 15

70. A company’s unit costs based on 100,000 units are: Variable costs Fixed costs

$75 30

The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone. The opportunity cost associated with this order is a. $225,000. b. $495,000. c. $270,000. d. $405,000. Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: (3,000) ($165 – $75) = $270,000

71. A company’s unit costs based on 100,000 units are: Variable costs Fixed costs

$75 30

The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone. The incremental profit (loss) from accepting the order would be a. $30,000. b. $(150,000). c. $180,000. d. $(90,000). Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: (5,000) ($135 – $75) – (3,000) ($165 – $75) = $30,000

72.

Able Company’s unit manufacturing cost is: Variable Costs $50 Fixed Costs 25 A special order for 2,000 units has been received from a foreign company. The unit price requested is $55. The normal unit price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is accepted, incremental profit (loss) will be a. $(46,000). b. $6,000. c. $(40,000). d. $10,000.

20 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 73.

In the analysis concerning the acceptance or rejection of a special order, which items are relevant? a. Variable costs only b. Fixed costs only c. Variable costs and fixed costs d. Variable costs and unavoidable costs

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

74.

What of the following would not be relevant in a make-or-buy decision? a. Unavoidable variable costs b. Incremental fixed costs c. Opportunity costs d. Avoidable fixed cost

Ans: A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

75.

Which of the following is not a qualitative factor to be considered in a make-or-buy decision? a. Possible lost jobs from buying outside b. Supplier’s ability to satisfy quality standards c. Incremental benefit from buying outside d. Supplier’s ability to meet production schedule

Ans: C, LO: 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

76.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente accepts the offer, by how much will net income increase (decrease)? a. $3,750 b. $19,950 c. $(8,850) d. $(2,850) Ans: A, LO: 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: ($8,400 + $11,250 + $12,600) – (10,000) ($2.85) = $3,750

Incremental Analysis

77.

20 - 17

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by a. $750. b. $(5,850). c. $(3,150). d. $6,750. Ans: D, LO: 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: ($8,400 + $11,250 + $12,600 + $3,000) – (10,000) (2.85) = $6,750

78.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be a. $150. b. $7,350. c. $(150). d. $(3,600). Ans: B, LO: 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: ($8,400 + $11,250 + $12,600) – (10,000) (2.85) + $3,600 = $7,350

79. Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: Direct materials $ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. What is the relevant cost per unit of part A12E? a. $58 b. $85 c. $93 d. $66 Ans: D, LO: 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: ($55,000 + $160,000 + $75,000 + $40,000) / 5,000 = $66

20 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 80.

Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: Direct materials $ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. If the outside supplier offers a unit price of $68, net income will increase (decrease) by a. $(10,000). b. $125,000. c. $(50,000). d. $85,000.

Ans: A, LO: 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: ($55,000 + $160,000 + $75,000 + $40,000) / 5,000 = $66; ($66 – $68) (5,000) = – $10,000

81.

In a make-or-buy decision, which costs can be considered relevant? a. Unavoidable variable costs, incremental fixed costs, and sunk costs b. Incremental variable costs, unavoidable fixed costs, and opportunity costs c. Incremental variable costs, incremental fixed costs, and sunk costs d. Incremental variable costs, incremental fixed costs, and opportunity costs

Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

82.

Billings Company has the following costs when producing 100,000 units: Variable costs Fixed costs

$600,000 900,000

An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $165,000. The net increase (decrease) in the net income of accepting the supplier’s offer is a. $285,000. b. $315,000. c. $(15,000). d. $840,000. Ans: B, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($600,000 + $165,000) - ($4.50*100,000) = 315,000.

Incremental Analysis 83.

20 - 19

Sanders Inc. has the following costs when producing 100,000 units: Variable costs Fixed costs

$600,000 900,000

An outside supplier is interested in producing the item for Sanders. If the item is produced outside, Sanders could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sanders accept the outside supplier’s offer if Sanders wanted to increase net income by $120,000? a. $8.70 b. $6.30 c. $7.50 d. $5.70 Ans: B, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($600,000) + ($150,000 – $120,000)] ÷ 100,000 = $6.30

84.

Which statement is true concerning the decision rule on whether to make or buy? a. The company should buy if the cost of buying is less than the cost of producing. b. The company should buy if the incremental revenue exceeds the incremental costs. c. The company should buy as long as total revenue exceeds present revenues. d. The company should buy assuming no additional fixed costs are incurred.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

85.

Which one of the following does not affect a make-or-buy decision? a. Variable manufacturing costs b. Opportunity costs c. Incremental revenue d. Direct labor

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

86.

During 2012, it cost Westa, Inc. $18 per unit to produce part T5. During 2013, it has increased to $21 per unit. In 2013, Southside Company has offered to provide Part T5 for $16 per unit to Westa. As it pertains to the make-or-buy decision, which statement is true? a. Differential costs are $5 per unit. b. Incremental costs are $2 per unit. c. Net relevant costs are $2 per unit. d. Incremental revenues are $3 per unit.

Ans: A, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: $21 – $16 = $5

87.

Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $125,000 for 100,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct materials Direct labor Manufacturing overhead Total

$ 46,500 43,500 60,000 $150,000

20 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition MC. 87

(cont.) The manufacturing overhead consists of $24,000 of costs that will be eliminated if the components are no longer produced by Chapman. From Chapman’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made? a. $25,000 incremental savings b. $11,000 incremental cost c. $11,000 incremental savings d. $25,000 incremental cost

Ans: B, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: $125,000 – $46,500 – $43,500 – $24,000 = $11,000

88.

The cost to produce Part A was $20 per unit in 2012. During 2013, it has increased to $23 per unit. In 2013, Supplier Company has offered to supply Part A for $18 per unit. For the make-or-buy decision, a. incremental revenues are $5 per unit. b. incremental costs are $3 per unit. c. net relevant costs are $3 per unit. d. differential costs are $5 per unit.

Ans: D, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: $23 – $18 = $5

89.

Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is a. $0. b. $20,000. c. $140,000. d. $160,000.

90.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor $11 Variable overhead 5 Fixed overhead 8 Total $24 The fixed overhead is an allocated common cost. How much is the relevant cost of the wicket? a. $36 b. $24 c. $19 d. $16

Incremental Analysis 91.

20 - 21

Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $18 each. If Truckel makes the wickets, variable costs are $16 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable. Should Truckel make or buy the wickets? a. Buy; savings = $15,000 b. Buy; savings = $5,000 c. Make; savings = $10,000 d. Make; savings = $5,000

Ans: B, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($18) (5,000) – (5,000) ($16 + $8 – $5) = $5,000

92.

Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$20,000 9,000 21,000 8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make? a. $50,000 b. $56,000 c. $44,000 d. $52,000 Ans: D, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: $20,000 + $9,000 + $21,000 + $2,000 = $52,000

93.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

94.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

95.

Opportunity cost must be considered in decisions involving a. budgeting. b. financial accounting. c. CVP analysis. d. resources that have alternative uses.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

20 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 96.

The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. subtracted from the "Make" costs. b. added to the "Make" costs. c. added to the "Buy" costs. d. none of these.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

97.

Opportunity cost is usually a. a standard cost. b. a potential benefit. c. a sunk cost. d. included as part of cost of goods sold.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

98.

Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. quality control specifications may not be met. b. the outside supplier could increase prices significantly in the future. c. profitable product lines may be dropped. d. the supplier may not deliver on time.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

99.

Tex's 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 Tex's 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, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $120,000 + $25,000 + $45,000 + $20,000 = $210,000

Incremental Analysis 100.

20 - 23

Tex's 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 Tex's 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. Buy and save $5,000 b. Make and save $5,000 c. Make and save $15,000 d. Buy and save $15,000 Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $190,000 – ($120,000 + $25,000 + $45,000 + $5,000) = $5,000

101.

Bell's Shop can make 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$24,000 6,000 3,000 ?

The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed costs are $2,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component? a. $8,000 b. $6,000 c. $4,000 d. Cannot be determined. Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $39,000 – ($24,000 + $6,000 + $3,000 – $2,000) = $8,000

102.

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$34,000 15,000 9,000 10,000

Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally? a. $58,000 b. $64,000 c. $59,000 d. $62,000 Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $34,000 + $15,000 + $9,000 + $6,000 = $64,000

20 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 103.

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$27,000 16,000 4,000 7,000

None of Ruth Company's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally? a. $46,000 b. $58,000 c. $51,000 d. $55,000 Ans: D, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $27,000 + $16,000 + $4,000 + $8,000 = $55,000

104.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total costs change? a. An increase of $40,000 b. An increase of $2,500 c. An increase of $8,500 d. A decrease of $11,000

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $40,000 – ($15,000 + $6,500 + $16,000) = $2,500

105.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision? a. Make and save $500 b. Buy and save $500 c. Make and save $2,500 d. Buy and save $6,500

Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $44,000 – ($15,000 + $6,500 + $16,000) – $4,000 = $2,500

Incremental Analysis 106.

20 - 25

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Crigui could avoid $4,000 in fixed overhead costs if it acquires the 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 Crigui would expect to pay for the units? a. $34,000 b. $31,000 c. $38,000 d. $35,000

Ans: D, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $13,000 + $15,000 + $3,000 + $4,000 = $35,000

107.

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit 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 Crigui would be willing to accept to acquire the 60,000 units externally? a. $38,000 b. $34,000 c. $35,000 d. $42,000

108.

Tasty Bites produces corn chips. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead

$18 13 11 14

An outside supplier has offered to produce the corn chips for $30 per batch. How much will Tasty Bites save if it accepts the offer? a. $15 per batch b. $12 per batch c. $26 per batch d. $1 per batch Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($18 + $13 + $11) − $30 = $42

20 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 109.

NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to assemble the product is estimated at $17 per unit and the company believes the market would support a price of $68 on the assembled unit. What decision should NF Toy make? 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 $16 per unit. c. Process further, the company will be better off by $23 per unit. d. Process further, the company will be better off by $11 per unit.

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($68 − $52) − $17 = $1

110.

Moreland Clean Company spent $8,000 to produce Product 89, which can be sold as is for $10,000, or processed further incurring additional costs of $3,000 and then be sold for $14,000. Which amounts are relevant to the decision about Product 89? a. $8,000, $10,000, and $14,000 b. $8,000, $3,000, and $14,000 c. $10,000, $3,000, and $14,000 d. $8,000, $10,000, $3,000 and $14,000

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($14,000 − $10,000) − $3,000 = $1,000

111.

Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do? a. Sell the inventory for $20,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $15,000 cost d. Manufacture further and sell it for $50,000

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($50,000 − $15,000) − $20,000 = $15,000

112.

New Age Makeup produces face cream. Each bottle of face cream 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. New Age Makeup could sell the sunscreen bottles for $23 each. a. Face cream must be processed further because its profit is $9 each. b. Face cream must not be processed further because costs increase more than revenue. c. Face cream must not be processed further because it decreases profit by $1 each. d. Face cream must be processed further because it increases profit by $3 each.

Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $23 − ($10 + $14) = − $1

Incremental Analysis 113.

20 - 27

Janssen Company has old inventory on hand that cost $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if manufactured further at an additional cost of $24,000. What should Janssen do? a. Sell the inventory for $32,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $24,000 cost d. Manufacture further and sell it for $80,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $80,000 − $24,000 = $56,000

114.

A company has a process that results in 24,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $160,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? a. Process further, the company will be better off by $16,000. b. Sell now, the company will be better off by $16,000. c. Process further, the company will be better off by $144,000. d. Sell now, the company will be better off by $160,000.

Ans: B, LO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($14 − $8) (24,000) − $160,000 = $16,000

115.

The decision rule on whether to sell or process further a. varies from situation to situation. b. is process further as long as total revenue exceeds present revenues. c. is process further if incremental 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, LO: 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

116.

Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $60 and Eddy Company would sell it for $135. The cost to assemble the product is estimated at $27 per unit and Eddy Company believes the market would support a price of $174 on the assembled unit. What is the correct decision using the sell or process further decision rule? a. Sell before assembly, the company will be better off by $27 per unit. b. Sell before assembly, the company will be better off by $39 per unit. c. Process further, the company will be better off by $39 per unit. d. Process further, the company will be better off by $12 per unit.

Ans: D, LO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($174 − $135) − $27 = $12

20 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 117.

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct material $ 31,000 Direct labor 29,000 Manufacturing overhead 40,000 Total $100,000 The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made? a. $18,000 incremental savings b. $6,000 incremental cost c. $2,000 incremental savings d. $18,000 incremental cost

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $82,000 − ($31,000 + $29,000 + $16,000) = $6,000

118.

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, LO: 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

119.

Marcus Company gathered the following data about the three products that it produces: Present Estimated Additional Estimated Sales Product Sales Value Processing Costs if Processed Further A $12,000 $8,000 $21,000 B 14,000 5,000 18,000 C 11,000 3,000 16,000 Which of the products should not be processed further? a. Product A b. Product B c. Product C d. Products A and C

Incremental Analysis 120.

20 - 29

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July 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 2,000 $20,000 4,800 7,000 $ 8,200

Total 4,900 $60,000 28,000 17,000 $15,000

How much are total joint costs of the products? a. $28,000 b. $17,000 c. $45,000 d. $15,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

121.

Which of the following is not involved in the sell or process further decision? a. Revenues b. Variable costs c. Opportunity costs d. Fixed costs

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

122.

All of the following are relevant to the sell or process further decision except a. costs incurred beyond the split-off point. b. revenues at the split-off point. c. costs incurred before the split-off point. d. revenues beyond the split-off point.

Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

123.

Costs incurred before the split-off point are a. sunk costs. b. incremental costs. c. relevant costs. d. opportunity costs.

Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

124.

Which of the following terms are synonymous? a. Avoidable costs and irrelevant costs b. Unavoidable costs and incremental costs c. Sunk costs and relevant costs d. Joint costs and sunk costs

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

20 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

125. Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Product Green lumber Rough lumber Sawdust

Sales Value at Split-off $159,600 124,000 102,000

Additional Variable Costs $24,000 28,200 19,600

Sales Value after Further Processing $178,000 173,600 130,000

The additional profit that would result from processing rough lumber further is a. $21,400. b. $49,600. c. $145,400. d. $95,800. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($173,600 − $124,000) − $28,200 = $21,400

126. Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Product Green lumber Rough lumber Sawdust

Sales Value at Split-off $159,600 124,000 102,000

Additional Variable Costs $24,000 28,200 19,600

Sales Value after Further Processing $178,000 173,600 130,000

Which products should be processed further? a. Green lumber and rough lumber b. Green lumber and sawdust c. Rough lumber and sawdust d. All three products Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

Incremental Analysis

20 - 31

127. Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Product Green lumber Rough lumber Sawdust

Sales Value at Split-off $159,600 124,000 102,000

Additional Variable Costs $24,000 28,200 19,600

Sales Value after Further Processing $178,000 173,600 130,000

What is the increase in profit if the appropriate products are processed further? a. $24,200 b. $29,800 c. $96,000 d. $255,800 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($173,600 − $124,000 − $28,200) + ($130,000 − $102,000 − $19,600) = $29,800

128.

The point in the production process when joint products are readily identifiable is the a. separation point. b. split-off point. c. common point. d. break-even point.

Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

129.

The costs incurred prior to the split-off point are referred to as a. separable costs. b. split-off costs. c. joint product costs. d. joint costs.

Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

130.

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If HiTech updates the computers and sells them, net income will increase by $9,000.

At what price were the updated versions sold? a. $26,800 b. $13,200 c. $13,600 d. $16,000 Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $4,600 + $2,400 + $9,000 = $16,000

20 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 131.

What amount would be considered sunk costs? a. $2,400 b. $9,000 c. $17,800 d. $20,200 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

132.

When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the a. book value of the old equipment. b. cost of replacing the old equipment. c. salvage value of the old equipment. d. difference between future cost savings and the new equipment’s costs.

Ans: D, LO: 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

133.

In an equipment replacement decision, the cost of the old equipment is a(n) a. incremental cost. b. sunk cost. c. relevant cost. d. opportunity cost.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

134.

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000

If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. Which of the following amounts is irrelevant to the replacement decision? a. $375,000 b. $135,000 c. $315,000 d. $60,000 Ans: B, LO: 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 Solution: $225,000 − $90,000 = $135,000

Incremental Analysis

135.

20 - 33

If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. What is the net cost of the new equipment? a. $375,000 b. $315,000 c. $150,000 d. $75,000 Ans: B, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: $375,000 − $60,000 = $315,000

136.

If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The net advantage (disadvantage) of replacing the old equipment with the new equipment is a. $60,000 b. $(15,000) c. $(75,000) d. $90,000 Ans: B, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics Solution: (5) (300,000 − 240,000) − ($375,000 − $60,000) = $(15,000)

137.

Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cost of the old equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The accumulated depreciation of the old equipment

Ans: B, LO: 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

20 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

138.

A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment d. Book value of the old equipment

Ans: D, LO: 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

139.

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? a. It is relevant since it increases the cost of the new equipment. b. It is not relevant since it reduces the cost of the old equipment. c. It is not relevant to the decision since it does not impact the cost of the new equipment. d. It is relevant since it reduces the cost of the new equipment.

Ans: D, LO: 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

140.

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment b. Depreciation expense of the old equipment c. The loss on disposal of the old equipment d. The current disposal price of the old equipment

Ans: D, LO: 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

141.

The cash disposal value of old equipment is considered to be a (an) a. irrelevant cost. b. avoidable cost. c. sunk cost. d. relevant cost.

Ans: D, LO: 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

142.

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cash price of the new equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The cost savings if the new equipment is purchased

Ans: C, LO: 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

143.

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, LO: 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

Incremental Analysis 144.

20 - 35

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, LO: 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

145.

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis? a. Annual depreciation charge on the old equipment b. Book value of the old equipment c. Estimated annual depreciation of the new equipment d. Cost of the new equipment

Ans: D, LO: 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

146.

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, LO: 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

147.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $300,000 Accumulated Depreciation 90,000 Remaining useful life 10 years Useful life -0Annual operating costs $240,000

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is a sunk cost? a. $240,000 b. $180,600 c. $600,000 d. $210,000 Ans: D, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $300,000 − $90,000 = $210,000

20 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 148.

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is relevant to the replacement decision? a. $210,000 b. $300,000 c. $59,400 d. $90,000 Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $240,000 − $180,600 = $59,400

149.

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. The net advantage (disadvantage) of replacing the old machine is a. $18,000 b. $24,000 c. $(6,000) d. $(60,000) Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: (10) ($240,000 − $180,600) − $600,000 + $24,000 = $18,000

Incremental Analysis 150.

20 - 37

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Wood $500,000 325,000 175,000 75,000 $100,000

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans: B, LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $110,000 − $7,000 = $103,000

151.

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Wood $500,000 325,000 175,000 75,000 $100,000

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans: A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $110,000 − $15,000 = $125,000

152.

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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

20 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

153.

A 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 90,000 130,000 $ (40,000)

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 $40,000. b. decrease by $90,000. c. decrease by $12,000. d. increase by $12,000. Ans: C, LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $90,000 − (.60) ($130,000) = $12,000

154.

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued, a. total net income will increase by the amount of the product line's fixed costs. b. total net income will decrease by the amount of the product line's fixed costs. c. the contribution margin of the product line will indicate the net income increase or decrease. d. the company's total fixed costs will decrease.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

155.

A segment has the following data: Sales Variable expenses Fixed expenses

$700,000 300,000 550,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments? a. $400,000 increase b. $400,000 decrease c. $5,000 decrease d. Cannot be determined from the data provided. Ans: B, LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $700,000 − $300,000 = 400,000

Incremental Analysis 156.

20 - 39

Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results of which appear below for 2013: Sales Variable expenses Fixed expenses Net loss

$1,400,000 920,000 600,000 $ (120,000)

If this product line is eliminated, 30% of the fixed expenses can be eliminated. How much are the relevant costs in the decision to eliminate this product line? a. $180,000 b. $1,520,000 c. $1,340,000 d. $1,100,000 Ans: D, LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $920,000 + (.30) ($600,000) = $1,100,000

157.

North Division has the following information: Sales $1,200,000 Variable expenses 640,000 Fixed expenses 620,000 If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped? a. $60,000 increase b. $620,000 decrease c. $560,000 decrease d. $580,000 increase

Ans: C, LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Solution: $1,200,000 − $640,000 = $560,000

158.

The potential effects of the decision to eliminate a line of business on existing employees and the community are a. ignored in incremental analysis. b. quantitative factors. c. qualitative factors. d. opportunity costs.

Ans: C, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

159.

When will the elimination of a product line have no effect on the company’s overall profit? a. When the avoidable fixed costs equal the product line’s contribution margin b. When the unavoidable fixed costs equal the product line’s contribution margin c. When there are no fixed costs incurred by the product line d. When the product line contribution margin is negative

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

20 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 160.

Accounting's contribution to the decision-making process occurs in all of the following steps except to a. identify the problem and assign responsibility. b. determine possible courses of action. c. review results of the decision. d. make a decision.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

161.

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income? a. $5,000 decrease b. $5,000 increase c. $15,000 increase d. $90,000 increase

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions Solution: ($21*5,000) + (($18+$2) x 5,000)= 105,000- 100,000 = 5,000 increase

162.

In a make-or-buy decision, opportunity costs are a. added to the make total cost. b. deducted from the make total cost. c. added to the buy total cost. d. ignored.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

163.

Which of the following would generally not affect a make-or-buy decision? a. Selling expenses b. Direct labor c. Variable manufacturing costs d. Opportunity cost

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

164.

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

165.

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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Incremental Analysis 166.

20 - 41

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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. 47. 48. 49. 50.

b b c b c d c b d c c c b b c a d b d d

51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

b a a d b d d d b a b d c b b d b d b c

71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

a b d a c a d b d a d b b a c a b d b b

91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

b d a c d b b c c a a b d b c d c b a c

111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

d b d b d d b c b c d c a d a c b b d d

131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

c d b b b b b d d d d c c d d b d c a b

151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166.

a b c c b d c c a a b a a c c d

20 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

BRIEF EXERCISES BE 167 Sedgwick Inc. is considering Plan 1 which is estimated to have sales of $40,000 and costs of $15,500. The company currently has sales of $37,000 and costs of $14,000. Instructions Compare plans using incremental analysis. Ans: N/A, LO: 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 167

(3 min.)

Incremental revenue ($40,000 – $37,000) Incremental costs ($15,500 – $14,000) Incremental increase in profit if Plan 1 is selected

$3,000 (1,500) $1,500

BE 168 Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1 per bear. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. Ans: N/A, LO: 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 168

(5 min.)

Incremental revenue (8,000 × $14) Incremental variable costs ($12 × 8,000) Incremental shipping costs ($1× 8,000) Incremental profit if special order accepted

$112,000 (96,000) (8,000) $ 8,000

BE 169 Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable)

$100 140 80 150

Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Incremental Analysis Solution 169

20 - 43

(5 min.)

Incremental Analysis Cost to buy (1,200 × $420) Cost savings: Savings of DM $100 × 1,200 = $120,000 Savings of DL $140 × 1,200 = 168,000 Savings of VOH $80 × 1,200 = 96,000 Savings of FOH 40% × $150 × 1,200 = 72,000 Total cost savings Incremental net cost to buy

Incremental Effect $(504,000)

+ 456,000 $ (48,000)

BE 170 Parks Corporation currently manufactures 3,000 staplers annually for its main product. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 3.00 7.00 4.00 7.00 $21.00

Gallup Company has contacted Parks with an offer to sell it 3,000 staplers for $18.00 each. $5 of the fixed overhead per unit is unavoidable. Instructions Prepare an incremental analysis for the make-or-buy decision. Ans: N/A, LO: 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 170

(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

$(54,000) + 9,000 + 21,000 + 12,000 + 6,000 $ (6,000)

BE 171 Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $13 each, and can supply all the units it needs. Instructions Prepare an incremental analysis to determine if Calc should buy the baskets from the supplier. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

20 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 171 (6–8 min.) Incremental cost to buy (900 × $13) Incremental cost savings: DM ($4 × 900) VOH ($3 × 900) DL ($2 × 900) FOH ($5 × 30% × 900) Additional cost to buy

$(11,700) +3,600 +2,700 +1,800 +1,350 $ (2,250)

or Make Incremental cost to buy (900 × $13) Incremental costs to make: DM ($4 × 900) VOH ($3 × 900) DL ($2 × 900) FOH Incremental cost to buy

$3,600 2,700 1,800 4,500 $12,600

Buy $11,700

3,150 $14,850

BE 172 Hernandez, Inc. manufactures three models of picture frames for a total of 8,000 frames per year. The unit cost to produce a metal frame follows: Direct materials Direct labor Variable overhead Fixed overhead (70% unavoidable) Total

$ 6 8 2 5 $21

A local company has offered to supply Hernandez the 8,000 metal frames it needs for $17 each. Instructions Create an incremental analysis for the make-or-buy decision. Ans: N/A, LO: 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 172

(5 min.)

Incremental cost to buy Incremental savings: Direct materials savings Direct labor savings Variable overhead savings Fixed overhead savings—avoidable portion Incremental savings if “buy” decision is made

$(136,000) +48,000 +64,000 +16,000 +12,000 $ 4,000

Incremental Analysis

20 - 45

BE 173 Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back): Direct materials Direct labor Variable overhead Fixed overhead Total

$ 1 10 5 8 $24

Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products. Instructions Should Wood Chuck make or buy the cushions? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 173

(5 min.)

Cost to make – Cost to buy = Incremental cost ($24 – $2) – $18 = $4 = Incremental cost per set Incremental cost to make = $4 × 5,000 units = $20,000 Therefore, Wood Chuck should buy to save $4 per set. BE 174 Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000 more to turn the annual chicken crop into chicken meat. Instructions If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would report. What should Paola Farms do? Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 174

(4 min.)

Incremental revenues: ($2.75 – $1.00) × 60,000 chickens = $105,000 Incremental costs: given as $65,000 Incremental profits: $105,000 – $65,000 = $40,000 profit Paola Farms should slaughter.

BE 175 Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000.

20 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 175

(Cont.)

Instructions Prepare an analysis showing whether the old machine should be retained or replaced. Ans: N/A, LO: 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 175

(4 min.)

Variable manufacturing costs New machine cost Net savings over 3 years

Retain Equipment $1,560,000

Replace Equipment $1,230,000

Net Income Change $330,000* (300,000) $ 30,000

*For 3 years of remaining life BE 176 Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow: Units sold Revenue Variable departmental costs Fixed costs Net income (loss)

Sour Cream 2,000 $10,000 6,000 5,000 $ (1,000)

Ice Cream 500 $20,000 13,000 2,000 $ 5,000

Yogurt 400 $10,000 4,200 3,000 $ 2,800

Butter 200 $20,000 4,800 7,000 $ 8,200

Total 3,100 $60,000 28,000 17,000 $15,000

Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. Ans: N/A, LO: 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 176

(4 min.)

Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5,000 x .30) Incremental decrease in profits if dropped

$(10,000) + 6,000 + 1,500 $ (2,500)

BE 177 Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. Results of the fourth quarter are presented below: Books Music Videos Total Units sold 1,000 2,000 2,000 5,000 Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)

$24,000 15,000 3,000 4,400 $ 1,600

$48,000 22,000 6,000 8,800 $11,200

$30,000 23,000 4,000 8,800 $ (5,800)

$102,000 60,000 13,000 22,000 $ 7,000

Incremental Analysis BE 177

20 - 47

(Cont.)

Instructions Prepare an incremental analysis of the effect of dropping the Video product line. Ans: N/A, LO: 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 177

(5 min.)

Incremental revenue Incremental savings on variable costs Incremental savings on direct fixed costs Incremental decrease in profit to drop video line

$(30,000) +23,000 +4,000 $ (3,000)

BE 178 Harmark has three product lines in its retail stores: kites, wind socks, and flags. Results of the fourth quarter are presented below: Kites Wind Socks Flags Total Units sold 1,000 2,000 2,000 5,000 Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)

$22,000 17,000 1,000 8,000 $ (4,000)

$40,000 22,000 3,000 8,000 $ 7,000

$23,000 12,000 2,000 8,000 $ 1,000

$85,000 51,000 6,000 24,000 $ 4,000

The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines. Instructions What will happen to profits if Harmark discontinues the Kites product line? Ans: N/A, LO: 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 178

(5 min.)

Incremental revenue Incremental costs: Variable cost savings Direct fixed cost savings Drop in profits if discontinued

$(22,000) +17,000 +1,000 $ (4,000)

BE 179 Dolls R Us sells three products in its retail stores: baby dolls, teenage dolls, and plush dolls. Results of the fourth quarter are below: Baby Dolls Teenage Dolls Plush Dolls Total Units sold 1,000 2,000 2,000 5,000 Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)

$32,000 22,000 5,000 6,000 $ (1,000)

$43,000 24,000 4,000 7,000 $ 8,000

$26,000 13,000 3,000 7,000 $ 3,000

$101,000 59,000 12,000 20,000 $ 10,000

20 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 179

(cont.)

Instructions Demand for individual products is not affected by changes in other product lines. Prepare an incremental analysis to determine if the Baby Dolls should be discontinued Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 179

(5 min.)

Incremental revenue Incremental costs: Variable cost savings Direct cost savings Drop in profits if discontinued

$(32,000) +22,000 +5,000 $ (5,000)

EXERCISES Ex. 180 Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow: Units sold Selling price per unit Variable costs per unit Fixed costs per unit

A 8,000 65 35 15

B 16,000 52 30 15

For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold. The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $39. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year's result to be the same as last year's. Instructions Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision. Ans: N/A, LO: 2, 7, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Incremental Analysis Solution 180

20 - 49

(8 – 10 min.)

Calculation of contribution margin per unit:

Selling price per unit Less: variable costs/unit Net incremental net income

A $ 65 35 $ 30

B $ 52 30 $ 22

C $ 80 39 $ 41

Fixed costs = 15 × (8,000 + 16,000) = 360,000 Company profit with Products A and B: Units sold Sales revenue Less: Variable costs Contribution margin Less: Fixed costs Net profit Company profit with Products A and C: Units sold Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net profit

A 8,000

B 16,000

Total

$ 520,000 280,000 $ 240,000

$ 832,000 480,000 $ 352,000

$ 1,352,000 $ 760,000 592,000 360,000 $ 232,000

A 8,800*

C 11,000

Total

$ 572,000 308,000 $ 264,000

$ $

880,000 429,000 451,000

$ 1,452,000 737,000 715,000 360,000 $ 355,000

*Product A sales increase by 10%, (8,000  110%) Yes product C should be introduced since net profit increases by $123,000 ($355,000 − $232,000)

Ex. 181 Felter Company produced and sold 50,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows: Sales price Variable manufacturing cost Fixed manufacturing cost ($500,000 ÷ 50,000) Profit per unit

$70 $45 10

55 $15

The company received a proposal from a foreign company to buy 10,000 units of Felter Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

20 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 181

(9–13 min.) FELTER COMPANY Incremental Analysis Proposal to sell 10,000 units at $50

Revenues (10,000 × $50) Costs (10,000 × $45) Net Income

Reject Order $ -0-0$ -0-

Accept Order $500,000 (450,000) $ 50,000

Net Income Increase (Decrease) $500,000 (450,000) $ 50,000

Felter Company would increase its income by $50,000 in accepting the special order. Ex. 182 Carney Company manufactures cappuccino makers. For the first eight months of 2013, the company reported the following operating results while operating at 80% of plant capacity: Sales (500,000 units) Cost of goods sold Gross profit Operating expenses Net income

$90,000,000 54,000,000 36,000,000 24,000,000 $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit. In September, Carney Company receives a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Carney Company accept the special order? Justify your answer. Ans: N/A, LO: 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 182

(12–17 min.)

(a) Revenues Cost of Goods Sold Operating Expense Net Income

Reject Order $ -0-0-0$ -0-

Accept Order $5,400,000 3,800,000* 1,410,000** $ 190,000

Net Income Increase (Decrease) $5,400,000 (3,800,000) (1,410,000) $ 190,000

*Variable cost of goods sold = 40,000 × $95 = $3,800,000. **Variable operating expenses = 40,000 × $35 = $1,400,000 + $10,000 = $1,410,000. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that acceptance of the special order will not affect relations with existing customers.

Incremental Analysis

20 - 51

Ex. 183 Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs. For the first 6 months of 2013, the company reported the following operating results while operating at 80% capacity: Sales (100,000 units) Cost of goods sold Gross profit Operating expenses Net income

$7,000,000 4,200,000 2,800,000 2,000,000 $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Gregg Company accept the special order? Justify your answer. Ans: N/A, LO: 3, 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.)

(a) Revenues Cost of Goods Sold Operating Expense Net Income

Reject Order $ -0-0-0$ -0-

Accept Order $27,000 18,900 9,600 $ (1,500)

Net Income Increase (Decrease) $27,000 (18,900) (9,600) $ (1,500)

Variable cost of goods sold = $4,200,000 × 75% = $3,150,000. Variable cost of goods sold per unit = $3,150,000 ÷ 100,000 = $31.50. Variable cost of goods sold for the special order = 600 × $31.50 = $18,900. Variable operating expenses = $2,000,000 × 70% = $1,400,000 Variable operating expenses per unit = $1,400,000 ÷ 100,000 = $14 Variable operating expenses for the special order = 600 × $14 = $8,400 + $1,200 = $9,600 (b)

The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.

Ex. 184 Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is: Materials Labor Variable overhead Fixed overhead Total

$ 10,000 30,000 20,000 40,000 $100,000

Larkin also incurs 5% sales commission ($0.30) on each disc sold.

20 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex 184

(cont.)

Rudd Corporation offers Larkin $4.25 per disc for 3,000 discs. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer, its fixed overhead will increase from $40,000 to $43,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Innova accept the special order? Why or why not? Ans: N/A, LO: 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 184

(12 min.)

(a) Revenues Materials ($0.40) Labor ($1.20) Variable overhead ($0.80) Fixed overhead Sales commissions Net income (b)

Reject Order $ -0-0-0-0-0-0$ -0-

Accept Order $12,750 (1,200) (3,600) (2,400) (3,000) -0$ 2,550

Net Income Effect $12,750 (1,200) (3,600) (2,400) (3,000) -0$ 2,550

As shown in the incremental analysis, Larkin should accept the special order because incremental revenue exceeds incremental expenses by $2,550.

Ex. 185 Kasten, Inc. budgeted 10,000 widgets for production during 2013. Kasten has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr. × 2 hrs./unit) Variable manufacturing overhead ($4/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $46

$ 70,000 300,000 40,000 50,000 $460,000

Instructions Answer each of the following independent questions: 1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten has never done business. This customer has offered $43 per widget. Should Kasten accept the order? 2. Kasten received an offer from another company to manufacture the same quality widgets for $39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on distribution? Ans: N/A, LO: 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

Incremental Analysis Solution 185

20 - 53

(10–12 min.)

1. Yes, Kasten can make an extra $3,000. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $4 = Incremental profit per unit

$43 41 $ 2

Total incremental profit = $2 × 1,000 = $2,000 2. Yes, Kasten will save $10,000 if it buys instead of makes. Cost to buy per widget Cost to make per widget: $7 + ($15 × 2) + $4 = Incremental savings per widget if purchased

$39 41 $ 2

Total incremental savings if purchased = $2 × 10,000 = $20,000 Ex. 186 Coyle Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$35,000 15,000 10,000 20,000 $80,000

Another company has offered to sell the same component part to the company for $13 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $22,000. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision. Ans: N/A, LO: 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 186

(13–18 min.)

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6,000 × $13) Total annual cost Opportunity cost Total cost

Make $35,000 15,000 10,000 20,000 -080,000 22,000 $102,000

Buy -0-0-020,000 78,000 98,000 -0$98,000

Increase (Decrease) $ 35,000 15,000 10,000 -0(78,000) (18,000) 22,000 $ 4,000

Income is expected to increase by $4,000 if the component part is purchased from the outside firm and the new product is manufactured.

20 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 187 Agler Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 1 10 5 8 $24

Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for $17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated to other products. Instructions Should Agler make or buy the subassemblies? Explain your answer. Ans: N/A, LO: 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 187

(6 min.)

Cost to make - cost to buy = incremental cost ($24 – $2) – $17 = $5 Incremental cost to make = $5 × 4,000 units = $20,000 Agler should buy to save $5 per unit. Ex. 188 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. 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 bicycles per year. A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

Incremental Analysis Solution 188

20 - 55

(15–20 min.)

(a) Direct Materials (50,000 × $8) Direct Labor (50,000 × $9) Variable Manufacturing Costs ($450,000 × 60%) Fixed Manufacturing Costs Purchase Price (50,000 × $21) Total annual cost

Make $ 400,000 450,000

Buy $ -0-0-

Net Income Increase (Decrease) $ 400,000 450,000

270,000 30,000 -0$1,150,000

-030,000 1,050,000 $1,080,000

270,000 -0(1,050,000) $ 70,000

(b) The seats should be purchased from the outside supplier. As indicated, the company's net income would increase $70,000 by purchasing the seats. Ex. 189 Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows: Direct materials Direct labor Overhead Total

$65 48 96 $209

Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs. A vendor has offered to supply the NJF1 component at a price of $175 per unit. Instructions (a) Should Larkin purchase the component from the outside vendor if its capacity remains idle? (b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Interdesign need to make an accurate decision? Show your calculations. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

20 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 189

(10-12 min.)

(a)

Direct material Direct labor Material handling Variable overhead Purchase price Total unit cost

Make NJF1 $ 65 48 10 43* 0 $ 166

Buy NJF1 $ 0 0 0 0 175 $175

Net Income Increase (Decrease) $ 65 48 10 43 (175) $(9)

*Variable overhead = 50%  ($96 − $10) The unit should not be purchased from the outside vendor, as the per unit cost would be $9 greater than if they made it. (b) In order for Larkin to make an accurate decision, they would have to know the opportunity cost of manufacturing the other product. As determined in (a), purchasing the product from outside would cost $9,000 more (1,000  $9). Interdesign would have to increase their contribution margin by more than $9,000 through the manufacture of the other product, before it would be economical for them to purchase the NJF1 from the outside vendor. Ex. 190 A company manufactures three products using the same production process. The costs incurred up to the split-off point are $200,000. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of units produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follow: Number of Selling Price Selling Price Additional Product Units Produced at Split-off after Processing Processing Costs X 5,000 $10.00 $15.00 $14,000 Y 10,000 11.60 16.20 21,000 Z 4,000 19.40 21.60 12,000 Instructions (a) Which product(s) should be processed further and which should be sold at the split-off point? (b) Would your decision be different if the company was using the quantity of output to allocate joint costs? Explain. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 190

(8–10 min.)

(a) Revenue after further processing: Product X–$75,000 (5,000 units X $15.00 per unit) Product Y–$1,62,000 (10,000 units X $16.20 per unit) Product Z–$86,400 (4,000 units X $21.60 per unit) Revenue at split-off: Product X–$50,000 (5,000 units X $10.00 per unit) Product Y–$116,000 (10,000 units X $11.60 per unit) Product Z–$77,600 (4,000 units X $19.40 per unit)

Incremental Analysis Solution 190

20 - 57

(cont.)

X Incremental revenue $25,000 Incremental cost 14,000 Increase (decrease) in profit $ 11,000

Y $46,000 21,000 $25,000

Z $ 8,800 12,000 $(3,200)

Product X and Y should be processed further but Product Z should be sold at the split–off point. (b) The decision would remain the same. It does not matter how the joint costs are allocated because joint costs are irrelevant to this decision. Ex. 191 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2013, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs

$6.00 1.20 .80 .60 $8.60

The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. Ans: N/A, LO: 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 191

(15–20 min.) Sell Chemical $12.00

Process Further $15.50

6.00 1.20 .80 .60 8.60 $ 3.40

7.70 1.80 1.30 .60 11.40 $ 4.10

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) $3.50 (1.70) (.60) (.50) — (2.80) $.70

(A) $6.00 + $1.70 (B) $1.20 + $.60 (C) $.80 + $.50 Assuming the company sells all 40,000 gallons that it produces, the incremental net income would be $28,000 (40,000 gallons × $.70).

20 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 192 Ecker, Inc. produces milk at a total cost of $66,000. The production generates 60,000 gallons of milk which can be sold for $1 per gallon to a pasteurization company, or the milk can be processed further into ice cream and then sold for $3 per gallon. It costs $75,000 more to turn the annual milk supply into ice cream. Instructions If Ecker processes the milk into ice cream, how much is the incremental profit or loss? Should Ecker process the milk into ice cream or sell it as is? Ans: N/A, LO: 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 192

(6 min.)

Incremental revenues: ($3 – $1) × 60,000 gallons = $120,000 Incremental costs: given as $75,000 Incremental profits: $120,000 – $75,000 = $45,000 profit Ecker should process into ice cream. Ex. 193 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. Direct materials Direct labor Variable overhead (70% of direct labor) Fixed overhead (30% of direct labor) Manufacturing cost per unit

$150 70 49 21 $290

The unassembled bikes are sold to retailers at $450 each. Speedy 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 $495 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. (b) Should Speedy sell or process further? Why or why not? Ans: N/A, LO: 5, Bloom: E, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Incremental Analysis Solution 193

20 - 59

(12 min.)

(a)

Sales per unit Costs per unit Materials Labor Variable overhead (70%) Fixed overhead Total Net income per unit

Sell $450

Process Further $495

Net Income Increase (Decrease) $ 45

150 70 49 21 $290 $160

155 80 56 21 312 $183

(5) (10) (7) -0(22) $ 23

(b) As shown in the incremental analysis, Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $23 per unit.

Ex. 194 Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life

Old Machine $340,000 230,000 5 years

New Machine $370,000 — 5 years

It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Instructions Determine whether the company should purchase the new machine. Ans: N/A, LO: 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 194

(11–16 min.)

Cost savings New machine cost Proceeds from sale of old machine Net incremental net income

Retain Equipment $ -0-0$ -0$ -0-

Replace Net Income Equipment Increase/(Decrease) $425,000 (A) $425,000 (370,000) (370,000) 8,000 8,000 $ 63,000 $ 63,000

(A) $85,000 × 5 = $425,000. The company should purchase the new machine because there will be an increase in net income of $63,000.

20 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 195 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life

Current Copier $10,000 8,000 7,000 5 years

New Model $20,000 — 2,600 5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Instructions Prepare an analysis to show whether the company should retain or replace the machine. Ans: N/A, LO: 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 195

(12–16 min.)

Operating costs New machine cost Salvage value Totals

Retain Machine $35,000 -0-0$35,000

Replace Machine $13,000 20,000 (1,000) $32,000

Net Income Increase (Decrease) $22,000 (20,000) 1,000 $ 3,000

The current copier should be replaced. The incremental analysis shows that net income for the five-year period will be $3,000 higher by replacing the current copier. Ex. 196 Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2013 are presented below. Bud Wise Er Total Units sold 3,000 5,000 2,000 10,000 Revenue $70,000 $50,000 $40,000 $160,000 Less variable costs 32,000 26,000 16,000 74,000 Less direct fixed costs 14,000 19,000 12,000 45,000 Less allocated fixed costs 6,000 10,000 4,000 20,000 Net income $18,000 $ (5,000) $ 8,000 $ 21,000 All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that sales at the Bud division will increase by 12%, and that sales at the Er division will stay the same. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

Incremental Analysis Solution 196

20 - 61

(10–12 min.)

(a) Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income

Bud $78,400 35,840 14,000 12,537 $16,023

Er $40,000 16,000 12,000 7,463 $ 4,537

Total $118,400 51,840 26,000 20,000 $ 20,560

Calculations: Revenue = $70,000 × 112% = $78,400 Variable costs = $32,000 × 112% = $35,840 Allocation of total allocated fixed costs of $20,000: To Bud: [3,360 ÷ (3,360 + 2,000)] × $20,000 = $12,537 To Er: [2,000 ÷ (3,360 + 2,000)] × $20,000 = $7,463 (b) No. The profit decreases by $440 ($21,000 – $20,560) when the division is eliminated. The increase in sales by 12% of the Bud division was not enough to offset the loss of the Wise division. Ex. 197 Trump Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-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, 2013 are presented below: Sales Cost of goods sold Gross profit Selling & administrative expenses Net income

Timber Division $1,500,000 900,000 600,000 250,000 $ 350,000

Consumer Division $500,000 350,000 150,000 180,000 $ (30,000)

Total $2,000,000 1,250,000 750,000 430,000 $ 320,000

In the Consumer Division, 70% of the cost of goods sold are variable costs and 35% of selling and administrative expenses are variable costs. The management of the company feels it can save $45,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. (b) If the company had discontinued the division for 2013, determine what net income would have been. Ans: N/A, LO: 7, Bloom: E, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

20 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 197

(20–25 min.)

(a)

CONSUMER DIVISION

Sales Variable expenses: Cost of goods sold Selling and admin. exp. Contribution margin Fixed expenses: Cost of goods sold Selling and admin. exp. Net income (A) (B)

Continue $500,000

Net Income Increase (Decrease) $(500,000)

Eliminate $ -0-

245,000 (A) 63,000 (B) 192,000

-0-0-0-

245,000 63,000 (192,000)

105,000 (C) 117,000 (D) $ (30,000)

60,000 67,000 $(127,000)

45,000 50,000 $(97,000)

$350,000 × 70% = $245,000 $180,000 × 35% = $63,000

$350,000 – $245,000 = $105,000 $180,000 – $63,000 = $117,000

The company should continue the Consumer Division because contribution margin, $192,000, is greater than the avoidable fixed costs, $97,000. (b)

Net income for the total company would have been $223,000: Total net Income + Decrease in Net Income $320,000 + $(97,000) = $223,000

Ex. 198 Mercer has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)

Books 1,000 $20,000 17,000 1,000 7,000 $ (5,000)

Music 2,000 $40,000 22,000 3,000 7,000 $ 8,000

Videos 2,000 $25,000 12,000 2,000 7,000 $ 4,000

Total 5,000 $85,000 51,000 6,000 21,000 $ 7,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A, LO: 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 198

(6 min.)

Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued

$(20,000) + 17,000 + 1,000 $ (2,000)

Incremental Analysis

20 - 63

Ex. 199 A recent accounting graduate from Marvel State University evaluated the operating performance of Fanning Company's four divisions. The following presentation was made to Fanning's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60,000. (See analysis below.) 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

Southern Division $480,000 400,000 80,000 140,000 $ (60,000)

Total $2,480,000 1,350,000 1,130,000 940,000 $ 190,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. Ans: N/A, LO: 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 199

(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-

280,000 35,000 315,000 165,000

-0-0-0-0-

280,000 35,000 315,000 (165,000)

120,000 105,000 $ (60,000)

120,000 90,000 $(210,000)

-015,000 $(150,000)

The accountant is not correct. If the Southern Division is eliminated, the net income will be $150,000 less, not $60,000 greater. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $15,000.

20 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

COMPLETION STATEMENTS 200. An important purpose of management accounting is to provide _____________________ for decision making. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Interaction, IMA: Business Economics

201. The process used to identify the financial data that change under alternative courses of action is called __________________ analysis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

202. In a decision on whether an order should be accepted at a special price when there is plant capacity available, a major consideration is whether the special price exceeds __________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

203. The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

204. A decision whether to sell a product now or to process it further, depends on whether the incremental _____________ from processing further are greater than the incremental processing ______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

205. The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Answers to Completion Statements 200. relevant information 201. incremental (differential) 202. variable costs (incremental costs)

203. opportunity 204. revenues, costs 205. book, sunk

Incremental Analysis

20 - 65

MATCHING 206. Match the items below by entering the appropriate code letter in the space provided. A. Incremental analysis B. Opportunity cost C. Sunk cost

____

1. A cost that cannot be changed by any present or future decision.

____

2. The process of identifying the financial data that change under alternative courses of action.

____

3. The potential benefit that may be lost from following an alternative course of action.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

Answers to Matching 1. C 2. A 3. B

20 - 66 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 207 Management is often faced with the alternative of continuing to make a product or component internally, or going to an external source and purchasing the product or component. In gathering relevant information for these two alternatives, briefly identify the quantitative factors that should be considered. Are there any qualitative factors that should also be considered? Ans: N/A, LO: 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 207 The quantitative factors to be considered in a make or buy decision include the incremental costs to make the product, the incremental costs of buying the product, and the opportunity cost (potential benefit foregone) if the product is made. Generally, all variable production costs are relevant in a make or buy decision, but only some fixed costs, or no fixed costs, are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. S-A E 208 Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision? Ans: N/A, LO: 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 208 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 209 (Communication) You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows: Option #1 Initial Investment $(95,000) Cost savings of labor over 4 years 95,000

Option #2 $(270,000) 270,000

Incremental Analysis

20 - 67

S-A E 209 (Cont.) Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given. Ans: N/A, LO: 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 209 I recommend that the company accept Option #1, to purchase upgrades to our present system and to buy a more efficient printer. In the first place, the changes will be easier to implement because the equipment is similar to that which we already use. Secondly, the company will have less money invested in the project, which decreases our risk of loss should the project fail. Option #2 appears to be too risky.

CHAPTER 21 BUDGETARY PLANNING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

4 5 5 6 6 6 1 2

K C C K C C K K

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.

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

21 - 2

Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING 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.

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 LEARNING 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

Learning Objective 1 TF 39. MC 42. MC 40. MC 147. MC 41. MC 148. Learning 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. Learning 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.

Type

Item

Type

Item

Type

MC MC MC

196. 197. 208.

C C Ma

209.

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

Learning Objective 4 MC 182. Ex Ex 183. Ex Learning Objective 5 MC 129. MC 154. MC 130. MC 155. MC 131. MC 156. MC 132. MC 163. MC 133. MC 164. MC 134. MC 165. MC 135. MC 166. MC 136. MC 167. Learning Objective 6 MC 142. MC 145. MC 143. MC 146. MC 144. MC 157. BE = Brief Exercise Ex = Exercise

21 - 3

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

MC MC MC

158. MC 193. Ex 194. Ex

195. 207.

Ex C

C = Completion Ma = Matching

CHAPTER LEARNING 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 merchandise purchases budget. In service companies budgeting is a critical factor in coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts. .

21 - 4

Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition

TRUE-FALSE STATEMENTS 1.

Budgets are statements of management's plans stated in financial terms.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A benefit of budgeting is that it provides definite objectives for evaluating performance.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A budget can be a means of communicating a company's objectives to external parties.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A budget can be used as a basis for evaluating performance.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A well-developed budget can operate and enforce itself.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The budget itself and the administration of the budget are the responsibility of the accounting department.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Effective budgeting requires clearly defined lines of authority and responsibility.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

Budgetary Planning 14.

21 - 5

Budgeting and long-range planning are two terms that describe the same process.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

21 - 6 26.

Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

Budgetary Planning

21 - 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

21 - 8 42.

Test Bank for Accounting, Tools for Business Decision Making, Fifth 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

Budgetary Planning 48.

21 - 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation

21 - 10 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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

Budgetary Planning 60.

21 - 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, LO: 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, LO: 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, LO: 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 60,000 pounds of raw materials on hand on January 1, 120,000 pounds are desired for inventory at January 31, and 410,000 pounds are required for January production, how many pounds of raw materials should be purchased in January? a. 350,000 pounds b. 530,000 pounds c. 290,000 pounds d. 470,000 pounds

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 410,000 + 120,000 - 60,000 = 470,000 pounds

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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 12 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning 72.

21 - 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

1,200 426,000 472,000

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. 428,000 b. 424,000 c. 474,000 d. 429,200 Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (3,200 + 426,000 – 1,200) = 428,000

73.

An overly optimistic sales budget may result in a. increases in selling prices late in the year. b. insufficient inventories. c. increased sales during the year. d. excessive inventories.

Ans: D, LO: 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 production 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, LO: 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, LO: 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 32,000. Beginning finished goods units are 3,600. Required production units are 33,600. What are the desired ending finished goods units? a. 2,000 b. 3,600 c. 6,400 d. 5,200

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 3,600 + 33,600 − 32,000 = 5,200

21 - 14 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 6,000 (beginning units) + 104,000 − 100,000 = 10,000 (ending units)

78.

The production budget shows that expected unit sales are 48,000. The total required units are 54,000. What are the required production units? a. 6,000 b. 9,000 c. 12,000 d. Cannot be determined from the data provided.

Ans: D, LO: 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

3,000 9,000 9,900

What are the direct materials per unit? a. .33 pounds b. 3.0 pounds c. 3.3 pounds d. Cannot be determined from the data provided. Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 9,000  3,000 = 3

80.

The direct materials budget shows: Desired ending direct materials Total materials required Direct materials purchases

48,000 pounds 69,000 pounds 63,200 pounds

The total direct materials needed for production is a. 21,000 pounds. b. 5,800 pounds. c. 15,200 pounds. d. 132,200 pounds. Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 69,000 − 48,000 = 21,000

Budgetary Planning 81.

21 - 15

If the required direct materials purchases are 24,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds? a. 60,000 b. 12,000 c. 36,000 d. 24,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (3.5) (24,000) + 24,000 − (3) (24,000) = 36,000

82.

Dart, Inc. makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available: 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 umbrellas 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, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($.60 + $1.20 + $.30 + $.35) (8,000) = $19,600

83.

Which of the following expenses would not appear on a selling and administrative expense budget? a. Sales commissions b. Depreciation c. Property taxes d. Indirect labor

Ans: D, LO: 3, Bloom: C, Difficulty: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 16 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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, LO: 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, LO: 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, LO: 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, 2013 and 240,000 units for February 2013. 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, 2012, how many units should be produced in January, 2013 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 204,000 + (.3) (240,000) − 61,200 = 214,800

89.

At January 1, 2013, Deer Corp. has beginning inventory of 2,000 surfboards. Deer estimates it will sell 10,000 units during the first quarter of 2013 with a 12% increase in sales each quarter. Deer’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2013? a. $450,000 b. $1,950,000 c. $1,881,600 d. $12,544

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (10,000) (1.12) (1.12) ($150) = $1,881,600

Budgetary Planning 90.

21 - 17

Doe Manufacturing plans to sell 6,000 purple lawn chairs during May, 5,700 in June, and 6,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Doe produce during June? a. 5,745 b. 6,600 c. 5,655 d. Not enough information to determine.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 5,700 + (.15) (6,000) − (.15) (5,700) = 5,745

91.

Strand Company is planning to sell 400 buckets and produce 380 buckets during March. Each bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Strand has 300 kilos of plastic in beginning 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

92.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month? a. $2,871 b. $2,970 c. $11,484 d. $11,880

21 - 18 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 93.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted for direct labor for the month? a. $2,610 b. $10,440 c. $2,700 d. $41,760

94.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted in pounds for direct materials to be purchased for the month? a. 38,280 b. 37,680 c. 38,880 d. 40,200

95.

Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie Nursery keeps 15% of the next month’s sales as ending inventory. How many units should Lorie Nursery produce during April? a. 308 b. 332 c. 320 d. 356

Budgetary Planning 96.

21 - 19

Comma Co. makes and sells widgets. The company is in the process of preparing its selling and administrative expense budget for the month. The following budget data are available: Item 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, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($1 + $3 + $4 + $2) (80,000) + $10,000 + $120,000 + $4,000 + $6,000 = $940,000

97.

Comma Manufacturing 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 Comma Manufacturing 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

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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 456,000 + 3,200 − 1,200 = 458,000

21 - 20 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 99.

Off-Line Co. has 9,000 units in beginning finished goods. The sales budget shows expected sales to be 36,000 units. If the production budget shows that 42,000 units are required for production, what was the desired ending finished goods? a. 3,000. b. 9,000. c. 15,000. d. 27,000.

100.

Lion Industries required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively. How many pounds of direct material Z must be purchased? a. 378,000. b. 396,000. c. 408,000. d. 426,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (132,000) (3) + 330,000 − 300,000 = 426,000

101.

Haft Construction Company determines that 54,000 pounds of direct materials are needed for production in July. There are 3,200 pounds of direct materials on hand at July 1 and the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases? a. $158,400. b. $160,800. c. $163,200. d. $165,600.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (54,000 + 2,800 − 3,200) ($3) = $160,800

102.

Pell Manufacturing is preparing its direct labor budget for May. Projections for the month are that 33,400 units are to be produced and that 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.

Budgetary Planning 103.

21 - 21

Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 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. 220,500. b. 207,000. c. 274,500. d. 216,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (180,000 + 18,000 + 18,000) + (.25) (180,000 + 18,000 + 18,000 + 18,000) − (.25) (180,000 + 18,000 + 18,000) = 220,500

104.

Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 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. $3,051,000. b. $4,428,000. c. $5,319,000. d. $6,156,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (180,000 + 18,000 + 18,000) ($25) (.4) + (180,000 + 18,000 + 18,000) ($25) (.6) (.7) + (180,000 + 18,000) (25) (.6) (.3) = $5,319,000

105.

Bear, Inc. 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, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: 200,000 + (2  20,000) + [200,000 + (3  20,000)] (.25) − [200,000 + (2  20,000)] (.25) = 245,000

21 - 22 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 106.

Bear, Inc. 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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (200,000 + 20,000 + 20,000) ($35) (.4) + (200,000 + 20,000 + 20,000) ($35) (.6) (.7) + (200,000 + 20,000) ($35) (.6) (.3) = $8,274,000

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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: (120,000 + 300,000 − 80,000) ($30) = $10,200,000

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, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning 110.

21 - 23

A company has budgeted direct materials purchases of $300,000 in July and $480,000 in August. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. During August, the following items were budgeted: Wages Expense Purchase of office equipment Selling and Administrative Expenses Depreciation Expense

$150,000 72,000 48,000 36,000

The budgeted cash disbursements for August are a. $648,000. b. $426,000. c. $696,000. d. $732,000. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($300,000) (.3) + (480,000) (.7) + $150,000 + $72,000 + $48,000 = $696,000

111.

Astor Manufacturing has the following budgeted sales: January $120,000, February $180,000, and March $150,000. 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. $168,000. b. $159,000. c. $157,500. d. $150,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($150,000 * .40) + ($150,000 * .60 * .50) + ($180,000 * .6 * .5) = $159,000

112.

Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-fourths of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($180,000 * .25) + ($210,000 * .75) = $202,500.

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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 24 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

115.

The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than a. the prior years. b. management's minimum required balance. c. the amount needed to avoid a service charge at the bank. d. the industry average.

Ans: B, LO: 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, LO: 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, LO: 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning 119.

21 - 25

Kam Department Store reported the following information for 2013: 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 Kam receive in November? a. $580,000 b. $1,300,000 c. $1,200,000 d. $1,160,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($1,160,000) (.5) + ($1,240,000) (.5) = $1,200,000

120.

The following information was taken from Southgate Industry’s cash budget for the month of July: Beginning cash balance $480,000 Cash receipts 304,000 Cash disbursements 544,000 If the company 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $480,000 + $304,000 − $544,000 − $400,000 = $160,000

121.

The cash budget reflects a. all revenues and all expenses for a period. b. expected cash receipts and cash disbursements from all sources. c. all the items that appear on a budgeted income statement. d. all the items that appear on a budgeted balance sheet.

Ans: B, LO: 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 Terra Co.: 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

21 - 26 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition MC. 122

(cont.)

a. b. c. d.

$370,320. $336,000. $360,000. $352,800.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($360,000) (.7) + ($420,000) (.2) + ($300,000) (.08) = $360,000

123.

Hyde Corp.'s cash budget showed total available cash less cash disbursements. What does this amount equal? a. Ending cash balance b. Total cash receipts c. The excess of available cash over cash disbursements d. The amount of financing required

Ans: C, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

125.

A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($540,000) (.6) + ($216,000) (.3) + ($360,000) (.05) = $406,800

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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning 127.

Correy Inc. reported the following information for 2013: October November Budgeted sales $460,000 $440,000 Budgeted purchases $240,000 $256,000 • • • • •

21 - 27

December $540,000 $288,000

All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month. Cost of goods sold is 35% of sales. Correy 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 Correy receive during November? a. $220,000 b. $490,000 c. $450,000 d. $440,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($440,000) (.5) + ($460,000) (.5) = $450,000

128.

Correy Company reported the following information for 2013: Budgeted sales Budgeted purchases • • •

October $460,000 $240,000

November $440,000 $256,000

December $540,000 $288,000

Cost of goods sold is 35% of sales. Correy 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, 2013? a. $96,000 b. $144,000 c. $204,000 d. $102,400 Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($240,000) (.40) = $96,000

129.

Petal Co. reported the following information for 2013: Budgeted sales • •

October $930,000

November $870,000

December $1,080,000

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, 2013 budgeted Accounts Receivable? a. $900,000 b. $540,000

21 - 28 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition MC. 129

(cont.)

c. $465,000 d. $435,000 Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($870,000) (.5) = $435,000

130.

Bean Manufacturing reported the following information for 2013: 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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $100,000 + $20,000 + $28,000 = $148,000

131.

During September, the capital expenditure budget indicates a $420,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $60,000. The company wants to maintain a minimum cash balance of $30,000. What is the minimum cash loan that must be planned to be borrowed from the bank during September? a. $330,000 b. $360,000 c. $450,000 d. $390,000

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $60,000 − $420,000 − $30,000 = $390,000

132.

Young Co. has budgeted its activity for December according to the following information: 1. 2. 4. 5.

Sales at $600,000, all for cash. Budgeted depreciation for December is $15,000. The cash balance at December 1 was $15,000. Selling and administrative expenses are budgeted at $60,000 for December and are paid for in cash. 6. The planned merchandise inventory on December 31 and December 1 is $18,000. 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. $345,000 b. $510,000 .

Budgetary Planning MC. 132

21 - 29

(cont.)

c. $525,000 d. $492,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($600,000) (.75) + $60,000 = $510,000

133.

Dex Industries expects to purchase $120,000 of materials in March and $140,000 of materials in April. Three-fourths of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. 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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($120,000) (.25) + ($140,000) (.75) (.98) = $132,900

134.

On January 1, Witt Company has a beginning cash balance of $126,000. During the year, the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If Witt requires an ending cash balance of $120,000, Witt Company must borrow a. $96,000. b. $120,000. c. $144,000. d. $276,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $126,000 − $1,020,000 + $870,000 − $120,000 = $144,000

135.

Mapleview, 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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($250,000) (.4) + ($250,000) (.6) (.5) + ($300,000) (.6) (.5) = $265,000

136.

Burr, Inc.'s direct materials budget shows total cost of direct materials purchases for April $400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for June are a. $528,000. b. $512,000. c. $480,000. d. $416,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($560,000) (.6) + ($480,000) (.4) = $528,000

21 - 30 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 137.

Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser? a. Direct labor budget b. Cash budget c. Sales budget d. Budgeted income statement

Ans: A, LO: 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, LO: 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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

141.

Budgeting in not-for-profit organizations a. is not important because they are not profit-oriented. b. usually starts with budgeting expenditures, rather than receipts. c. is necessary only if some product is produced and sold. d. consists entirely of budgeted contributions.

Ans: B, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning 143.

21 - 31

Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget. b. merchandise purchases budget. c. master time sheet. d. sales forecast.

Ans: B, LO: 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.

Orange Co. is a manufacturer and Pineapple Company is a merchandiser. What is the difference in the budgets the two entities will prepare? a. Orange Co. will prepare a production budget, and Pineapple Company will prepare a merchandise purchases budget. b. Orange Co. will prepare a sales forecast, and Pineapple Company will prepare a sales budget. c. Pineapple Company will prepare a production budget, and Orange Co. will prepare a merchandise purchases budget. d. Both companies will prepare the same types of budgets.

Ans: A, LO: 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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

147.

The primary benefits of budgeting include all of the following except it a. requires only top management to plan ahead and formalize their future goals. b. provides definite objectives for evaluating performance. c. creates an early warning system for potential problems. d. motivates personnel throughout the organization.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 32 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 149.

Coordinating the preparation of the budget is the responsibility of the a. treasurer. b. president. c. chief accountant. d. budget committee.

Ans: D, LO: 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, LO: 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, LO: 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.

Grey Company has 24,000 units in beginning finished goods. If sales are expected to be 120,000 units for the year and Grey desires 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

153.

The important end-product of the operating budgets is the a. budgeted income statement. b. cash budget. c. production budget. d. budgeted balance sheet.

Ans: A, LO: 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, Kale Company has a beginning cash balance of $42,000. During the year, the company expects cash disbursements of $340,000 and cash receipts of $290,000. If Kale requires an ending cash balance of $40,000, the company must borrow a. $32,000. b. $40,000. c. $48,000. d. $92,000.

Budgetary Planning 155.

21 - 33

The budget that is often considered to be the most important financial budget is the a. cash budget. b. capital expenditure budget. c. budgeted income statement. d. budgeted balance sheet.

Ans: A, LO: 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.

Lark Corp.'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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($350,000 * .60) + ($300,000 * .40) = $330,000

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, LO: 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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 34 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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 d 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 Wynn, Inc. manufactures beanies. The budgeted units to be produced and sold are below: August September

Expected Production 3,500 2,800

Expected Sales 2,900 3,900

It takes 18 yards of yarn to produce a beanie. The company's policy is to maintain yarn at the end of each month equal to 5% of next month's production needs and to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated production needs. The cost of yarn is $0.20 a yard. At August 1, 3,150 yards of yarn were on hand. Instructions Compute the budgeted cost of purchases. Ans: N/A, LO: 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% × 2,800 × 18) Less: Beginning inventory on hand (yards) (5% × 3,500 × 18) Yards needed to purchase Cost per yard Budgeted cost of purchases .

3,500 18 63,000 2,520 (3,150) 62,370 $0.20 $12,474

Budgetary Planning

21 - 35

BE 160 The budget components for Birk Company for the quarter ended June 30 appear below. Birk sells trash cans for $12 each. Budgeted production for the next three months is: April May June

26,000 units 46,000 units 29,000 units

Birk desires to have trash cans on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Birk had 4,000 completed units on hand. Five pounds of plastic are required for each trash can. At the end of each month, Birk desires to have 10 percent of the following month’s production material needs on hand. At March 31, Birk had 13,000 pounds of plastic on hand. The materials used in production costs $0.60 per pound. Each trash can 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% × 29,000) × 5 × $0.60 per pound = $8,700 BE 161 Smoke, Inc. makes and sells buckets. Each bucket uses 1/2 pound of plastic. Budgeted production of buckets in units for the next three months is as follows: Budgeted production

April 21,000

May 22,000

June 24,000

The company wants to maintain monthly ending inventories of plastic equal to 25% of the following month's budgeted production needs. The cost of plastic is $2.20 per pound. Instructions Prepare a direct materials purchases budget for the month of May. Ans: N/A, LO: 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.)

Buckets to be produced during May Pounds of plastic needed for each bucket Total pounds of plastic needed for production Add ending inventory, pounds of plastic desired (25% × 24,000 × 1/2) Less beginning inventory, pounds of plastic (25% × 22,000 × 1/2) Pounds of plastic needed to purchase Cost per pound Estimated cost of purchases for May

22,000 1/2 11,000 3,000 (2,750) 11,250 $2.20 $24,750

21 - 36 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition BE 162 The budget components for Park Company for the quarter ended June 30 appear below. Park sells trash cans for $12 each. Budgeted sales and production for the next three months are: Sales Production April 20,000 units 26,000 units May 50,000 units 46,000 units June 30,000 units 29,000 units Park desires to have trash cans on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Park had 4,000 completed units on hand. Five pounds of plastic are required for each trash can. At the end of each month, Park desires to have 10 percent of the following month’s production material needs on hand. At March 31, Park had 13,000 pounds of plastic on hand. The materials used in production cost $0.60 per pound. Each trash can 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, LO: 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 trash cans expected during April (given) Pounds of plastic per trash can Total pounds of plastic needed for sales production Add ending plastic inventory desired (10% × 46,000 × 5) 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

26,000 5 130,000 23,000 153,000 (13,000) 140,000 $0.60 $84,000

BE 163 Jent Company reported the following information for 2013: Budgeted sales Budgeted purchases • •

October $320,000 $120,000

November $340,000 $128,000

December $360,000 $144,000

All sales are on credit. Customer amounts on account are collected 40% in the month of sale and 60% in the following month.

Instructions Compute the amount of cash Jent will receive during November. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning Solution 163

21 - 37

(3 min.)

From November sales: $340,000 × 40% = $136,000 From October sales: $320,000 × 60% = $192,000 Total = $136,000 + $192,000 = $328,000 BE 164 Plack Company budgeted the following information for 2013: 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. Plack purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month. Selling and administrative expenses are budgeted at $30,000 for May and are expected to increase 5% per month. 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, LO: 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 ($30,000 × 1.05 × 1.05) Cash paid for income taxes Total cash disbursements

$ 61,200 44,000 33,075 38,400 $176,675

BE 165 Sable, Inc. has budgeted direct materials purchases of $400,000 in March and $500,000 in April. Past experience indicates that the company pays for 60% of its purchases in the month of purchase and the remaining 40% 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 38 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 165

(4 min.)

Payment of March purchases ($400,000 × 40%) Payment of April purchases ($500,000 × 60%) Wages expense Purchase of office equipment Selling and administrative expenses Total budgeted cash disbursements

$160,000 300,000 120,000 200,000 126,000 $906,000

BE 166 Chain Inc. provided the following information: Projected merchandise purchases • • •

April $92,000

May $80,000

June $66,000

Chain pays 40% of merchandise purchases in the month purchased and 60% in the following month. General operating expenses are budgeted to be $31,000 per month of which depreciation is $3,000 of this amount. Chain pays operating expenses in the month incurred. Chain makes loan payments of $4,000 per month of which $450 is interest and the remainder is principal.

Instructions Calculate budgeted cash disbursements for May. Ans: N/A, LO: 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 ($80,000 × 40%) Cash paid for April purchases ($92,000 × 60%) Budgeted cash paid for purchases Budgeted cash payments for operating expenses ($31,000 – $3,000) Budgeted cash payments for loan ($4,000 – $450) Budgeted cash payments for interest Total budgeted cash disbursements for May

$ 32,000 55,200 87,200 28,000 3,550 450 $119,200

BE 167 Beal, Inc. provided the following information: Projected merchandise purchases • •

March $65,000

April $75,000

May $80,000

Beal pays 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. Beal pays operating expenses in the month incurred.

Instructions Calculate Beal’s budgeted cash disbursements for May. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning Solution 167

21 - 39

(4 min.)

Cash paid for merchandise purchases: May purchases: $80,000 × 40% = April purchases: $75,000 × 60% = Cash paid for operating expenses ($20,000 − $2,000) Budgeted cash disbursements for May

$32,000 45,000 18,000 $95,000

BE 168 The beginning cash balance is $15,000. Sales are forecasted at $800,000 of which 80% will be on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $475,000. Accounts Receivable from previous accounting periods totaling $9,000 will be collected in the current year. The company is required to make a $15,000 loan payment and an annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $90,000, and the annual interest rate is 10%. Instructions Compute the excess of cash receipts over cash disbursements. Ans: N/A, LO: 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% × $800,000 Credit sales: (80% × $800,000) × 70% Cash expenditures Loan payment Interest payment (10% × $90,000) Net increase in cash

9,000 160,000 448,000 (475,000) (15,000) (9,000) $ 118,000

EXERCISES Ex. 169 Delta Manufacturing has budgeted the following unit sales: 2012 April May June July

Units 25,000 40,000 60,000 45,000

Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit and the remainder are sold by the Central Division at an average price of $12 per unit. Instructions Prepare separate sales budgets for each division and for the company in total for the second quarter of 2013. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 40 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 169

(15–20 min.) DELTA MANUFACTURING Sales Budget For the Quarter Ended June 30, 2013

Coastal Division Expected unit sales Unit selling price Total sales

April 10,000 $15 $150,000

May 16,000 $15 $240,000

June 24,000 $15 $360,000

Total 50,000 $15 $750,000

Central Division Expected unit sales Unit selling price Total sales

15,000 $12 $180,000

24,000 $12 $288,000

36,000 $12 $432,000

75,000 $12 $900,000

Total Company Expected unit sales Total sales

25,000 $330,000

40,000 $528,000

60,000 $792,000

125,000 $1,650,000

Ex. 170 Pitt Corp. makes and sells a single product, widgets. Two pounds of sand are needed to make one widget. Budgeted production of widgets for the next few months follows: September October

25,000 units 31,000 units

The company wants to maintain monthly ending inventories of sand equal to 20% of the following month's production needs. On August 31, 10,000 pounds of sand were on hand. Instructions How much sand should be purchased in September? Ans: N/A, LO: 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 sand needed per widget Pounds of sand needed for September sales units Add: ending inventory desired (20% × 31,000 units × 2 pounds) Less: beginning inventory on hand Pounds of sand needed to be purchased

25,000 × 2 50,000 12,400 (10,000) 52,400

Budgetary Planning

21 - 41

Ex. 171 Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows: Units of Product 2013 Regular Deluxe Total July 10,000 15,000 25,000 August 6,000 10,000 16,000 September 9,000 14,000 23,000 October 8,000 12,000 20,000 It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials 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 6,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5 Regular and $8 Deluxe. Instructions Prepare separate direct materials budgets for each product for the third quarter of 2013. Ans: N/A, LO: 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.) BUTLER MANUFACTURING Direct Materials Budget—Regular For the Quarter Ended September 30, 2013

July August Units to be produced 10,000 6,000 Direct materials per unit × 2 × 2 Total pounds needed for production 20,000 12,000 Add: Desired ending direct materials (pounds) 3,600 5,400 Total materials required 23,600 17,400 Less: Beginning direct materials (pounds) 6,000 3,600 Direct materials purchases 17,600 13,800 Cost per pound × $5 × $5 Total cost of direct materials purchases $88,000 $69,000 *30% × (8,000 × 2) BUTLER MANUFACTURING Direct Materials Budget—Deluxe For the Quarter Ended September 30, 2013 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 × $8 Total cost of direct materials purchases $560,000 *20% × (12,000 × 5) .

August 10,000 × 5 50,000 14,000 64,000 10,000 54,000 × $8 $432,000

September Total 9,000 × 2 18,000 4,800* 22,800 5,400 17,400 × $5 $87,000 $244,000

September Total 14,000 × 5 70,000 12,000* 82,000 14,000 68,000 × $8 $544,000 $1,536,000

21 - 42 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition

Ex. 172 Garver Industries 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 3 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 20% 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 30% of the pounds needed for the following month's production. There were 8,640 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, LO: 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)

GARVER INDUSTRIES 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 *April units: 11,000 × 20%. (2)

January 10,000 1,600 11,600 2,000 9,600

February 8,000 1,800 9,800 1,600 8,200

March 9,000 2,200* 11,200 1,800 9,400

Total

27,200

GARVER INDUSTRIES 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 9,600 × 3 28,800 7,380 36,180 8,640 27,540 × $4 $110,160

**April units: 11,800 × 3 = 35,400 × 30%.

February 8,200 × 3 24,600 8,460 33,060 7,380 25,680 × $4 $102,720

March 9,400 × 3 28,200 10,620** 38,820 8,460 30,360 × $4 $121,440

Total

$334,320

Budgetary Planning

21 - 43

Ex. 173 Benet Company has budgeted the following unit sales: 2013 Quarter 1 2 3 4

2013 Units 105,000 60,000 75,000 120,000

Quarter 1

Units 90,000

The finished goods inventory on hand on December 31, 2012 was 21,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's anticipated sales. Instructions Prepare a production budget for 2013. Ans: N/A, LO: 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.) BENET COMPANY Production Budget For the Year Ended December 31, 2013 Quarter 2 3 60,000 75,000 15,000 24,000 75,000 99,000 12,000 15,000 63,000 84,000

1 Expected unit sales 105,000 Desired ending finished goods units 12,000 Total required units 117,000 Less: Beginning finished goods units 21,000 Required production units 96,000

4 120,000 18,000* 138,000 24,000 114,000

Total

357,000

*2013 Q1: 90,000 units × 20% = 18,000. 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 $5.

•

Total cost of the direct materials purchases is $1,035,000.

Instructions Prepare a direct materials budget for the period. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 44 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition 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 $5

90,000* × 2 180,000 36,000 216,000 9,000 207,000 × 5 $1,035,000

*2X + .2(2X) – .1X = 207,000 2X + .4X – .1X = 207,000 2.3X = 207,000 X = 90,000 Ex. 175 Tall Oak, Inc. produces rulers from plastic resin. Tall Oak has estimated production and sales of rulers in units for the next 2 months as: May June Estimated production 42,000 48,000 Estimated sales 50,000 36,000 Each ruler requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Tall Oak wants to have 20% of the next month's 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 175

(10 min.) TALL OAK, INC. 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% × 42,000 × .25 lbs.) Add: ending inventory desired (20% × 48,000 × .25 lbs.) Pounds needed for production in May Cost per pound Total cost of purchases of materials

42,000 × .25 10,500 (2,100) + 2,400 10,800 × $4.50 $48,600

Budgetary Planning

21 - 45

Ex. 176 Pulham Company is preparing its direct labor budget for 2013 from the following production budget based on a calendar year: Quarter 1 2 3 4

Units 60,000 30,000 45,000 75,000

Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate to $11 per hour on October 1. Instructions Prepare a direct labor budget for 2013. Ans: N/A, LO: 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

(10–15 min.) PULHAM COMPANY Direct Labor Budget For the Year Ended December 31, 2013

Quarter 1 2 3 4 Units to be produced 60,000 30,000 45,000 75,000 Direct labor time (hours) per unit × 2 × 2 × 2 × 2 Total required direct labor hours 120,000 60,000 90,000 150,000 Direct labor cost per hour × $10* × $10 × $10 × $11 Total direct labor cost $1,200,000 $600,000 $900,000 $1,650,000

Total

$4,350,000

*$11 ÷ 110% = $10. 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

21 - 46 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Ex. 177

(Cont.)

___________

1. Ending cash balance

___________

2. Total selling and administrative expenses

___________

3. Total sales (in dollars)

___________

4. Interest expense

___________

5. Ending raw materials inventory (in dollars)

___________

6. Ending finished goods inventory (in dollars)

Ans: N/A, LO: 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 Leaf Industries is preparing its master budget for 2013. Relevant data pertaining to its sales budget are as follows: Sales for the year are expected to total 8,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.20 per unit in the second quarter. Instructions Prepare a sales budget for 2013 for Leaf Industries. 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

Solution 178 (9–14 min.) LEAF INDUSTRIES Sales Budget For the Year Ended December 31, 2013

Unit sales Unit selling price Total sales

1 2,000,000 × $2.00 $4,000,000

Quarter 2 3 2,400,000 1,200,000 × $2.20 × $2.20 $5,280,000 $2,640,000

4 2,400,000 × $2.20 $5,280,000

Year 8,000,000 Var. $17,200,000

Budgetary Planning

21 - 47

Ex. 179 Shep Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2013, 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

$30 6% 2% 4% $24,000 19,000 6,000 2,000 1,000

Instructions Prepare a selling and administrative expense budget for the first quarter of 2013. Ans: N/A, LO: 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.) SHEP COMPANY Selling and Administrative Expense Budget For the Quarter Ended March 31, 2013

Variable expenses Sales commissions ($600,000 × 6%) Delivery expense ($600,000 × 2%) Advertising ($600,000 × 4%) Total variable Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Total fixed Total selling and administrative expenses

$ 36,000 12,000 24,000 72,000 $ 24,000 19,000 6,000 2,000 1,000 52,000 $124,000

Ex. 180 Thread Company is preparing its manufacturing overhead budget for 2013. 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 $0.80; indirect labor $1.20; and maintenance $0.50. Fixed overhead costs per quarter: Supervisory salaries $42,000; depreciation $16,000; and maintenance $12,000.

21 - 48 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Ex. 180

(Cont.)

Instructions Prepare the manufacturing overhead budget for the year, showing quarterly data. Ans: N/A, LO: 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.) THREAD COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2013 1

Variable costs Indirect materials ($.80/hour) Indirect labor($1.20/hour) Maintenance($.50/hour) Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead Direct labor hours Manufacturing overhead rate per direct labor hour ($410,000  52,000)

Quarter 2

Year

$8,000 12,000 5,000 25,000

$9,600 14,400 6,000 30,000

$11,200 16,800 7,000 35,000

$12,800 19,200 8,000 40,000

$41,600 62,400 26,000 130,000

42,000 16,000 12,000 70,000 $95,000

42,000 16,000 12,000 70,000 $100,000

42,000 16,000 12,000 70,000 $105,000

42,000 16,000 12,000 70,000 $110,000

168,000 64,000 48,000 280,000 $410,000

10,000

12,000

14,000

16,000

52,000 $7.88

Ex. 181 Walt Bach Company has accumulated the following budget data for the year 2013. 1. Sales: 40,000 units, unit selling price $50. 2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5 hours at $12 per hour, and manufacturing overhead $6 per direct labor hour. 3. Inventories (raw materials only): Beginning, 10,000 pounds; ending, 15,000 pounds. 4. Raw materials cost: $5 per pound. 5. Selling and administrative expenses: $200,000. 6. Income taxes: 30% of income before income taxes. Instructions (a) Prepare a schedule showing the computation of cost of goods sold for 2013. (b) Prepare a budgeted income statement for 2013. Ans: N/A, LO: 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

Budgetary Planning Solution 181

21 - 49

(16 min.)

(a) WALT BACH COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2013 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

40,000 units × $37 = $1,480,000. (b) WALT BACH COMPANY Budgeted Income Statement For the Year Ending December 31, 2013 Sales (40,000 × $50)............................................................................ Cost of goods sold (see part (a)) .......................................................... Gross profit .......................................................................................... Selling and administrative expenses .................................................... Income before income taxes ................................................................ Income tax expense ($320,000 × 30%) ................................................ Net income...........................................................................................

$2,000,000 1,480,000 520,000 200,000 320,000 96,000 $ 224,000

Ex. 182 The Northeast Regional Division of Union Corp. 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 $176,000. Quarterly salaries are $20,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows: Rent expense Depreciation on office equipment Utilities expense Miscellaneous expenses

$24,000 $12,000 $3,600 2% of sales

The income statement for the first quarter of 2012 was as follows:

21 - 50 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Ex. 182

(Cont.)

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 ...........................................................................................

$720,000 396,000 324,000 $52,000 24,000 12,000 3,600 12,800 104,400 $219,600

Instructions Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2013. (Show computations.) Ans: N/A, LO: 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.)

UNION CORP. 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 $720,000 × 110% = $792,000 Cost of goods sold Beginning inventory Purchases ($792,000 × 55% = $435,600) Cost of goods available Ending inventory ($792,000 × 105% = $831,600 × 25% = $207,900) Cost of goods sold Sales salaries: $20,000 + ($792,000 × .05) = $59,600. Miscellaneous expenses: $792,000 × .02 = $15,840.

$792,000 403,700 388,300 59,600 24,000 12,000 3,600 15,840 115,040 $273,260

$176,000 435,600 611,600 207,900 $403,700

Budgetary Planning

21 - 51

Ex. 183 In September 2013, the budget committee of Jason Company assembles the following data: 1. Expected Sales October $1,800,000 November 1,700,000 December 1,600,000 2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule. Ans: N/A, LO: 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.) JASON COMPANY Budgeted Income Statement For the Month Ended October 31, 2013

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.

21 - 52 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Ex. 184 Burr, Inc. provided the following information: Projected sales Projected merchandise purchases • •

July $220,000 $150,000

August $260,000 $180,000

Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts. Burr pays 30% of merchandise purchases in the month purchased and 70% in the following month.

•

General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Burr pays operating expenses in the month incurred.

•

Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

Instructions Calculate Burr's budgeted cash disbursements for August. Ans: N/A, LO: 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 ($20,000 – $2,000) Cash paid for loan ($3,000 – $400) Cash paid for interest Budgeted cash disbursements for August

$ 54,000 105,000 18,000 2,600 400 $180,000

Ex. 185 Casa Development, Inc. has budgeted sales revenues as follows: January February March April May June

Budgeted Sales Revenues $55,000 75,000 90,000 80,000 60,000 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, LO: 5, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning Solution 185

21 - 53

(20–25 min.) CASA DEVELOPMENT, INC. Expected Cash Receipts from Sales For the Quarter Ended June 30 April

February sales Credit sales: ($75,000 × .80 × .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: ($80,000 × .80 × .60) ($80,000 × .80 × .30) ($80,000 × .80 × .05) Cash sales: ($80,000 × .20)

38,400 19,200 $ 3,200 16,000

May sales Credit sales: ($60,000 × .80 × .60) ($60,000 × .80 × .30) Cash sales: ($60,000 × .20)

28,800 14,400 12,000

June sales Credit sales: ($35,000 × .80 × .60) Cash sales: ($35,000 × .20) Total cash receipts

$79,000

$63,600

16,800 7,000 $41,400

Ex. 186 Cruises, Inc. has budgeted sales revenues as follows: June $135,000 90,000 $225,000

Credit sales Cash sales Total sales

July $125,000 255,000 $380,000

August $ 90,000 195,000 $285,000

$300,000 240,000 105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash.

21 - 54 Test Bank for Accounting, Tools for Business Decision Making, Fifth 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 6% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, LO: 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.) CRUISES, INC. Cash Budget For the Two Months of July and August

Beginning cash balance Add: Receipts Collections from customers Cash sales Total receipts Total available cash Less: Disbursements Purchases Selling and administrative expenses Dividends Equipment purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance

July $ 50,000

August $ 50,000

129,000 255,000 384,000 434,000

104,000 195,000 299,000 349,000

270,000 48,000 103,000

172,500 48,000

421,000 13,000

30,000 250,500 98,500

37,000 $ 50,000

(37,185)* $ 60,315

*37,000 × 6% × 1/12 = $185 + $37,000 = $37,185. Schedule of Expected Collections from Customers Credit sales June (135,000) July ($125,000) August ($90,000) Total collections

July $ 54,000 75,000 $129,000

August $ 50,000 54,000 $104,000

Schedule of Expected Payments for Purchases of Inventory Inventory purchases June ($300,000) July ($240,000) August ($105,000) Total payments

July $150,000 120,000 $270,000 .

August $120,000 52,500 $172,500

Budgetary Planning

21 - 55

Ex. 187 Clay Co.’s projected sales are as follows: August September October

$400,000 $450,000 $550,000

Clay estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. Instructions How much are Clay Co.'s budgeted cash receipts for October? Ans: N/A, LO: 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: $550,000 × 30% Collections from September sales: $450,000 × 50% Collections from August sales: $400,000 × 18% Total budgeted cash receipts for October

$165,000 225,000 72,000 $462,000

Ex. 188 The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended December 31, 2013. The following information is available: 1. The cash budget shows an expected cash balance of $75,000 at December 31, 2013. 2. The 2013 sales budget shows total annual sales of $800,000. All sales are made on account and accounts receivable at December 31, 2013 are expected to be 10% of annual sales. 3. The merchandise purchases budget shows budgeted cost of goods sold for 2013 of $600,000 and ending merchandise inventory of $95,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2013. 4. The December 31, 2012 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings $48,000. 5. The budgeted income statement for 2013 includes the following: depreciation on equipment $15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not be paid until 2013. 6. In 2013, 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. Instructions Prepare an unclassified budgeted balance sheet at December 31, 2013. Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 56 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 188

(20–25 min.) DELL PRINTING CO. Budgeted Balance Sheet December 31, 2013

Assets Cash..................................................................................................... Accounts receivable ............................................................................. Merchandise inventory ......................................................................... Equipment ............................................................................................ $294,000 Less: Accumulated depreciation ($122,000 + $15,000) ........................ 137,000 Total assets................................................................................... Liabilities and Stockholders' Equity Accounts payable ................................................................................. Income taxes payable .......................................................................... Common stock ..................................................................................... Retained earnings ................................................................................ Total liabilities and stockholders' equity .........................................

$ 75,000 80,000 95,000 157,000 $407,000 $ 19,000 21,000 270,000 97,000 $407,000

Ex. 189 The management of Ocean Industries estimates that credit sales for August, September, October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale

25% 60% 10%

Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 189

(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

Budgetary Planning

21 - 57

Ex. 190 The beginning cash balance is $20,000. Sales are forecasted at $700,000 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, LO: 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% × $700,000 Credit sales: (80% × $700,000) × 70% Cash expenditures Loan payment Interest payment (10% × $120,000) Net increase in cash Add: beginning cash balance Ending cash balance

$ 12,000 140,000 392,000 (500,000) (20,000) (12,000) 12,000 20,000 $32,000

Ex. 191 Rudd Company has budgeted sales revenue as follows for the next 4 months: February March April May

$300,000 240,000 210,000 330,000

Past experience indicates that 80% of sales each month are on credit 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. Instructions Prepare a schedule which shows expected cash receipts from sales for the month of May. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 58 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 191

(7–9 min.) RUDD COMPANY Expected Cash Receipts from Sales For the Month Ended May 31

March sales Credit sales: ($240,000 × .80 × .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 Hagen Company's budgeted sales and direct materials purchases are as follows. Budgeted Sales $300,000 330,000 350,000

January February March

Budgeted D.M. Purchases $60,000 70,000 80,000

Hagen's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Hagen's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of 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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 192

(10 min.)

(a) HAGEN COMPANY Expected Collections from Customers March March cash sales (40% × $350,000) .................................................................. $140,000 Collection of March credit sales [(60% × $350,000) × 10%] ............................................................................. 21,000 Collection of February credit sales [(60% × $330,000) × 50%] ............................................................................. 99,000 Collection of January credit sales [(60% × $300,000) × 36%] ............................................................................. 64,800 Total collections ................................................................................... $324,800 (b)

Budgetary Planning Solution 192

21 - 59

(Cont.) HAGEN COMPANY Expected Payments for Direct Materials

March March cash purchases (50% × $80,000) ............................................................. $40,000 Payment of March credit purchases [(50% × $80,000) × 40%] .............................................................................. 16,000 Payment of February credit purchases [(50% × $70,000) × 60%] .............................................................................. 21,000 Total payments ..................................................................................... $77,000 Ex. 193 Minor Landscaping Company is preparing its budget for the first quarter of 2013. 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 2012 and expected service revenues for 2013 are: November 2012, $120,000; December 2012, $110,000; January 2013, $140,000; February 2013, $160,000; March 2013, $170,000. Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase and 60% the following month. Actual purchases for 2012 and expected purchases for 2013 are: December 2012, $21,000; January 2013, $20,000; February 2013, $22,000; March 2013, $27,000. Instructions (a) Prepare the following schedules for each month in the first quarter of 2013 and for the quarter in total: (1) Expected collections from clients. (2) Expected payments for landscaping supplies. (b) Determine the following balances at March 31, 2013: (1) Accounts receivable. (2) Accounts payable. Ans: N/A, LO: 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

21 - 60 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 193

(12 min.)

(a) (1) MINOR LANDSCAPING COMPANY Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2013 January February March November ($120,000) ........ $12,000 December ($110,000) ........ 33,000 $11,000 January ($140,000) ............ 84,000 42,000 $14,000 February ($160,000)........... 96,000 48,000 March ($170,000) ........................ 102,000 Total collections ............ $129,000 $149,000 $164,000

Quarter $ 12,000 44,000 140,000 144,000 102,000 $442,000

(2) MINOR LANDSCAPING COMPANY Schedule of Expected Payments for Landscaping Supplies For the Quarter Ending March 31, 2013 January February March December ($21,000) .......... $12,600 January ($20,000) .............. 8,000 $12,000 February ($22,000)............. 8,800 $13,200 March ($27,000) ................. 10,800 Total payments ............. $20,600 $20,800 $24,000

Quarter $12,600 20,000 22,000 10,800 $65,400

(b) (1) Accounts receivable at March 31, 2013: ($160,000 × 10%) + ($170,000 × 40%) = $84,000 (2) Accounts payable at March 31, 2013: ($27,000 × 60%) = $16,200 Ex. 194 In May 2013, the budget committee of Crater, Inc. assembles the following data in preparation of budgeted merchandise purchases for the month of June. 1. Expected sales: June $750,000, July $900,000. 2. Cost of goods sold is expected to be 80% 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, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning

21 - 61

Solution 194 (12 min.) (a) CRATER, INC. Merchandise Purchases Budget For the Month Ending June 30, 2013 Budgeted cost of goods sold ($750,000 × 80%) ........................................... Add: Desired ending merchandise inventory ($900,000 × 80% × 40%) ........................................................................ Total ............................................................................................................. Less: Beginning merchandise inventory ($600,000 × 40%) ................................................................................... Required merchandise purchases ................................................................

$600,000 288,000 888,000 240,000 $648,000

(b) CRATER, INC. Budgeted Income Statement For the Month Ending June 30, 2013 Sales ............................................................................................................ Cost of goods sold (80% × $750,000) ........................................................... Gross profit ...................................................................................................

$750,000 600,000 $150,000

Ex. 195 In September 2013, the management of Rye Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November. 1. Expected Sales October November December

$1,500,000 2,100,000 2,700,000

2. Cost of goods sold is expected to be 70% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month. Ans: N/A, LO: 6, Bloom: C, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

21 - 62 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition Solution 195

(12–17 min.) RYE COMPANY Merchandise Purchases Budget For the Months of October and November, 2013 October $1,050,000 294,000 1,344,000 210,000 $1,134,000

Budgeted cost of goods sold Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchase October $1,500,000 × 70% = $1,050,000 $1,470,000 × 20% = $294,000 $1,050,000 × 20% = $210,000

November $1,470,000 378,000 1,848,000 294,000 $1,554,000

November $2,100,000 × 70% = $1,470,000 $2,700,000 × 70% × 20% = $378,000

COMPLETION STATEMENTS 196. A _________________ is a formal written statement of management's plans expressed in financial terms. Ans: N/A, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning

21 - 63

202. A major difference between the annual budget and long-range planning is the ____________________ over which the data pertain. Ans: N/A, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

205. The ________________ is a set of interrelated budgets that constitutes a plan of action for a specified period of time. Ans: N/A, LO: 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, LO: 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, LO: 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

21 - 64 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition

MATCHING 208. Match the items below by entering the appropriate code letter in the space provided. A. Budget B. Financial budgets C. Budget committee D. Master budget E. Sales forecast

F. G. H. I. J.

Production budget Cash budget Long-range planning Direct materials budget Sales budget

____ 1. A selection of strategies to achieve long-term goals. ____ 2. An estimate of expected sales for the budget period. ____ 3. Budgets that indicate the cash resources needed for expected operations and planned capital expenditures. ____ 4. The projection of potential sales for the industry and the company's expected share of such sales. ____ 5. Management's plans expressed in financial terms for a specified future time period. ____ 6. A projection of anticipated cash flows. ____ 7. A group responsible for coordinating the preparation of the budget. ____ 8. A projection of production requirements to meet expected sales. ____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period. ____ 10. An estimate of the quantity and cost of direct materials to be purchased. Ans: N/A, LO: 1, 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

Budgetary Planning

21 - 65

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, LO: 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, LO: 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. S-A E 211 Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions. Ans: N/A, LO: 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.

21 - 66 Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition S-A E 212 What is participative budgeting? What are its potential benefits? What are its potential shortcomings? Ans: N/A, LO: 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) Ashley Finn is a new production manager. After a great deal of effort, including considerable market research, she completes her budget and submits it to her boss, Keith Payne. Without even looking at it, he asks her what her "fudge factor" was, and which items contained the most slack. Ashley, very surprised, responds that she doesn't use any "fudge factor," and that all her figures are honest. Mr. Payne counters by asking her how she would respond if she had to cut about 20% from her budget, as it is. He tells her that most budgets are trimmed in committee, and she had better be ready. He returns the budget to her, and tells her to come back with something reasonable. Required: 1. Is it ethical to build slack into a budget? Explain. 2. Was it ethical for Mr. Payne to refuse to accept a budget without slack? Briefly explain. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 213 1. Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical. 2. As Ashley Finn's superior, Mr. Payne has the obligation to correct her mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Ashley must continue to be honest. One way to do that would be for Ashley to submit her trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Mr. Payne the ability to intelligently defend her budget while in committee.

Budgetary Planning

21 - 67

S-A E 214 (Communication) At Boulder Industries, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Bart Gray, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process. Required: You are the accounting manager. Write a memo to Mr. Gray. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible. Ans: N/A, LO: 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: Bart Gray FROM: Julie Jase SUBJECT: Budgets At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well. Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use. I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible. (signed)

CHAPTER 22 BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

5 6 7 7 8 8 1 2

K K K K C C K K

33. 34. sg 35. sg 36. a, sg 37.

3 4 5 7 8

K C K K K

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.

6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7

C AP C C AP AP AP AN AP AN AP AP AP AP AP AP AP AN AP AP C C K C K AP

142. 143. 144. 145. 146. 147. a 148. a 149. a 150. a 151. a 152. a 153. a 154. a 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.

7 7 7 7 7 7 8 8 8 8 8 8 8 8 1 2 2 3 3 3 3 4 4 6 7 7

K K AP C

177. 178. a 179.

7 8 8

AN AP AP

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

C K K C C 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. 61. 62. 63.

1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2,3 2 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 K AP AP AP C C K C C 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. 89.

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 4

C K C C K K AP C C C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K

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.

168 169. 170.

3 73 .3

AP AP AP

171. 172. 173. .

3 4 6

AP AP AP

174. 175. 176.

3 3 4 4 4 4 4 5

K K C C C C C K

25. 26. 27. 28. a 29. a 30. sg 31. sg 32.

Multiple Choice Questions 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 6 6 6 6 6 6

AP C C C K C C C C K C C C C K C C C C C K C K C C AP

Brief Exercises 7 7 7 .

AP AP AP

C AP K C C C AP AP AP C K K AP K K K K K K K AP

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Exercises 180. 181. 182. 183. 184.

2 2,3 3 3 3

AP AP AP AP AP

185. 186. 187. 188. 189.

3 3 3 3 3

AP AP AP AP AP

190. 191. 192. 193. 194.

3 3,6 4,5 5 5

AP AP AP AN AP

195. 196. 197. 198. 199.

6 6 6,7 7 7

AN AN AP AP AP

4 7 7

K K K

200. 201. 202. 203. 204.

7 7 7 7 7

AP AN AN AN AN

Item

Type

Completion Statements 205. 206. 207.

1 1 1

K K K

208. 209. 210.

3 3 4

K K K

211. 212. 213.

4 4 4

K K K

214. 215. 216.

Matching 217.

1-7

218. 219.

1 3

K K

Short-Answer Essay

sg st

220. 221.

4 4

K K

222. 223.

7 7

K K

This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 2. 3.

TF TF TF

31. 38. 39.

TF MC MC

40. 41. 42.

4. 5. 6.

TF TF TF

7. 8. 32.

TF TF TF

45. 46. 47.

9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

TF TF TF TF TF TF TF TF TF TF

33. 53. 55. 56. 57. 58. 59. 60. 61. 62.

TF MC MC MC MC MC MC MC MC MC

63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

Type

Item

Type

Item

Learning Objective 1 MC 43. MC 205. MC 44. MC 206. MC 156. MC 207. Learning Objective 2 MC 48. MC 51. MC 49. MC 52. MC 50. MC 53. Learning Objective 3 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 159. MC 80. MC 160. MC 81. MC 161. MC 82. MC 162.

Type

Item

Type

C C C

217. 218.

MA S-A

MC MC MC

54. 157. 158.

MC MC MC

180. 181.

Ex Ex

MC MC MC MC MC MC MC MC MC MC

168. 169. 170. 171. 181. 182. 183. 184. 185. 186.

BE BE BE BE Ex Ex Ex Ex Ex Ex

187. 188. 189. 190. 191. 208. 209. 219.

Ex Ex Ex Ex Ex C C S-A

Budgetary Planning and Responsibility Accounting

19. 20. 21. 22. 23.

TF TF TF TF TF

34. 89. 90. 91. 92.

TF MC MC MC MC

93. 94. 95. 96. 97.

24. 25.

TF TF

35. 105.

TF MC

106. 107.

26. 110. 111.

TF MC MC

112. 113. 114.

MC MC MC

115. 116. 117.

27. 28. 36. 121. 122. 123. 124. 125.

TF TF TF MC MC MC MC MC

126. 127. 128. 129. 130. 131. 132. 133.

MC MC MC MC MC MC MC MC

134. 135. 136. 137. 138. 139. 140. 141.

29. 30.

TF TF

37. 148.

TF MC

149. 150.

Note: TF = True-False MC = Multiple Choice

Learning Objective 4 MC 98. MC 103. MC 99. MC 104. MC 100. MC 163. MC 101. MC 164. MC 102. MC 172. Learning Objective 5 MC 108. MC 192. MC 109. MC 193. Learning Objective 6 MC 118. MC 165. MC 119. MC 173. MC 120. MC 191. Learning Objective 7 MC 142. MC 174. MC 143. MC 175. MC 144. MC 176. MC 145. MC 177. MC 146. MC 197. MC 147. MC 198. MC 166. MC 199. MC 167. MC 200. Learning Objective 8a MC 151. MC 153. MC 152. MC 154. BE = Brief Exercise Ex = Exercise

MC MC MC MC BE

192. 210. 211. 212. 213.

Ex C C C C

Ex Ex

194.

MC BE Ex

193. 194. 195.

BE BE BE BE Ex Ex Ex Ex MC MC

22 - 3

220. 221.

S-A S-A

Ex Ex Ex

196. 197.

Ex Ex

201. 202. 203. 204. 214. 215. 216. 222.

Ex Ex Ex Ex C C C K

223.

155. 178.

MC BE

179.

C = Completion S-A = Short-Answer

CHAPTER LEARNING 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. .

22 - 4 4

Test Bank for Accounting, Tools for Business Decision Making Fifth 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. a

8. Explain the difference between ROI and residual income. ROI is controllable margin divided by average operating assets. Residual income is the income that remains after subtracting the minimum rate of return on a company's average operating assets. ROI sometimes provides misleading results because profitable investments are often rejected when the investment reduces ROI but increases overall profitability.

TRUE-FALSE STATEMENTS 1.

Budget reports comparing actual results with planned objectives should be prepared only once a year.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Certain budget reports are prepared monthly, whereas others are prepared more frequently depending on the activities being monitored.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

The master budget is not used in the budgetary control process.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

A master budget is most useful in evaluating a manager's performance in controlling costs.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 6.

22 - 5

A static budget is one that is geared to one level of activity.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

A static budget is changed only when actual activity is different from the level of activity expected.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

A static budget is most useful for evaluating a manager's performance in controlling variable costs.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

A flexible budget can be prepared for each of the types of budgets included in the master budget.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

22 - 6 18.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls.

19.

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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

24.

A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

25.

The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

26.

Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

27.

The denominator in the formula for calculating the return on investment includes operating and nonoperating assets.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

28.

The formula for computing return on investment is controllable margin divided by average operating assets.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Budgetary Planning and Responsibility Accounting a

29.

22 - 7

When evaluating residual income, the calculation tells management what percentage return was generated by the particular division being evaluated.

Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

30.

Residual income generates a dollar amount which represents the increase in value to the company beyond the cost necessary to pay for the financing of assets.

Ans: T, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

31.

Budget reports provide the feedback needed by management to see whether actual operations are on course.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation a

37.

Residual income and ROI are used as performance evaluation methods for profit center performance

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 8

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Answers to True-False Statements Item

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

Ans.

Item

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Item

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Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

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 F

25. 26. 27. 28. 29. 30.

T F F T F T

31. 32. 33. 34. 35. 36.

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37.

MULTIPLE CHOICE QUESTIONS 38.

What is budgetary control? a. Another name for a flexible budget b. The degree to which the CFO controls the budget c. The use of budgets in controlling operations d. The process of providing information on budget differences to lower level managers

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 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, LO: 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, LO: 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Budgetary Planning and Responsibility Accounting 43.

22 - 9

The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

44.

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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

22 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 49.

Top management's reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

50.

If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed.

Ans: D, LO: 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, LO: 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, LO: 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, LO: 2,3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Budgetary Planning and Responsibility Accounting 54.

22 - 11

Another name for the static budget is a. master budget. b. overhead budget. c. permanent budget. d. flexible budget.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

55.

The master budget of Windy Co. shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labor Machine supplies Indirect materials Depreciation on factory building Total manufacturing overhead

$720,000 180,000 210,000 150,000 $1,260,000

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of a. b. c. d.

$1,482,000. $1,260,000. $1,512,000. $1,362,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: {[($720,000 + $180,000 + $210,000) / 50,000] × 60,000} + $150,000 = $1,482,000

56.

Boland Manufacturing prepared a 2013 budget for 120,000 units of product. Actual production in 2013 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, LO: 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($1,044,000 − $540,000) / 3 = 168,000

22 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 58.

Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct materials cost b. Direct labor cost c. Variable manufacturing overhead d. Fixed manufacturing overhead

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

59.

In developing a flexible budget within a relevant range of activity, a. only fixed costs are included. b. it is necessary to relate variable cost data to the activity index chosen. c. it is necessary to prepare a budget at 1,000 unit increments. d. variable and fixed costs are combined and are reported as a total cost.

Ans: B, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

63.

A flexible budget a. is prepared when management cannot agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Budgetary Planning and Responsibility Accounting 64.

22 - 13

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, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

65.

Within the relevant range of activity, the behavior of total costs is assumed to be a. linear and upward sloping. b. linear and downward sloping. c. curvilinear and upward sloping. d. linear to a point and then level off.

Ans: A, LO: 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, LO: 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, LO: 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, LO: 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 70.

Best Shingle's budgeted manufacturing costs for 50,000 squares of shingles are: Fixed manufacturing costs Variable manufacturing costs

$12,000 $16.00 per square

Best produced 40,000 squares of shingles during March. How much are budgeted total manufacturing costs in March? a. $640,000 b. $812,000 c. $800,000 d. $652,000 Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (40,000 × $16) + $12,000 = $652,000

71.

A flexible budget depicted graphically a. is identical to a CVP graph. b. differs from a CVP graph in the way that fixed costs are shown. c. differs from a CVP graph in the way that variable costs are shown. d. differs from a CVP graph in that sales revenue is not shown.

Ans: D, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

74.

Shane Industries prepared a fixed budget of 60,000 direct labor hours, with estimated overhead costs of $300,000 for variable overhead and $90,000 for fixed overhead. Shane then prepared a flexible budget at 57,000 labor hours. How much is total overhead costs at this level of activity? a. $285,000 b. $375,000 c. $370,500 d. $390,000

Budgetary Planning and Responsibility Accounting 75.

22 - 15

For June, Gold Corp. estimated sales revenue at $600,000. It pays sales commissions that are 4% of sales. The sales manager's salary is $285,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $15,000. How much are budgeted selling expenses for the month of July if sales are expected to be $540,000? a. $42,000 b. $327,000 c. $27,000 d. $330,000

76.

Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are: Fixed manufacturing costs Variable manufacturing costs

$50,000 per month $12.00 per ton of steel

Nikoto produced 40,000 tons of steel during March. 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (40,000 × $12) + $50,000 = $530,000

77.

Smart 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 foot

Smart 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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (40,000 × $16) + $24,000 = $664,000

78.

In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is a. $96,000. b. $108,000. c. $105,000. d. $99,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [($72,000 / 160,000) × 180,000] + $24,000 = $105,000

22 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 79.

Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $48,000 variable and $270,000 fixed. If Stone had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $3,000 unfavorable b. $3,000 favorable c. $9,000 unfavorable d. $12,000 favorable

80.

A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $140,000 Depreciation $60,000 Indirect labor 200,000 Taxes 10,000 Factory supplies 20,000 Supervision 50,000 A flexible budget prepared at the 80,000 machine hours level of activity would show total manufacturing overhead costs of a. $288,000. b. $360,000. c. $384,000. d. $408,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: {[($140,000 + $200,000 + $20,000) / 100,000] × 80,000} + $60,000 + $10,000 + $50,000 = $408,000

81.

In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is: a. $144,000. b. $162,000. c. $157,500. d. $148,500.

82.

Chambers, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $64,000 variable and $180,000 fixed. If Chambers had actual overhead costs of $250,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $2,000 unfavorable. b. $2,000 favorable. c. $6,000 unfavorable. d. $8,000 favorable.

Budgetary Planning and Responsibility Accounting 83.

22 - 17

A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $120,000 Depreciation $50,000 Indirect labor 160,000 Taxes 10,000 Factory supplies 20,000 Supervision 40,000 A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of a. $270,000. b. $360,000. c. $370,000. d. $300,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: {[($120,000 + $160,000 + $20,000) / 100,000] × 90,000} + $50,000 + $10,000 + $40,000 = $370,000

84.

Kevin Jarvis Industries produced 192,000 units in 90,000 direct labor hours. Production for the period was estimated at 198,000 units and 99,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 96,000 hours and 99,000 hours. b. 99,000 hours and 90,000 hours. c. 96,000 hours and 90,000 hours. d. 90,000 hours and 90,000 hours.

Ans: D, LO: 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 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $90,000 Depreciation $37,500 Indirect labor 120,000 Taxes 7,500 Factory supplies 15,000 Supervision 30,000 A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of a. $202,500. b. $270,000. c. $277,500. d. $225,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: {[($90,000 + $120,000 + $15,000) / 100,000] × 90,000} + $37,500 + $7,500 + $30,000 = $277,500

86.

Kathleen Corp. produced 320,000 units in 150,000 direct labor hours. Production for the period was estimated at 330,000 units and 165,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 160,000 hours and 165,000 hours. b. 165,000 hours and 150,000 hours. c. 160,000 hours and 150,000 hours. d. 150,000 hours and 150,000 hours.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

22 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 87.

At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $30,000. At 15,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $90,000. Fixed and variable costs may be expressed as: a. $30,000 fixed plus $4 per direct labor hour variable. b. $30,000 fixed plus $6 per direct labor hour variable. c. $60,000 fixed plus $2 per direct labor hour variable. d. $60,000 fixed plus $4 per direct labor hour variable.

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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [($36,000 / 18,000) × 18,400] − $37,400 = <$600>

89.

The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called a. static reporting. b. flexible accounting. c. responsibility accounting. d. master budgeting.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

90.

Power Manufacturing 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $300,000 − $180,000 = $120,000

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 92.

22 - 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 104.

22 - 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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 $1,000,000 $ 500,000

Actual $1,050,000 $ 450,000

Difference $50,000 $50,000

The manager's overall performance a. is 20% below expectations. b. is 20% above expectations. c. is equal to expectations. d. cannot be determined from information given. Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($1,050,000 − $450,000) − ($1,000,000 − $500,000) = $100,000; $100,000 / ($1,000,000 − $500,000) = 20%

Budgetary Planning and Responsibility Accounting 116.

22 - 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, LO: 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 $600,000 $200,000

Actual $580,000 $220,000

Difference $20,000 U $20,000 U

The manager's overall performance a. is 10% above expectations. b. is 10% below expectations. c. is equal to expectations. d. cannot be determined from the information provided. Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($580,000 − $220,000) − ($600,000 − $200,000) = $40,000; $40,000 / ($600,000 − $200,000) = 10%

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, LO: 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, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 120.

Pippen Co. recorded operating data for its shoe division for the year. The company’s desired return is 5%. Sales Contribution margin Total direct fixed costs Average total operating assets

$1,000,000 200,000 120,000 400,000

Which one of the following reflects the controllable margin for the year? a. 20% b. 50% c. $60,000 d. $80,000 Solution: $200,000 − $120,000 = $80,000 Ans: D, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

121.

Las Sendas, Inc. had average operating assets of $4,000,000 and sales of $2,000,000 in 2013. If the controllable margin was $600,000, the ROI was a. 60% b. 50% c. 30% d. 15%

Ans: D, LO: 7, Bloom: A, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $600,000 / $4,000,000 = 15%

122.

Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2013. If the controllable margin was $600,000, the ROI was a. 50% b. 40% c. 20% d. 10%

123.

The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: Project Phoenix Chicago

Investment $120,000 $540,000

Controllable Margin $30,000 $50,000

ROI 25% 9.25%

The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division’s ROI? a. Both the Phoenix and Chicago options b. Only the Phoenix option c. Only the Chicago option d. Neither the Phoenix nor the Chicago options Ans: B, LO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 124.

22 - 25

Bogey Co. recorded operating data for its Cheap division for the year. Bogey 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $160,000 / $4,000,000 = 4%

125.

Dingo Division’s operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this project? a. Yes, ROI will drop by 6.6% which is still above the minimum required rate of return. b. No, the return is less than the required rate of 9%. c. Yes, ROI still exceeds the cost of capital. d. No, ROI will decrease to 7%.

Ans: B, LO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

126.

Grown Industries reported the following items for 2013: 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $200,000 − $80,000 = $120,000

22 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 127.

Griffin Corp. is evaluating its Piquette division, an investment center. The division has a $60,000 controllable margin and $400,000 of sales. How much will Griffin’s average operating assets be when its return on investment is 10%? a. $600,000 b. $660,000 c. $400,000 d. $340,000

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $60,000 / .10 = $600,000

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%

129.

Rhein Manufacturing recorded operating data for its auto accessories division for the year. Sales $750,000 Contribution margin 150,000 Total direct fixed costs 90,000 Average total operating assets 400,000 How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant? a. 45.0% b. 22.5% c. 15.0% d. 12.0%

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($150,000 + $30,000 − $90,000) / $400,000 = 22.5%

130.

The current controllable margin for Henry Division is $93,000. Its current operating assets are $300,000. The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000. If the equipment is purchased, what will happen to the return on investment for Henry Division? a. An increase of 16.1% b. A decrease of 13.3% c. A decrease of 3.3% d. A decrease of 7.2%

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($93,000 / $300,000) − ($93,000 + $15,000) / ($300,000 + $90,000) = 3.3%

Budgetary Planning and Responsibility Accounting 131.

22 - 27

Monte, Inc. recorded operating data for its Sandtrap division for the year. Monte 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. 17% c. 20% d. 30% Ans: D, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $180,000 / $600,000 = 30%

132.

Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. 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, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($46,000 / $210,000) − [$46,000 / ($210,000 + $40,000)] = 3.5%

133.

Benet Division of United Refinery Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Benet Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project? a. No, 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, LO: 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 Fulmar Division of Jayne Manufacturing had an ROI of 25% when sales were $3 million and controllable margin was $600,000. What were the average operating assets? a. $150,000 b. $750,000 c. $2,400,000 d. $12,000

22 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 135.

Naples, Inc. recorded operating data for its shoe division for the year. Sales Contribution margin Total fixed costs Average total operating assets

$750,000 135,000 90,000 300,000

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. 25% b. 18% c. 45% d. 12% Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: ($135,000 + $30,000 − $90,000) / $300,000 = 25%

136.

A distinguishing characteristic of an investment center is that a. revenues are generated by selling and buying stocks and bonds. b. interest revenue is the major source of revenues. c. the profitability of the center is related to the funds invested in the center. d. it is a responsibility center which only generates revenues.

Ans: C, LO: 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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation

138.

Return on investment is calculated by dividing a. contribution margin by sales. b. controllable margin by sales. c. contribution margin by average operating assets. d. controllable margin by average operating assets.

Ans: D, LO: 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, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 140.

22 - 29

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, LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $150,000 / $1,000,000 = 15%

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, LO: 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. investment center average operating assets. d. sales for the period.

Ans: C, LO: 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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

144.

In computing ROI, land held for future use a. will hurt the performance measurement of an investment center's manager. b. is important in evaluating the performance of a profit center manager. c. is included in the calculation of operating assets. d. is considered a nonoperating asset.

Ans: D, LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 145.

Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available, for which the following estimates have been made: Project A - Annual controllable margin = $24,000, operating assets = $400,000 Project B - Annual controllable margin = $60,000, operating assets = $550,000 Which project should be funded? a. Both projects b. Project A c. Project B d. Neither project

Ans: C, LO: 7, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $24,000 / $400,000 = 6%; $60,000 / $550,000 = 10.9%

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

147.

Which of the following valuations of operating assets is not readily available from the accounting records? a. Cost b. Book value c. Market value d. Both cost and market value

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation a

148. The following information is available for Halle Department Stores: Average operating assets Controllable margin Contribution margin Minimum rate of return

$600,000 60,000 150,000 8%

How much is Halle’s residual income? a. $102,000 b. $540,000 c. $12,000 d. $48,000 Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: $60,000 − (8% × $600,000) = $12,000

Budgetary Planning and Responsibility Accounting

22 - 31

149. What is the goal of residual income? a. To maximize the amount of costs which are controllable b. To maximize profits c. To maximize the total amount of residual income d. To maximize controllable margin

Ans: c, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

150. Which one of the following is a correct statement about residual income? a. Its goal is to maximize profits of an investment center. b. It is less effective for evaluating investment centers than ROI. c. It is the ratio of controllable margin to the minimum rate of return on average operating assets. d. It evaluates performance by comparing the return of an investment center with the company’s minimum rate of return.

Ans: d, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

151. Which one of the following does not impact the amount of residual income? a. Contribution margin b. Net income c. Sales d. Controllable costs

Ans: b, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

152. For what purpose do companies calculate residual income? a. To determine whether decentralization is possible or not b. To motivate managers through possible termination c. To evaluate management performance d. To measure company profits

Ans: c, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

153. Lew Co. had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000. The company’s operating assets total $800,000, and its required return is 10%. How much is the residual income? a. $120,000 b. $20,000 c. $80,000 d. $320,000

Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ($400,000 − $200,000 − $100,000) − ($800,000 × 10%) = $20,000 a

154. Quincy Corp. earned controllable margin of $500,000 on sales of $6,400,000. The division had average operating assets of $5,200,000. The company requires a return on investment of at least 8%. How much is residual income? a. $416,000 b. $84,000 c. $584,000 d. $512,000

22 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

155. The performance of the manager of Ottawa Division is measured by residual income. Which of the following would decrease the manager’s performance measure? a. Decrease in required rate of return b. Increase in amount of return on investment desired c. Increase in sales d. Increase in contribution margin

Ans: b, LO: 8, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

156.

Which of the following would not be considered an aspect of budgetary control? a. It assists in the determination of differences between actual and planned results. b. It provides feedback value needed by management to see whether actual operations are on course. c. It assists management in controlling operations. d. It provides a guarantee for favorable results.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

157.

A static budget is usually appropriate in evaluating a manager's effectiveness in controlling a. fixed manufacturing costs and fixed selling and administrative expenses. b. variable manufacturing costs and variable selling and administrative expenses. c. fixed manufacturing costs and variable selling and administrative expenses. d. variable manufacturing costs and fixed selling and administrative expenses.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

158.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

159.

Sydney, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $128,000 variable and $360,000 fixed. If Sydney had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $4,000 unfavorable b. $4,000 favorable c. $12,000 unfavorable d. $16,000 favorable

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: [($128,000 / 16,000) × 18,000] + $360,000 = $504,000; $504,000 − $500,000 = $4,000

160.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting 161.

22 - 33

A flexible budget is appropriate for a. b. c. d.

Direct Labor Costs No Yes Yes No

Manufacturing Overhead Costs No Yes No Yes

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting

162.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

163.

Controllable costs for responsibility accounting purposes are those costs that are directly influenced by a. a given manager within a given period of time. b. a change in activity. c. production volume. d. sales volume.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

164.

All of the following statements are correct about controllable costs except a. all costs are controllable at some level of responsibility within a company. b. all costs are controllable by top management. c. fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. costs incurred directly by a level of responsibility are controllable at that level.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation

165.

Which of the following will cause an increase in ROI? a. An increase in variable costs b. An increase in average operating assets c. An increase in sales d. An increase in controllable fixed costs

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation

166.

Costs that relate specifically to one center and are incurred for the sole benefit of that center are a. common fixed costs. b. direct fixed costs. c. indirect fixed costs. d. noncontrollable fixed costs.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation

22 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 167.

If controllable margin is $300,000 and the average investment center operating assets are $2,000,000, the return on investment is a. .67%. b. 6.66%. c. 20%. d. 15%.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation Solution: $300,000 / $2,000,000 = 15%

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.

c b d d d c d c d a b c d a c b a a b b

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

d b c d d b c a c d d c d d d b b b d d

78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.

c b d c b c d c d a d c d a c b c c c d

98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

b a b d c c a b d c c d b c c c a b a b

118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.

b b d d d b a b b a a b c d c a c a c b

138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157.

d a a a c c d c c c c c d b c b b b d a

158. 159. 160. 161. 162. 163. 164. 165. 166. 167.

d b c b b a c c b d

BRIEF EXERCISES BE 168 Devlin 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 $13,600 5,500 2,200

Instructions Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting Solution 168

22 - 35

(4 min.)

3,200 × ($6.50 + $2.40 + $1.10) + ($13,600 + $5,500 + $2,200) = $53,300 BE 169 Wind Productions uses flexible budgets. Items from the budget for March in which 3,000 units were produced and sold appear below: Direct materials Indirect materials - variable Supervisor salaries Depreciation on factory equipment Direct labor Property taxes on factory

$18,000 2,000 15,000 4,000 10,000 1,000

Instructions If Wind prepares a flexible budget at 4,000 units, compute its total variable cost. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 169

(4 min.)

Variable cost per unit: ($18,000 + $2,000 + $10,000) ÷ 3,000 = $10 per unit Variable cost at 4,000 units: $10 × 4,000 = $40,000 BE 170 Cyber Construction’s manufacturing costs for August when production was 1,000 units appear below: Direct material Direct labor Variable overhead Factory depreciation Factory supervisory salaries Other fixed factory costs

$12 per unit $7,500 6,000 9,000 7,800 2,500

Instructions Compute the flexible budget manufacturing cost amount for a month when 900 units are produced. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 170

(5 min.)

Direct material ($12 × 900) Direct labor [($7,500 ÷ 1,000) × 900] Variable overhead [($6,000 ÷ 1,000) × 900] Factory depreciation—fixed Factory supervisory salaries—fixed Other fixed factory costs—fixed Total

$10,800 6,750 5,400 9,000 7,800 2,500 $42,250

22 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 171 Micro Miller Company’s budgeted sales for April were estimated at $700,000, sales commissions at 4% of sales, and the sales manager's salary at $80,000. Shipping expenses were estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000, plus 0.5% of sales. Instructions Determine the budgeted selling expenses on a flexible budget for April. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 171

(5 min.)

Sales commissions 4% × $700,000 Sales manager’s salary Shipping expenses 1% × $700,000 Miscellaneous selling: Fixed portion Variable: 0.5% × $700,000 Budgeted selling expenses

$ 28,000 80,000 7,000 1,000 3,500 $119,500

BE 172 Point, Inc. produces men’s shirts. The following budgeted and actual amounts are for 2013: Cost Budget at 2,500 units Actual Amounts at 2,800 units Direct materials $65,000 $75,000 Direct labor 70,000 78,000 Fixed overhead 35,000 34,500 Instructions Prepare a performance report for Point, Inc. for the year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 172

(5 min.) POINT, INC. Manufacturing Performance Budget Report For the Year Ended December 31, 2013

Direct materials Direct labor Fixed overhead Total costs

Budget $ 72,800 78,400 35,000 $186,200

Actual $ 75,000 78,000 34,500 $187,500

BE 173 Moss Corp. reported the following items for 2013: Controllable fixed costs Contribution margin Interest expense Variable costs Total assets

$ 77,000 122,000 20,000 80,000 $925,000

Differences $2,200 U 400 F 500 F $1,300 U

Budgetary Planning and Responsibility Accounting BE 173

22 - 37

(Cont.)

Instructions Compute the controllable margin for 2013. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 173

(2 min.)

$122,000 – $77,000 = $45,000 BE 174 The data for an investment center is given below. January 1, 2013 Current Assets $ 400,000 Plant Assets 3,000,000

December 31, 2013 $ 800,000 3,800,000

The controllable margin is $440,000. Instructions Compute the return on investment for the center for 2013. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 174

(4 min.)

Average current assets ($400,000 + $800,000) ÷ 2 = $600,000 Plant assets ($3,000,000 + $3,800,000) ÷ 2 = $3,400,000 ROI = Controllable Margin ÷ Average Operating Assets = $440,000 ÷ $4,000,000 = 11% BE 175 Data for the Deluxe Division of Park Industries which is operated as an investment center follows: Sales $6,000,000 Contribution Margin 800,000 Controllable Fixed Costs 440,000 Return on Investment 12% Instructions Calculate controllable margin and average operating assets. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 175

(3 min.)

Controllable Margin ($800,000 – $440,000) = $360,000 Average Operating Assets ($360,000 ÷ .12) = $3,000,000

22 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 176 Sage Division’s operating results include: • • •

Controllable margin, $300,000 Sales revenue, $2,400,000 Operating assets, $1,000,000

Sage is considering a project with sales of $240,000, expenses of $168,000, and an investment of $360,000. Sage’s required rate of return is 15%. Instructions Determine whether Sage should accept this project. Ans: N/A, LO: 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 176

(5 min.)

Current ROI = $300,000 ÷ $1,000,000 = 30% ROI of new project = $72,000 ÷ $360,000 = 20% New ROI with project = [$300,000 + $72,000] ÷ [$1,000,000 + $360,000] = 27.4% While ROI decreases, that does not make this a bad investment, since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted. BE 177 An investment center manager is considering three possible investments. The company’s required return is 10%. The required asset investment, controllable margins, and the ROIs of each investment are as follows: Project AA BB CC

Average Investment $160,000 140,000 220,000

Controllable Margin $32,000 16,000 66,000

ROI 20.0% 11.4% 30%

The investment center is currently generating an ROI of 23% based on $1,200,000 in operating assets and a controllable margin of $276,000. Instructions If the manager can select only one project, determine which 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, LO: 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 177

(4 min.)

CC is the best choice because it increases the ROI (30% is greater than 23%). Project AA BB CC

New ROI ($276,000 + $32,000) ÷ ($1,200,000 + $160,000) = 22.6% ($276,000 + $16,000) ÷ ($1,200,000 + $140,000) = 21.8% ($276,000 + $66,000) ÷ ($1,200,000 + $220,000) = 24.1%

Budgetary Planning and Responsibility Accounting

22 - 39

BE 178

The owner of Denver Toy Manufacturing Company has recently expanded his business in order to add an additional product line. In addition to toys, the company now sells shirts. The company has a minimum rate of return of 11%. Toys Shirts Sales $600,000 $200,000 Controllable margin 120,000 10,000 Average operating assets 900,000 200,000 Instructions Compute the residual income for both investment centers. Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 178

(5 min.)

Controllable margin Average assets × 11% Residual income

Toys $120,000 99,000 $ 21,000

Shirts $ 10,000 22,000 $(12,000)

BE 179

Floors Direct has 4 divisions. Its hardwood flooring division’s information follows for 2013: Sales Controllable margin Variable costs Average operating assets

$4,000,000 250,000 60,000 1,800,000

Instructions Floor’s required rate of return is 10%. How much is its residual income? Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 179

(4 min.)

$250,000 – (10% × $1,800,000) = $70,000

22 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

EXERCISES Ex. 180 Clark Company's master budget reflects budgeted sales information for the month of June, 2013, 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 Clark Company which shows whether the company achieved its planned objectives. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 180

(10–15 min.) CLARK COMPANY Sales Budget Report For the Month Ended June 30, 2013

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. 181 Beal Manufacturing Co.'s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000. Instructions a. Determine how much would appear on Beal's flexible budget for 2013 if 18,000 units are produced and sold. b. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation? Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 181

(8–10 min.)

a. Variable costs: Direct labor Direct materials Fixed costs Total costs b.

12,000 Units

Unit Variable Cost

18,000 Units

$72,000 12,000 84,000 48,000 $132,000

$6.00 1.00

$108,000 18,000 126,000 48,000 $174,000

If a static budget were used, budgeted variable costs would be only $84,000 because they would be based on the static budget level of 12,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of activity. .

Budgetary Planning and Responsibility Accounting

22 - 41

Ex. 182 Cody Co. developed its annual manufacturing overhead budget for its master budget for 2013 as follows: Expected annual operating capacity Variable overhead costs Indirect labor Indirect materials Factory supplies Total variable Fixed overhead costs Depreciation Supervision Property taxes Total fixed Total costs

120,000 Direct Labor Hours $600,000 120,000 60,000 780,000 240,000 120,000 96,000 456,000 $1,236,000

The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours. Instructions Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 182

(15–20 min.) CODY CO. Monthly Flexible Manufacturing Overhead Budget

Activity level Direct labor hours Variable costs Indirect labor Indirect materials Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

8,000

9,000

$40,000 8,000 4,000 52,000

$45,000 9,000 4,500 58,500

20,000 10,000 8,000 38,000 $90,000

20,000 10,000 8,000 38,000 $96,500

22 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 183 Copper Manufacturing has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department: COPPER MANUFACTURING Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

3,000

4,000

$ 3,000 15,000 4,500 22,500

$ 4,000 20,000 6,000 30,000

20,000 12,000 15,000 47,000 $69,500

20,000 12,000 15,000 47,000 $77,000

Instructions Prepare a flexible budget at the 5,000 direct labor hours of activity. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 183

(15–20 min.) COPPER MANUFACTURING Monthly Flexible Manufacturing Overhead Budget Mixing Department

Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

5,000 $ 5,000 25,000 7,500 37,500 20,000 12,000 15,000 47,000 $84,500

Budgetary Planning and Responsibility Accounting

22 - 43

Ex. 184 Berne, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor Indirect materials Maintenance Utilities

$5.00 2.50 .80 .30

Fixed overhead costs per month are: Supervision Insurance Property taxes Depreciation

$800 200 300 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. Instructions Prepare a flexible manufacturing overhead budget for the expected range of activity, using increments of 1,000 machine hours. Ans: N/A, LO: 3, 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.) BERNE, INC. Monthly Flexible Manufacturing Overhead Budget

Activity level Machine hours

2,000

3,000

4,000

Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable

$10,000 5,000 1,600 600 17,200

$15,000 7,500 2,400 900 25,800

$20,000 10,000 3,200 1,200 34,400

Fixed costs Supervision Insurance Property taxes Depreciation Total fixed Total costs

800 200 300 900 2,200 $19,400

800 200 300 900 2,200 $28,000

800 200 300 900 2,200 $36,600

22 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 185 Telemark Production'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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185

(8–10 min.)

Direct materials ($10 × 2,200) Direct labor [($4,000 ÷ 2,000) × 2,200] Variable overhead [($10,000 ÷ 2,000) × 2,200] Factory depreciation—fixed Factory supervisory salaries—fixed Other fixed factory costs Total

$22,000 4,400 11,000 16,000 11,600 3,000 $68,000

Ex. 186 Webb, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor $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, 2013, 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

Budgetary Planning and Responsibility Accounting Ex. 186

22 - 45

(Cont.)

Instructions Prepare a flexible budget report, assuming that the company used 6,000 machine hours during August. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 186

(20–25 min.) WEBB, INC. Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 2013 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 F

Ex. 187 Lapp Manufacturing uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $480,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery

6% 4% 5% 1%

Fixed selling expenses consist of sales salaries $80,000 and depreciation on delivery equipment $20,000. Instructions Prepare a flexible budget for increments of $40,000 of sales within the relevant range. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 187

(17–22 min.) LAPP MANUFACTURING Monthly Flexible Selling Expense Budget

Activity level Sales Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total costs

$400,000

$440,000

$480,000

$24,000 16,000 20,000 4,000 64,000

$26,400 17,600 22,000 4,400 70,400

$28,800 19,200 24,000 4,800 76,800

80,000 20,000 100,000 $164,000

80,000 20,000 100,000 $170,400

80,000 20,000 100,000 $176,800

Ex. 188 Cadiz Co. uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery

5% 4% 7% 1%

Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000. The actual selling expenses incurred in February, 2013, by Cadiz are as follows: Sales commissions Advertising Traveling Delivery

$17,200 12,000 23,700 2,400

Fixed selling expenses consist of sales salaries $41,500 and depreciation on delivery equipment $10,000. Instructions Prepare a flexible budget performance report, assuming that February sales were $330,000. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Budgetary Planning and Responsibility Accounting Solution 188

22 - 47

(17–22 min.) CADIZ CO. Selling Expense Budget Report (Flexible) For the Month Ended February 28, 2013

Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total expenses

Difference Favorable F Unfavorable U

Budget $330,000

Actual $330,000

$16,500 13,200 23,100 3,300 56,100

$17,200 12,000 23,700 2,400 55,300

$ 700 1,200 600 900 800

40,000 10,000 50,000 $106,100

41,500 10,000 51,500 $106,800

1,500 U — 1,500 U $ 700 U

U F U F F

Ex. 189 A flexible budget graph for the Assembly Department shows the following: 1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $120,000. 2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000. Instructions Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 189

(5 min.)

Budgeted Costs: Assembly $120,000 + $4.80/direct labor hour. Fixed costs are $120,000. Variable costs are $4.80 per labor hour. ($360,000 – $120,000) ÷ 50,000. Ex. 190 Ace Production Co. has two production departments, Fabricating and Assembling. At a department managers' meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following. 1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $100,000 in the Fabricating Department, and $80,000 in the Assembling Department. .

22 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 190

(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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 190

(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. 191 Hubbard, Inc.'s static budget at 3,000 units of production includes $12,000 for direct labor, $3,000 for utilities (variable), and total fixed costs of $24,000. Actual production and sales for the year was 9,000 units, with an actual cost of $70,800. Instructions Determine if Hubbard is over or under budget. Ans: N/A, LO: 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 191 Variable costs: Direct labor Utilities Fixed costs Total costs

(8–10 min.) 3,000 Units

Unit Variable Cost

9,000 Units

$ 12,000 3,000 15,000 24,000 $39,000

$4.00 1.00

$36,000 9,000 45,000 24,000 $69,000

The company is over budget by $1,800. The flexible budget amount allowed was $69,000, and the company incurred $70,800 of actual costs.

Budgetary Planning and Responsibility Accounting

22 - 49

Ex. 192 Campbell Clothing produces men's ties. The following budgeted and actual amounts are for 2013: 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 Campbell Clothing for the year. Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 192

(8–10 min.) CAMPBELL CLOTHING Manufacturing Performance Budget Report For the Year Ended December 31, 2013

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. 193 Data concerning manufacturing overhead for Wilson Industries are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level.

22 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 193

(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, LO: 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 193

(20–25 min.)

(a)

WILSON INDUSTRIES Mixing Department Manufacturing Overhead Cost Responsibility Report For the Months of July and August

Controllable Cost Indirect materials Indirect labor Factory supplies Supervision Total costs (b)

Budget 21,000 36,000 6,000 12,500 75,500

July Actual 20,500 39,500 7,600 11,500 79,100

Difference 500 F 3,500 U 1,600 U 1,000 F 3,600 U

Budget 24,500 42,000 7,000 12,500 86,000

August Actual 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. 194 Strickland Corp.'s manufacturing overhead budget for the first quarter of 2013 contained the following data: Variable Costs Indirect materials Indirect labor Utilities Maintenance

$40,000 24,000 20,000 12,000

Budgetary Planning and Responsibility Accounting Ex. 194

22 - 51

(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, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 194

(15–20 min.) STRICKLAND CORP. Manufacturing Overhead Cost Responsibility Report For the Quarter Ended March 31, 2013

Controllable Costs Indirect materials Indirect labor Utilities Maintenance Depreciation Property taxes Total costs

Budget $40,000 24,000 20,000 12,000 16,000 8,000 $120,000

Actual $37,200 26,400 21,000 10,600 16,000 9,000 $120,200

Difference $ 2,800 F 2,400 U 1,000 U 1,400 F — 1,000 U $ 200 U

Ex. 195 The Deluxe Division, a profit center of Riley Manufacturing Company, reported the following data for the first quarter of 2013: Sales $9,000,000 Variable costs 6,300,000 Controllable direct fixed costs 1,200,000 Noncontrollable direct fixed costs 530,000 Indirect fixed costs 300,000 Instructions (a) Prepare a performance report for the manager of the Deluxe Division. (b) What is the best measure of the manager's performance? Why? (c) How would the responsibility report differ if the division was an investment center? Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 195

(15–20 min.)

(a)

RILEY MANUFACTURING COMPANY Deluxe Division Management Performance Report For the Quarter Ended March 31, 2013 Sales ........................................................................................... Variable costs .............................................................................. Contribution margin ..................................................................... Controllable fixed costs................................................................ Controllable margin......................................................................

$9,000,000 6,300,000 2,700,000 1,200,000 $1,500,000

(b)

Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable revenues over controllable costs.

(c)

For an investment center, the responsibility report would also show the return on investment for the period.

Ex. 196 Danner Co. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows. Operating Data

Women's Shoes

Men's Shoes

Children's Shoes

Contribution margin

$280,000

(3)

$220,000

Controllable fixed costs

130,000

(4)

(5)

(1)

$ 90,000

96,000

800,000

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, 2013, and (2) all data equal budget except variable costs which are $20,000 over budget. Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 196

(10 min.)

(a) (1) Controllable margin ($280,000 – $130,000)

$150,000

(2) Variable costs ($800,000 – $280,000)

520,000

(3) Contribution margin ($480,000 – $330,000)

150,000

(4) Controllable fixed costs ($150,000 – $90,000)

60,000

(5) Controllable fixed costs ($220,000 – $96,000)

124,000

(6) Sales ($250,000 + $220,000)

470,000

Budgetary Planning and Responsibility Accounting Solution 196

22 - 53

(Cont.)

(b) DANNER CO. Women's Shoe Division Responsibility Report For the Month Ended June 30, 2013

_____________________________________________________________________________ Difference Favorable F Budget Actual Unfavorable U Sales $800,000 $800,000 $ 0 Variable costs 500,000 520,000 20,000 U Contribution margin 300,000 280,000 20,000 U Controllable fixed costs 130,000 130,000 0 Controllable margin $170,000 $150,000 $20,000 U Ex. 197 The Real Estate Products Division of McKenzie Co. is operated as a profit center. Sales for the division were budgeted for 2013 at $1,250,000. The only variable costs budgeted for the division were cost of goods sold ($610,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative 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 82,000 100,000 105,000

Instructions (a) Prepare a responsibility report for the Real Estate Products Division for 2013. (b) Assume the division is an investment center, and average operating assets were $1,200,000. Compute ROI. Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197

(15 min.)

(a) MCKENZIE CO. Real Estate Products Division Responsibility Report 2013

_____________________________________________________________________________ Budget Actual Difference Sales $1,250,000 $1,175,000 $75,000 U Variable costs Cost of goods sold 610,000 545,000 65,000 F Selling and administrative 80,000 82,000 2,000 U Total 690,000 627,000 63,000 F Contribution margin 560,000 548,000 12,000 U FOR INSTRUCTOR USE ONLY

22 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 197

(Cont.)

Controllable fixed costs Cost of goods sold Selling and administrative Total Controllable margin (b)

130,000 120,000 250,000 $310,000

140,000 100,000 240,000 $308,000

10,000 U 20,000 F 10,000 F $ 2,000 U

$308,000/$1,200,000 = 25.7%

Ex. 198 The Pacific Division of Henson Industries 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 5,000,000 Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $400,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $120,000. 3. Reduce average operating assets by 4% Instructions (a) Compute the return on investment (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, LO: 7, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 198

(10 min.)

(a) Controllable margin = ($4,000,000 – $2,600,000 – $800,000) = $600,000 ROI = $600,000 ÷ $5,000,000 = 12% (b)

1. Contribution margin percentage is 35%, or ($1,400,000 ÷ $4,000,000) Increase in controllable margin = $400,000 × 35% = $140,000 ROI = ($600,000 + $140,000) ÷ $5,000,000 = 14.8% 2. ($600,000 + $120,000) ÷ $5,000,000 = 14.4% 3. $600,000 ÷ ($5,000,000 – $200,000) = 12.5%

Budgetary Planning and Responsibility Accounting

22 - 55

Ex. 199 The Medford Burkett Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers' bonuses are based in part on the results shown in these reports. Recently, the company was the victim of a computer virus that deleted portions of the company's accounting records. This was discovered when the current period's responsibility reports were being prepared. The printout of the actual operating results appeared as follows. Planes $ ? 5,000,000 ? 1,500,000 ? 25,000,000 12%

Service revenue Variable costs Contribution margin Controllable fixed costs Controllable margin Average operating assets Return on investment

Taxis $450,000 ? 180,000 ? 70,000 ? 10%

Limos $ ? 320,000 380,000 ? 176,000 1,600,000 ?

Instructions Determine the missing pieces of information above. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Solution 199

(10 min.)

Planes: ROI = Controllable margin ÷ Average operating assets 12% = Controllable margin ÷ $25,000,000 Controllable margin = $25,000,000 × 12% = $3,000,000 Contribution margin = Controllable margin + Controllable fixed costs = $3,000,000 + $1,500,000 = $4,500,000 Service revenue = Contribution margin + Variable costs = $4,500,000 + $5,000,000 = $9,500,000 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 .

22 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 199

(Cont.)

Contribution margin $180,000 Variable costs

= Service revenue – Variable costs = $450,000 – Variable costs = $450,000 – $180,000 = $270,000

Limos: ROI = Controllable margin ÷ Average operating assets = $176,000 ÷ $1,600,000 = 11% Controllable margin = Contribution margin – Controllable fixed costs $176,000 = $380,000 – Controllable fixed costs Controllable fixed costs = $380,000 – $176,000 = $204,000 Contribution margin = Service revenue – Variable costs $380,000 Service revenue

= Service revenue – $320,000 = $380,000 + $320,000 = $700,000

Ex. 200 Perez Corp. reported the following: Beginning of year operating assets End of year operating assets Contribution margin Sales Controllable fixed costs

$3,200,000 3,000,000 1,000,000 5,000,000 643,000

Its required return is 10%. Instructions Compute the company’s ROI. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting Solution 200

22 - 57

(3 min.)

($1,000,000 – $643,000) ÷ [($3,200,000 + $3,000,000) ÷ 2] = 11.5% Ex. 201 Lombard, Inc. has two investment centers and has developed the following information: 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? $____________.

What was the amount of Department B's controllable margin? $____________.

If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.

If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A's new ROI would be _________________.

Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 201 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. 202 The Atlantic Division of Stark Productions Company reported the following results for 2013: Sales $4,000,000 Variable costs 3,200,000 Controllable fixed costs 300,000 Average operating assets 2,500,000 Management is considering the following independent alternative courses of action in 2014 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 10% with no change in sales or variable costs. 2. Reduce average operating assets by 10% with no change in controllable margin. 3. Increase sales $500,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2013. (b) Compute the expected return on investment for each of the alternative courses of action. Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 202 (a)

(15–20 min.)

Controllable margin Return on investment = ———————————— Average operating assets $500,000 2013 ROI = —————— = 20% $2,500,000

(b)

$530,000 (a) 1. ——————— = 21.2% $2,500,000 $500,000 2. ———————— = 22.2% $2,250,000 (b) $600,000 (c) 3. ——————— = 24% $2,500,000 (a)

$500,000 + ($300,000 × 10%) = $530,000.

(b)

$2,500,000 – ($2,500,000 × .10) = $2,250,000.

(c)

$4,000,000 – $3,200,000 Contribution margin 20% (————————————); $4,000,000 $500,000 + ($500,000 × 20%) = $600,000.

Ex. 203 Data for the following subsidiaries of Olive Manufacturing, which are operated as investment centers, are as follows: Fleming Company Oak Company Sales $3,000,000 $2,000,000 Controllable margin (1) (3) Average operating assets (2) 4,000,000 Contribution margin 1,200,000 800,000 Controllable fixed costs 500,000 200,000 Return on Investment 10% (4) Instructions Compute the missing amounts using the ROI formula. Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 203 (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% .

Budgetary Planning and Responsibility Accounting

22 - 59

Ex. 204 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 $ 700,000 4,000,000 330,000 1,200,000

The controllable margin is $760,000. Instructions What is the return on investment for the center for 2013? Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 204

(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 + $700,000) ÷ 2 = 500,000 $4,000,000

Note: Idle plant assets and land held for future use are not included in average operating assets. ROI = $760,000 ÷ $4,000,000 = 19%

COMPLETION STATEMENTS 205. The use of budgets in controlling operations is known as ________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

206. A major aspect of budgetary control is the use of budget reports that compare _____________________ with _______________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

207. In analyzing differences from planned objectives, management may ___________________, or it could decide to modify ___________________.

take

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

208. The master budget is a __________________ budget which is based on operating at one budgeted activity level. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

209. A __________________ budget projects budget data for various levels of activity. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

22 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 210. Total ________________ costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

211. Under ___________________ accounting, the evaluation of a manager's performance is based on the costs and revenues directly under that manager's control. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

212. A cost is __________________ at a given level of managerial responsibility if a manager has the authority to incur the cost in a given time period. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

213. In general, costs ____________________ directly by the level of responsibility are _______________, whereas costs that are ____________________ to the responsibility level are __________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

214. Responsibility centers may be classified into three types: (1)____________________, (2)___________________ and, (3)____________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Budget Preparation

215. The primary basis for evaluating the performance of a manager of an investment center is _________________. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation

216. Return on investment is calculated by dividing _________________________ by ________________________. Ans: N/A, LO: 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 205. 206. 207. 208. 209. 210. 211.

budgetary control actual results, planned objectives corrective action, future plans static flexible fixed responsibility

212. controllable 213. incurred, controllable, allocated, noncontrollable 214. cost centers, profit centers, investment centers 215. return on investment (ROI) 216. controllable margin, average operating assets

Budgetary Planning and Responsibility Accounting

22 - 61

MATCHING 217. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception

G. H. I. J. K. L.

Responsibility reporting system Return on Investment Profit center Investment center Indirect fixed costs Direct fixed costs

____

1. The review of budget reports by top management directed entirely or primarily to 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, LO: 1–7, 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

22 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 218 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Solution 218 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments. Management by exception is possible in such a system because, if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary. S-A E 219 Brad Ventura is confused about how a flexible budget is prepared. Identify the steps for Brad. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Solution 219 The steps in preparing a flexible budget are: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (3) Identify the fixed costs and determine the budgeted amount for each cost. (4) Prepare the budget for selected increments of activity within the relevant range. S-A E 220 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Budgetary Planning and Responsibility Accounting

22 - 63

Solution 220 Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager, it is necessary to use different bases for evaluation. An investment center manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit center. Similarly, because only costs are controllable for a cost center, such a center is evaluated only on the basis of its controllable costs. S-A E 221 What is responsibility accounting? Explain the purpose of responsibility accounting. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Solution 221 Responsibility accounting is a method of controlling operations that involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. The purpose of responsibility accounting is to evaluate a manager's performance on the basis of matters directly under that manager's control. S-A E 222 (Ethics) Dixon Corporation evaluates its managers based on return on investment (ROI). Kathryn Bricker and Lindsey Allan, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Lindsey remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result. Back at work, Kathryn continues to mull over Lindsey's remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing. Required: 1. Who are the stakeholders in this situation? 2. Is Kathryn's action ethical? Briefly explain. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Solution 222 1. The stakeholders include Kathryn Bricker Lindsey Allan managers of Dixon Corporation shareholders of Dixon Corporation

22 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition S-A E 222 (Cont.) 2. Kathryn's action is probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one's own benefit at the expense of the company's welfare is unethical. S-A E 223 (Communication) Eiger Manufacturing manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant's capacity, and sometimes depressingly slow. During a recent slow period, Nathan Jones, a production supervisor, complained to Janet Smith, accounting manager, about the flexible budget. "I try as hard as I can to meet the budget," he says, "and then I find out that just meeting the budget's not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average 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. Jones. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Strategic/Critical Thinking, AICPA FN: None, AICPA PC: Communication, IMA: Budget Preparation

Solution 223 TO:

Nathan Jones

FROM: Janet Smith RE:

Budget results

I appreciate your coming to me with your questions about the budget. I understand that the new procedures can be frustrating, especially when you receive an unfavorable report that you were not expecting. Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control. Please contact the Accounting Department if you have further questions. (signed)

CHAPTER 23 STANDARD COSTS AND BALANCED SCORECARD SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

4 5 6 9 9 9 1 2

C K C C C C K K

33. 3 34. 4 sg 35. 4 sg 36. 6 sg 37. 7 sg 38. 10

K K C K K K

4 4 5 5 5 5 5 5 5 6 6 6 7 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 9 10 10

AP AP K K K AP AP C AP K K C C K K K AP AP K K K K K AP C AP AP AP AP C K

AP AP AP AP K C C K K K K C C AP AP AP AP K K K K K K C K K K K

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 4 4

C K C K K K C C

25. 26. 27. 28. 29. 30. sg 31. sg 32.

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. 65. 66. 67. 68. 69.

1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

K K C C C K K K K K K C C C C C K K K K K K K C K C C K C C K

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. 97. 98. 99. 100.

3 3 3 3 3 3 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 AP AP AP AP K K K AP K C AP C C K AP AP C AP AP AP K K C K AP AP K K AP AP

101. 102. 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.

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 4 4 4 4 4 4 .

AP AP 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 AP AP AP AP

132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. a 155. a 156. a 157. a 158. a 159. a 160. a 161. a 162.

163. 164. a 165. a 166. a 167. a 168. a 169. a 170. a 171. a 172. a 173. a 174. a 175. a 176. a 177. a 178. a 179. st 180. st 181. st 182. sg 183. sg 184. st 185. sg 186. sg 187. sg,a 188. st,a 189. sg,a 190. a

10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 2 3 3 4 4 4 4 6 9 10 10

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Brief Exercises 191 192

1 AP 193. 4 AP 195. 5 AP 194. 4 AP a196. 10 .3 . sg This question also appears in the Study Guide. st a

AP AP

197. 198.

10 9

AP AP

199. 200.

9 10

AP AP

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 QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Exercises 201 202. 203. 204. 205. 206. .

1,3 3 3,4 4 4 4

A A P P A P A P A P A P

207. 208. 209. 210. 211. 212.

229 230

1 3. .

K K

231. 232.

239 1-5 .

240 241

K K

1 4. .

4 4 4 4 5 4,5

AP AP AP AP AP AN

213. a 214. a 215. a 216. a 217. a 218.

4,5,10 4,5,10 4,5,10 4,6,9 4,9 4,9

AN AP AP AP AP AP

219. 220. a 221. a 222. 223. 224. a

4,9 5,10 5,10 5,10 6 7

AP AP AP AP AP AP

225. 9 226. 9,10 a 227. 5,10 a 228. 10

AP AP AP AP

5 6

K K

Completion Statements 4 4

K K

233. 234.

4 5

K K

235. 236.

237. 238.

10 10

Matching Short-Answer Essay 242. 243.

4 8

244. 245.

1 4

K K

SUMMARY OF LEARNING 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

48. 49.

MC MC

50. 51.

6. 7. 8. 9. 10. 11. 12.

TF TF TF TF TF TF TF

13. 14. 15. 16. 17. 33. 55.

TF TF TF TF TF TF MC

56. 57. 58. 59. 60. 61. 62.

Type

Item

Type

Item

Learning Objective 1 MC 43. MC 46. MC 44. MC 47. MC 45. MC 191. Learning Objective 2 MC 52. MC 54. MC 53. MC 180. Learning Objective 3 MC 63. MC 70. MC 64. MC 71. MC 65. MC 72. MC 66. MC 73. MC 67. MC 74. MC 68. MC 75. MC 69. MC 76.

Type

Item

Type

Item

Type

MC MC BE

201. 229. 239.

Ex C Ma

240. 244.

SA SA

77. 78. 181. 182. 192. 201. 202.

MC MC MC MC BE Ex Ex

203. 230.

Ex C

MC MC MC MC MC MC MC MC MC

Standard Costs and Balanced Scorecard

18. 19. 20. 21. 22. 23. 24. 25. 34. 35. 79. 80. 81. 82.

TF TF TF TF TF TF TF TF TF TF MC MC MC MC

83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC

97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

26. 134. 135. 136.

TF MC MC MC

137. 138. 139. 140.

MC MC MC MC

195. 211. 212. 213.

27. 36.

TF TF

141. 142.

MC MC

143. 187.

37. 144.

TF MC

145. 146.

MC MC

147. 148.

150.

151.

152.

28. 29. 30.

TF TF TF

155. 156. 157.

MC MC MC

158. 159. 160.

38. 161. 162. 163. 164. 165.

TF MC MC MC MC MC

166. 167. 168. 169. 170. 171.

MC MC MC MC MC MC

172. 173. 174. 175. 176. 177.

Note: TF = True-False MC = Multiple Choice MA = Matching

Learning Objective 4 MC 111. MC 125. MC 112. MC 126. MC 113. MC 127. MC 114. MC 128. MC 115. MC 129. MC 116. MC 130. MC 117. MC 131. MC 118. MC 132. MC 119. MC 133. MC 120. MC 183. MC 121. MC 184. MC 122. MC 185. MC 123. MC 186. MC 124. MC 193. Learning Objective 5 BE 214. Ex 222. Ex 215. Ex 226. Ex 220. Ex 227. Ex 221. Ex 228. Learning Objective 6 MC 216. Ex 236. MC 223. Ex Learning Objective 7 MC 149. MC MC 224. Ex Learning Objective 8 MC 153. MC 154. Learning Objective 9a MC 188. MC 216. MC 198. BE 217. MC 199. BE 218. Learning Objective 10a MC 178. MC 200. MC 179. MC 213. MC 189. MC 214. MC 190. MC 215. MC 196. BE 220. MC 197. BE 221. BE = Brief Exercise Ex = Exercise

MC MC MC MC MC MC MC MC MC MC MC MC MC BE

194. 203. 204. 205. 206. 207. 208. 209. 210. 212. 213. 214. 215. 216.

BE Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex

Ex Ex Ex Ex

234. 235.

C C

243.

Ex Ex Ex

219. 225. 226.

Ex Ex Ex

BE Ex Ex Ex Ex Ex

222. 226. 227. 228. 237. 238.

Ex Ex Ex Ex C C

217. 218. 219. 231. 232. 233. 241. 242. 245.

C = Completion SA = Short Answer

23 - 3

Ex Ex Ex C C C K K K

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

CHAPTER LEARNING 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 (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.

Standard Costs and Balanced Scorecard

23 - 5

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. 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 variance is referred to as the overhead volume variance.

TRUE-FALSE STATEMENTS 1.

Inventories cannot be valued at standard cost in financial statements.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Standard cost is the industry average cost for a particular item.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

A standard is a unit amount, whereas a budget is a total amount.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard costs may be incorporated into the accounts in the general ledger.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

An advantage of standard costs is that they simplify costing of inventories and reduce clerical costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Setting standard costs is relatively simple because it is done entirely by accountants.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Cost Management

Normal standards should be rigorous but attainable.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Actual costs that vary from standard costs always indicate inefficiencies.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Ideal standards will generally result in favorable variances for the company.

Ans: F, LO: 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, LO: 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 6 12.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition In developing a standard cost for direct materials, a price factor and a quantity factor must be considered.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

13.

A direct labor price standard is frequently called the direct labor efficiency standard.

Ans: F, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

21.

The overhead controllable variance relates primarily to fixed overhead costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

22.

The overhead volume variance relates only to fixed overhead costs.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23.

If production exceeds normal capacity, the overhead volume variance will be favorable.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 24.

23 - 7

There could be instances where the production department is responsible for a direct materials price variance.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

25.

The starting point for determining the causes of an unfavorable materials price variance is the purchasing department.

Ans: T, LO: 4, 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 to work done.

Ans: T, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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, LO: 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.

Ans: F, LO: 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 8

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

36.

In using variance reports, top management normally looks carefully at every variance.

Ans: F, LO: 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, LO: 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.

Ans: T, LO: 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.

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 F T T 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

Item

Ans.

37. 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

41.

The difference between a budget and a standard is that a. a budget expresses what costs were, while a standard expresses what costs should be. b. a budget expresses management's plans, while a standard reflects what actually happened. c. a budget expresses a total amount, while a standard expresses a unit amount. d. standards are excluded from the cost accounting system, whereas budgets are generally incorporated into the cost accounting system.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 42.

23 - 9

Standard costs may be used by a. universities. b. governmental agencies. c. charitable organizations. d. all of these.

Ans: D, LO: 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, LO: 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, LO: 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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46.

A standard differs from a budget because a standard a. is a predetermined cost. b. contributes to management planning and control. c. is a unit amount. d. none of the above; a standard does not differ from a budget.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

47.

Marburg Co. expects direct materials cost of $6 per unit for 100,000 units (a total of $600,000 of direct materials costs). Marburg’s standard direct materials cost and budgeted direct materials cost is Standard Budgeted a. $6 per unit $600,000 per year b. $6 per unit $6 per unit c. $600,000 per year $6 per unit d. $600,000 per year $600,000 per year

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 10 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 48.

Using standard costs a. makes employees less “cost-conscious.” b. provides a basis for evaluating cost control. c. makes management by exception more difficult. d. increases clerical costs.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

49.

Using standard costs a. can make management planning more difficult. b. promotes greater economy. c. does not help in setting prices. d. weakens management control.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

50.

If standard costs are incorporated into the accounting system, a. it may simplify the costing of inventories and reduce clerical costs. b. it can eliminate the need for the budgeting process. c. the accounting system will produce information which is less relevant than the historical cost accounting system. d. approval of the shareholders is required.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

51.

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, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

52.

Which of the following statements about standard costs is false? a. Properly set standards should promote efficiency. b. Standard costs facilitate management planning. c. Standards should not be used in "management by exception." d. Standard costs can simplify the costing of inventories.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

53.

Which of the following is not considered an advantage of using standard costs? a. Standard costs can reduce clerical costs. b. Standard costs can be useful in setting prices for finished goods. c. Standard costs can be used as a means of finding fault with performance. d. Standard costs can make employees "cost-conscious."

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 54.

23 - 11

If a company is concerned with the potential negative effects of establishing standards, it should a. set loose standards that are easy to fulfill. b. offer wage incentives to those meeting standards. c. not employ any standards. d. set tight standards in order to motivate people.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

55.

A standard which represents an efficient level of performance that is attainable under expected operating conditions is called a(n) a. ideal standard. b. loose standard. c. tight standard. d. normal standard.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

56.

Ideal standards a. are rigorous but attainable. b. are the standards generally used in a master budget. c. reflect optimal performance under perfect operating conditions. d. will always motivate employees to achieve the maximum output.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

57.

The final decision as to what standard costs should be is the responsibility of a. the quality control engineer. b. the managerial accountants. c. the purchasing agent. d. management.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

58.

The labor time requirements for standards may be determined by the a. sales manager. b. product manager. c. industrial engineers. d. payroll department manager.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

59.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 12 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 60.

The most rigorous of all standards is the a. normal standard. b. realistic standard. c. ideal standard. d. conceivable standard.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

61.

Most companies that use standards set them at a. the normal level. b. a conceivable level. c. the ideal level. d. last year's level.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

62.

A managerial accountant 1. does not participate in the standard setting process. 2. provides knowledge of cost behaviors in the standard setting process. 3. provides input of historical costs to the standard setting process. a. b. c. d.

1 2 3 2 and 3

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

63.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

64.

The direct materials quantity standard would not be expressed in a. pounds. b. barrels. c. dollars. d. board feet.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

65.

The direct materials quantity standard should a. exclude unavoidable waste. b. exclude quality considerations. c. allow for normal spoilage. d. always be expressed as an ideal standard.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 66.

23 - 13

The direct labor quantity standard is sometimes called the direct labor a. volume standard. b. effectiveness standard. c. efficiency standard. d. quality standard.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

67.

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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

68.

Allowance for spoilage is part of the direct a. materials price standard. b. materials quantity standard. c. labor price standard. d. labor quantity standard.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

69.

The total standard cost to produce one unit of product is shown a. at the bottom of the income statement. b. at the bottom of the balance sheet. c. on the standard cost card. d. in the Work in Process Inventory account.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

70.

An unfavorable materials quantity variance would occur if a. more materials were purchased than were used. b. actual pounds of materials used were less than the standard pounds allowed. c. actual labor hours used were greater than the standard labor hours allowed. d. actual pounds of materials used were greater than the standard pounds allowed.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 14 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

71. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials price per pound is a. $1.96. b. $2.00. c. $2.13 d. $2.17 Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($2.00  .98) + $.10 + $.07 = $2.13

72. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials quantity per unit is a. 2.6 pounds. b. 2.7 pounds. c. 2.9 pounds. d. 3.0 pounds. Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 2.60 + .30 + .10 = 3.0

73. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor rate per hour is a. $ 12.00. b. $ 12.30. c. $15.60. d. $15.90. Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $12.00 + $.30 + $1.20 + $2.40 = $15.90

Standard Costs and Balanced Scorecard

23 - 15

74. Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and fringe benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor hours per unit is a. 1 hour. b. 1.1 hours. c. 1.2 hours. d. 1.3 hours. Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: 1 + .2 + .1 = 1.3

75.

The standard direct materials quantity does not include allowances for a. unavoidable waste. b. normal spoilage. c. unexpected spoilage. d. all of the above are included.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

76.

Allowances should not be made in the direct labor quantity standard for a. wasted time. b. rest periods. c. cleanup. d. machine downtime.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

77.

The standard predetermined overhead rate used in setting the standard overhead cost is determined by dividing a. budgeted overhead costs by an expected standard activity index. b. actual overhead costs by an expected standard activity index. c. budgeted overhead costs by actual activity. d. actual overhead costs by actual activity.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

78.

Hofburg’s standard quantities for 1 unit of product include 2 pounds of materials and 1.5 labor hours. The standard rates are $2 per pound and $7 per hour. The standard overhead rate is $8 per direct labor hour. The total standard cost of Hofburg’s product is a. $14.50. b. $17.00. c. $22.50. d. $26.50.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (2  $2) + (($7 + $8) (1.5)) = $26.50

23 - 16 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 79.

Which of the following statements is true? a. Variances are the differences between total actual costs and total standard costs. b. When actual costs exceed standard costs, the variance is favorable. c. An unfavorable variance results when actual costs are decreasing but standards are not changed. d. All of the above are true.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

80.

Unfavorable materials price and quantity variances are generally the responsibility of the a. b. c. d.

Price Purchasing department Purchasing department Production department Production Department

Quantity Purchasing Department Production Department Production Department Purchasing Department

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

81.

Scorpion Production 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, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (3,900  $81) − (3,960  $80) = $900

82.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

83.

If actual costs are greater than standard costs, there is a(n) a. normal variance. b. unfavorable variance. c. favorable variance. d. error in the accounting system.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 84.

23 - 17

A total materials variance is analyzed in terms of a. price and quantity variances. b. buy and sell variances. c. quantity and quality variances. d. tight and loose variances.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

85.

A company developed the following per-unit standards for its product: 2 pounds of direct materials at $4 per pound. Last month, 1,500 pounds of direct materials were purchased for $5,700. The direct materials price variance for last month was a. $5,700 favorable. b. $300 favorable. c. $150 favorable. d. $300 unfavorable.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: [$4 − ($5,700 / 1,500)]  1,500 = $300

86.

The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last month was a. $3,200 favorable. b. $2,400 favorable. c. $3,200 unfavorable. d. $5,600 unfavorable.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: [(6,000  2) − 11,200]  $4 = $3,200

87.

The purchasing agent of the Poplin, Inc. 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 c. Unfavorable materials price variance d. Unfavorable labor quantity variance

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

88.

The per-unit standards for direct labor are 2 direct labor hours at $15 per hour. If in producing 1,800 units, the actual direct labor cost was $48,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $1,800 unfavorable. b. $6,000 favorable. c. $3,750 unfavorable. d. $6,000 unfavorable.

23 - 18 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 89.

The standard rate of pay is $20 per direct labor hour. If the actual direct labor payroll was $117,600 for 6,000 direct labor hours worked, the direct labor price (rate) variance is a. $2,400 unfavorable. b. $2,400 favorable. c. $3,000 unfavorable. d. $3,000 favorable.

90.

The standard number of hours that should have been worked for the output attained is 6,000 direct labor hours and the actual number of direct labor hours worked was 6,300. If the direct labor price variance was $3,150 unfavorable, and the standard rate of pay was $9 per direct labor hour, what was the actual rate of pay for direct labor? a. $8.50 per direct labor hour b. $7.50 per direct labor hour c. $9.50 per direct labor hour d. $9.00 per direct labor hour

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: [(6,300  $9) + $3,150] / 6,300 = $9.50

91.

Which one of the following statements is true? a. If the materials price variance is unfavorable, then the materials quantity variance must also be unfavorable. b. If the materials price variance is unfavorable, then the materials quantity variance must be favorable. c. Price and quantity variances move in the same direction. If one is favorable, the others will be as well. d. There is no correlation of favorable or unfavorable for price and quantity variances.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

92.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

93.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 94.

23 - 19

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

95.

Information on Jayhawk'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

96.

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

97.

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, LO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

98.

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, LO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

99.

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.

23 - 20 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 100.

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. $0.20 c. $5.00 d. Cannot be determined from the data provided.

101.

A company uses 20,000 pounds of materials for which it paid $6.00 a pound. The materials price variance was $15,000 unfavorable. What is the standard price per pound? a. $0.75 b. $5.25 c. $6.00 d. $6.75

102.

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

103.

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s materials price variance is a. $120 U. b. $1,200 U. c. $1,080 U. d. $1,200 F.

Standard Costs and Balanced Scorecard 104.

23 - 21

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s materials quantity variance is a. $1,200 U. b. $1,200 F. c. $1,320 F. d. $1,320 U.

105.

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds, although the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s total materials variance is a. $2,400 U. b. $2,400 F. c. $2,520 U. d. $2,520 F.

106.

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

107.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

108.

Labor efficiency is measured by the a. materials quantity variance. b. total labor variance. c. labor quantity variance. d. labor rate variance.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 22 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 109.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

110.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

111.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

112.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

113.

Monster Company produces a product requiring 3 direct labor hours at $16.00 per hour. During January, 2,000 products are produced using 6,300 direct labor hours. Monster’s actual payroll 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

114.

A company developed the following per-unit standards for its product: 2 gallons of direct materials at $8 per gallon. Last month, 3,000 gallons of direct materials were purchased for $22,800. The direct materials price variance for last month was a. $22,800 favorable. b. $600 favorable. c. $1,200 favorable. d. $1,200 unfavorable.

Standard Costs and Balanced Scorecard 115.

23 - 23

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.

116.

The per-unit standards for direct labor are 1.5 direct labor hours at $15 per hour. If in producing 2,400 units, the actual direct labor cost was $46,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $2,400 unfavorable. b. $8,000 favorable. c. $5,000 unfavorable. d. $8,000 unfavorable.

117.

The standard rate of pay is $12 per direct labor hour. If the actual direct labor payroll was $47,040 for 4,000 direct labor hours worked, the direct labor price (rate) variance is a. $960 unfavorable. b. $960 favorable. c. $1,200 unfavorable. d. $1,200 favorable.

118.

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

119.

A company purchases 12,000 pounds of materials. The materials price variance is $6,000 favorable. What is the difference between the standard and actual price paid for the materials? a. $1.00 b. $.50 c. $2.00 d. $6.00

23 - 24 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 120.

A company uses 40,000 gallons of materials for which they paid $7.00 a gallon. The materials price variance was $80,000 favorable. What is the standard price per gallon? a. $2 b. $5 c. $7 d. $9

121.

All Urban Company produces a product requiring 4 pounds of material costing $3.50 per pound. During December, All Urban 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

122.

Shipp, Inc. manufactures a product requiring two pounds of direct material. During 2013, Shipp purchases 24,000 pounds of material for $99,200 when the standard price per pound is $4. During 2013, Shipp uses 22,000 pounds to make 12,000 products. The standard direct material cost per unit of finished product is a. $8.27. b. $9.01. c. $8.00. d. $8.53.

123.

Clark Company manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor quantity variance was a. $3,660 F. b. $3,600 U. c. $2,460 U. d. $3,660 U.

124.

Clark Company manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor price variance was a. $1,260 U. b. $4,860 U. c. $4,860 F. d. $3,600 U.

Standard Costs and Balanced Scorecard

125.

23 - 25

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.

126.

The standard direct labor cost for producing one unit of product is 5 direct labor hours at a standard rate of pay of $20. Last month, 15,000 units were produced and 73,500 direct labor hours were actually worked at a total cost of $1,350,000. The direct labor quantity variance was a. $30,000 unfavorable. b. $45,000 unfavorable. c. $45,000 favorable. d. $30,000 favorable.

127.

Atkins, Inc. produces a product requiring 8 pounds of material at $1.50 per pound. Atkins produced 10,000 units of this product during 2013 resulting in a $30,000 unfavorable materials quantity variance. How many pounds of direct material did Atkins use during 2013? a. 100,000 pounds b. 80,000 pounds c. 160,000 pounds d. 125,000 pounds

128.

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's total variance is a. $450 F. b. $135 U. c. $465 U. d. $600 U.

23 - 26 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 129.

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's materials price variance is a. $135 U. b. $465 F. c. $600 F. d. $1,050 F.

130.

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's materials quantity variance is a. $135 F. b. $465 U. c. $600 U. d. $1,050 U.

131.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's total labor variance is a. $1,030 U. b. $800 U. c. $1,030 F. d. $1,930 F.

132.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor price variance is a. $770 U. b. $800 U. c. $1,030 F. d. $1,930 F.

133.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor quantity variance is a. $770 U. b. $770 F. c. $1,800 F. d. $1,930 F.

Standard Costs and Balanced Scorecard

134.

23 - 27

Which one of the following describes the total overhead variance? a. The difference between what was actually incurred and the flexible budget amount b. The difference between what was actually incurred and overhead applied c. The difference between the overhead applied and the flexible budget amount d. The difference between what was actually incurred and the total production budget

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

135.

Manufacturing overhead costs are applied to work in process on the basis of a. actual hours worked. b. standard hours allowed. c. ratio of actual variable to fixed costs. d. actual overhead costs incurred.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

136.

The total overhead variance is the difference between the a. actual overhead costs and overhead costs applied based on standard hours allowed. b. actual overhead costs and overhead costs applied based on actual hours. c. overhead costs applied based on actual hours and overhead costs applied based on standard hours allowed. d. the actual overhead costs and the standard direct labor costs.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

137.

The predetermined overhead rate for Zane Company is $5, comprised of a variable overhead rate of $3 and a fixed rate of $2. The amount of budgeted overhead costs at normal capacity of $150,000 was divided by normal capacity of 30,000 direct labor hours, to arrive at the predetermined overhead rate of $5. Actual overhead for June was $9,500 variable and $6,050 fixed, and standard hours allowed for the product produced in June was 3,000 hours. The total overhead variance is a. $3,050 F. b. $550 F. c. $550 U. d. $3,050 U.

138.

The predetermined overhead rate for Zane Company is $5, comprised of a variable overhead rate of $3 and a fixed rate of $2. The amount of budgeted overhead costs at normal capacity of $150,000 was divided by normal capacity of 30,000 direct labor hours, to arrive at the predetermined overhead rate of $5. Actual overhead for June was $8,900 variable and $5,400 fixed, and 1,500 units were produced. The direct labor standard is 2 hours per unit produced. The total overhead variance is a. $1,800 F. b. $700 F. c. $700 U. d. $1,800 U.

23 - 28 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

139.

Which of the following is true? a. The form, content, and frequency of variance reports vary considerably among companies. b. The form, content, and frequency of variance reports do not vary among companies. c. The form and content of variance reports vary considerably among companies, but the frequency is always weekly. d. The form and content of variance reports are consistent among companies, but the frequency varies.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

140.

Denmark Corporation’s variance report for the purchasing department reports 1,000 units of material A purchased and 2,400 units of material B purchased. It also reports standard prices of $2 for Material A and $3 for Material B. Actual prices reported are $2.10 for Material A and $2.80 for Material B. Denmark should report a total price variance of a. $380 F. b. $340 F. c. $340 U. d. $380 U.

141.

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, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

142.

Variance reports are a. external financial reports. b. SEC financial reports. c. internal reports for management. d. all of these.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143.

In using variance reports, management looks for a. total assets invested. b. significant variances. c. competitors’ costs in comparison to the company's costs. d. more efficient ways of valuing inventories.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Standard Costs and Balanced Scorecard 144.

23 - 29

Parnell Company prepared its income statement for internal use. How would amounts for cost of goods sold and variances appear? a. Cost of goods sold would be at actual costs, and variances would be reported separately. b. Cost of goods sold would be combined with the variances, and the net amount reported at standard cost. c. Cost of goods sold would be at standard costs, and variances would be reported separately. d. Cost of goods sold would be combined with the variances, and the net amount reported at actual cost.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

145.

Alex Co. prepared its income statement for management using a standard cost accounting system. Which of the following appears at the “standard” amount? a. Sales b. Selling expenses c. Gross profit d. Cost of goods sold

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146.

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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

147.

Income statements prepared internally for management often show cost of goods sold at standard cost 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, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23 - 30 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

148.

In Zero Company’s income statement, they report gross profit of $55,000 at standard and the following variances: Materials price Materials quantity Labor price Labor quantity Overhead

$ 420 600 420 1,000 900

F F U F F

Zero would report actual gross profit of a. $51,660. b. $52,500. c. $57,500. d. $58,340. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $55,000 + $420 + $600 − $420 + $1,000 + $900 = $57,500

149.

In Zero Company’s income statement, they report actual gross profit of $52,500 and the following variances: Materials price Materials quantity Labor price Labor quantity Overhead

$ 420 600 420 1,000 900

F F U F F

Zero would report gross profit at standard of a. $46,660. b. $47,500. c. $55,000. d. $53,340. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $52,500 + $420 + $600 − $420 + $1,000 + $900 = $55,000

150.

The balanced scorecard a. incorporates financial and nonfinancial measures in an integrated system. b. is based on financial measures. c. is based on nonfinancial measures. d. does not use financial or nonfinancial measures.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

151.

Which is not one of the four most commonly used perspectives on a balanced scorecard? a. The financial perspective b. The customer perspective c. The external process perspective d. The learning and growth perspective

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 152.

23 - 31

The balanced scorecard approach a. uses only financial measures to evaluate performance. b. uses rather vague, open statements when setting objectives in order to allow managers and employees flexibility. c. normally sets the financial objectives first, and then sets the objectives in the other perspectives to accomplish the financial objectives. d. evaluates performance using about 10 different perspectives in order to effectively incorporate all areas of the organization.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

153.

The customer perspective of the balanced scorecard approach a. is the most traditional view of the company. b. evaluates the internal operating processes critical to the success of the organization. c. evaluates how well the company develops and retains its employees. d. evaluates the company from the viewpoint of those people who buy its products or services.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

154.

The perspectives included in the balanced scorecard approach include all of the following except the a. internal process perspective. b. capacity utilization perspective. c. learning and growth perspective. d. customer perspective.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

155. If 10,000 pounds of direct materials are purchased for $9,300 on account and the standard cost is $.90 per pound, the journal entry to record the purchase is a. Raw Materials Inventory ..................................................... 9,300 Accounts Payable ...................................................... 9,300 b. Work In Process Inventory .................................................. 9,300 Accounts Payable ...................................................... 9,000 Materials Quantity Variance ....................................... 300 c. Raw Materials Inventory ..................................................... 9,300 Accounts Payable ...................................................... 9,000 Materials Price Variance ............................................ 300 d. Raw Materials Inventory ..................................................... 9,000 Materials Price Variance ..................................................... 300 Accounts Payable ...................................................... 9,300

Ans: D, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: DR Raw Materials Inventory ($.90 x 10,000); DR Material Price Variance ($9,300 - $9,000) or $300; CR Accounts Payable $9,300

23 - 32 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

156. Debit balances in variance accounts represent a. unfavorable variances. b. favorable variances. c. favorable for price variances; unfavorable for quantity variances. d. favorable for quantity variances; unfavorable for price variances.

Ans: A, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

157. If a company purchases raw materials on account for $19,830 when the standard cost is $18,900, it will a. debit Materials Price Variance for $930. b. credit Materials Price Variance for $930. c. debit Materials Quantity Variance for $930. d. credit Material Quantity Variance for $930.

Ans: A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($19,830 - $18,900) = 930 DR Price Variance a

158. If a company issues raw materials to production at a cost of $18,900 when the standard cost is $18,300, it will a. debit Materials Price Variance for $600. b. credit Materials Price Variance for $600. c. debit Materials Quantity Variance for $600. d. credit Material Quantity Variance for $600.

Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($18,900 - $18,300) = $600 DR Quantity Variance a

159. If a company incurs direct labor cost of $82,000 when the standard cost is $84,000, it will a. debit Labor Price Variance for $2,000. b. credit Labor Price Variance for $2,000. c. debit Labor Quantity Variance for $2,000. d. credit Labor Quantity Variance for $2,000.

Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $82,000 - $84,000 = $2,000 CR Labor Price Variance.

160. If a company assigns factory labor to production at a cost of $84,000 when standard cost is $80,000, it will a. debit Labor Price Variance for $4,000. b. credit Labor Price Variance for $4,000. c. debit Labor Quantity Variance for $4,000. d. credit Labor Quantity Variance for $4,000.

Standard Costs and Balanced Scorecard

23 - 33

161. The overhead variances measure whether overhead costs a. b. c. d.

Are Effectively Managed Controllable Controllable Controllable and Volume Volume

Were Used Effectively Controllable and Volume Volume Controllable Controllable

Ans: B, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

162. The overhead volume variance is a. actual overhead less overhead budgeted for actual hours. b. actual overhead less overhead budgeted for standard hours allowed. c. overhead budgeted for actual hours less applied overhead. d. the fixed overhead rate times the difference between normal capacity hours and standard hours allowed.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

163. Budgeted overhead for Cinnabar Industries 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: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (32,000) ($6 + $4) − $310,000 = $10,000 a

164. Budgeted overhead for Cinnabar Industries 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, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (32,000 − 30,000) ($4) = $8,000

23 - 34 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

165. Budgeted overhead for Haft, Inc. at normal capacity of 60,000 direct labor hours is $3 per hour variable and $2 per hour fixed. In May, $310,000 of overhead was incurred in working 63,000 hours when 64,000 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, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: [(64,000  $3) + (60,000  2)] − $310,000 = $2,000 a

166. Budgeted overhead for Haft, Inc. at normal capacity of 60,000 direct labor hours is $3 per hour variable and $2 per hour fixed. In May, $310,000 of overhead was incurred in working 63,000 hours when 64,000 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, LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: (64,000 − 60,000) ($2) = $8,000 a

167. An overhead volume variance is calculated as the difference between normal capacity hours and standard hours allowed a. times the total predetermined overhead rate. b. times the predetermined variable overhead rate. c. times the predetermined fixed overhead rate. d. divided by actual number of hours worked.

Ans: C, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

168. Which of the following statements is false? a. The overhead volume variance indicates whether plant facilities were used efficiently during the period. b. The costs that cause the overhead volume variance are usually controllable costs. c. The overhead volume variance relates solely to fixed costs. d. The overhead volume variance is favorable if standard hours allowed for output are greater than the standard hours at normal capacity.

Ans: B, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

169. If the standard hours allowed are less than the standard hours at normal capacity, a. the overhead volume variance will be unfavorable. b. variable overhead costs will be underapplied. c. the overhead controllable variance will be favorable. d. variable overhead costs will be overapplied.

Ans: A, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard

23 - 35

170. 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, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

171. The overhead volume variance relates only to a. variable overhead costs. b. fixed overhead costs. c. both variable and fixed overhead costs. d. all manufacturing costs.

Ans: B, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

172. What does the controllable variance measure? a. Whether a company incurred more or less fixed overhead costs compared to the amount of overhead applied b. Whether a company incurred more or less overhead costs than allowed c. The efficiency of using variable overhead resources d. Whether the production manager is able to control the production facility

Ans: B, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

173. The overhead controllable variance is calculated as the difference between actual overhead costs incurred and the budgeted a. overhead costs for the standard hours allowed. b. overhead costs applied to the product. c. overhead costs at the normal level of activity. d. fixed overhead costs.

Ans: A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

174. If the standard hours allowed are less than the standard hours at normal capacity, the volume variance a. cannot be calculated. b. will be favorable. c. will be unfavorable. d. will be greater than the controllable variance.

Ans: C, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 36 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

175. The budgeted overhead costs for standard hours allowed and the overhead costs applied to the product are the same amount a. for both variable and fixed overhead costs. b. only when standard hours allowed are less than normal capacity. c. for variable overhead costs. d. for fixed overhead costs.

Ans: C, LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

176. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit

$92,400 $55,440 30,800 5,775 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's total overhead rate is a. $2.40. b. $4.00. c. $6.40. d. $6.53. Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($92,400 + $55,440)  (4  5,775) = $6.40 a

177. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit

$92,400 $55,440 30,800 5,775 4

$1,680 U. $6,160 U. $7,840 U. $22,400 U.

Ans: C, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: ($92,400 + $55,440)  (4  5,775) = $6.40; $151,200 − (5,600  4  $6.40) = $7,840

Standard Costs and Balanced Scorecard

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178. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit

$92,400 $55,440 30,800 5,775 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's controllable overhead variance is a. $1,680 U. b. $6,160 U. c. $7,840 U. d. $22,400 U. Ans: B, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $92,400  (5,775  4) = $4; [($4  5,600  4) + $55,440] − $151,200 = $6,160 a

179. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in labor hours Normal production level in units Standard labor hours per unit

$92,400 $55,440 30,800 5,775 4

During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's volume overhead variance is a. $1,680 U. b. $6,160 U. c. $7,840 U. d. $22,400 U. Ans: A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management Solution: $55,440  (4  5,775) = $2.40; ($2.40  5,600  4) − $55,440 = $1,680

180.

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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 38 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition 181.

Standards based on the optimum level of performance under perfect operating conditions are a. attainable standards. b. ideal standards. c. normal standards. d. practical standards.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

182.

The direct materials price standard should include an amount for all of the following except a. receiving costs. b. storing costs. c. handling costs. d. normal spoilage costs.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

183.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

184.

The difference between the actual labor rate multiplied by the actual labor hours worked and the standard labor rate multiplied by the standard labor hours is the a. total labor variance. b. labor price variance. c. labor quantity variance. d. labor efficiency variance.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

185.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

186.

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, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 187.

23 - 39

In reporting variances, a. promptness is relatively unimportant. b. management normally investigates all variances. c. the reports should facilitate management by exception. d. the reports are not departmentalized.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

188. A standard cost system may be used in a. b. c. d.

Job Order Costing No Yes No Yes

Process Costing No No Yes Yes

Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

189. 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, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

190. The overhead controllable variance is the difference between the a. budgeted overhead based on standard hours allowed and the overhead applied to production. b. budgeted overhead based on standard hours allowed and budgeted overhead based on actual hours worked. c. actual overhead and the overhead applied to production. d. actual overhead and budgeted overhead based on standard hours allowed.

Ans: D, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 40 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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. 58. 59. 60.

d c c d a a b c a b b a d c c b d c d c b c

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

a d a c c c d b c d c d d d c a a d a b d c

83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

b a b a d b b c d a b d b b b c c b b c b a

105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.

a a d c c b a b d c a b b c b d b c b a b d

127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148.

a b b c c a c b b a c b a a a c b c d d a c

149. 150. 151. 152. 153. 154. a 155. a 156. a 157. a 158. a 159. a 160. a 161. a 162. a 163. a 164. a 165. a 166. a 167. 168. 169. 170.

c a c c d b d a a c b c b d b a b a c b a c

171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. a 188. a 189. a 190.

b b a c c c c b a d b d d a b d c d c d

BRIEF EXERCISES BE 191 Seven Manufacturing Corporation uses both standards and budgets. The company estimates that production for the year will be 100,000 units of Product Fast. To produce these units of Product Fast, the company expects to spend $600,000 for materials and $800,000 for labor. Instructions Compute the estimates for (a) a standard cost and (b) a budgeted cost. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Solution 191

(5 min.)

(a) Standards are stated as a per unit amount. Thus, the standards are materials $6, ($600,000 ÷ 100,000), and labor $8, ($800,000 ÷ 100,000). (b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $600,000 and labor $800,000.

Standard Costs and Balanced Scorecard

23 - 41

BE 192 Labor data for making one pound of finished product in Curling Co. 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 cost per pound. Ans: N/A, LO: 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 192

(5 min.)

(a) Standard direct labor rate per hour = $14.00 ($11.00 + $1.80 + $1.20). (b) Standard direct labor hours per pound =1.5 hours (1.1 +.25 +.15). (C) Standard labor cost per pound = $21.00 ($14.00 × 1.5). BE 193 During March, Patt, Inc. purchases and uses 8,800 pounds of materials costing $35,640 to make 4,000 tiles. Patt’s standard material cost per tile is $8 (2 pounds of material × $4.00). Instructions Compute the total, price, and quantity material variances for Patt, Inc. for March. Ans: N/A, LO: 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 193

(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 194 During January, Ajax Co. incurs 1,850 hours of direct labor at an hourly cost of $11.80 in producing 1,000 units of its finished product. Ajax standard labor cost per unit of output is $22 (2 hours x $11.00). Instructions Compute the total, price, and quantity labor variances for Ajax Co. for January. Ans: N/A, LO: 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 194

(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).

23 - 42 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition BE 195 In October, Glazier 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. Glazier’s predetermined overhead rate is $5.00 per direct labor hour. Instructions Compute the total manufacturing overhead variance. Ans: N/A, LO: 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 195

(2 min.)

Actual Overhead – Overhead Applied = Total overhead Variance $194,000 – $200,000* = $6,000 F *40,000 × $5 = $200,000 a

BE 196

Overhead data for Glazier Inc. are given in BE 195. 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, LO: 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 196

(3 min.)

Actual overhead – Overhead Budgeted = Overhead Controllable Variance $194,000 – $212,000* = $18,000 F *(40,000 × $3.80) + $60,000 = $212,000 a

BE 197

Using the data in BE 195 and BE 196, compute the manufacturing overhead volume variance. Normal capacity was 50,000 direct labor hours. Ans: N/A, LO: 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 197

(3 min.)

Fixed Overhead Rate × (Normal Capacity Hours – Standard Hours Allowed) = Overhead Volume Variance

$1.20/hr.

(50,000 – 40,000)

$12,000 U

BE 198 Jet Industries purchased 6,000 units of raw material on account for $17,600, when the standard cost was $18,000. Later in the month, Jet Industries issued 5,600 units of raw materials for production, when the standard units were 5,800. Instructions Journalize the transactions for Jet Industries to account for this activity. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Standard Costs and Balanced Scorecard a

Solution 198

(a)

(b)

23 - 43

(5 min.)

Raw Materials Inventory ............................................................. Materials Price Variance ................................................... Accounts Payable .............................................................

18,000

Work in Process Inventory (5,800 × $3*) .................................... Materials Quantity Variance .............................................. Raw Materials Inventory (5,600 × $3) ...............................

17,400

400 17,600

600 16,800

*$3 = $18,000 ÷ 6,000 units a

BE 199 Pedra, Inc. incurred direct labor costs of $54,000 for 6,000 hours. The standard labor cost was $55,200. During the month, Pedra assigned 6,000 direct labor hours costing $54,000 to production. The standard hours were 6,200. Instructions Journalize the transactions for Pedra, Inc. to account for this activity. Ans: N/A, LO: 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 199

(a)

(b)

(5 min.)

Factory Labor ............................................................................ Labor Price Variance ....................................................... Factory Wages Payable ...................................................

55,200

Work in Process Inventory (6,200 × $9.20*) .............................. Labor Quantity Variance .................................................. Factory Labor ..................................................................

57,040

1,200 54,000

1,840 55,200

*$9.20 = $55,200 ÷ 6,000 hours a

BE 200

Manufacturing overhead data for the production of Product B by North Bank, Inc. are as follows. Overhead incurred for 69,000 actual direct labor hours worked Overhead rate (variable $2.00; fixed $1.00) at normal capacity of 72,000 direct labor hours Standard hours allowed for work done

$206,000 $3.00 69,000

Instructions Compute the controllable and volume overhead variances. Ans: N/A, LO: 10, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

23 - 44 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Solution 200

(5 min.)

Overhead controllable variance: Actual Overhead – Overhead Budgeted $206,000 – $210,000 [(69,000 × $2) + $72,000]

= $4,000 U

Overhead volume variance: Fixed Overhead Rate × Normal Capacity Hours = Standard Hours Allowed $1.00 × (72,000 – 69,000) = $3,000 U

EXERCISES Ex 201 Sonic, Inc. is planning to produce 2,500 units of product in 2013. 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 2013 for direct materials to be used, direct labor, and applied overhead. (b) Compute the standard cost of one unit of product. Ans: N/A, LO: 1,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Solution 201

(5 min.)

(a)

Direct materials: (2,500  3)  $6 = $45,000 Direct labor: (2,500  1/2)  $16 = $20,000 Overhead: $20,000  75% = $15,000

(b)

Direct materials: 3  $6 Direct labor: 1/2  $16 Overhead: $8  75% Standard cost:

= $18 = 8 = 6 $32

Ex. 202 Pane Corp. manufactures and sells a nutrition drink for children. It wants to develop a standard cost per gallon. The following are required for production of a 100 gallon batch: 1,960 ounces of lime Kool-Drink at $.12 per ounce 40 pounds of 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 Pane 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, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Standard Costs and Balanced Scorecard Solution 202

(15–20 min.)

Ingredient Lime Kool-Drink Sugar Kiwis Protein Tablets Water Lime Kool-Drink Sugar Kiwis Protein Tablets Water (a) (b) (c)

23 - 45

Amount Per Gallon 19.6 oz. .40 lb. .63 1 40 oz.

Standard Waste 2% 20% 10% 0% 0%

Standard Usage Standard Price (a) 20.00 oz. $ .12 (b) .50 lb. .60 (c) .70 .50 1 .90 40 oz. .003 Standard Cost per Gallon

.98X = 19.6 ounces .80X = .40 pounds .90X = .63 kiwis

Standard Cost $2.40 .30 .35 .90 .12 $4.07

X = 20.00 X= .50 X= .70

Ex. 203 Engines Done Right Co. is trying to establish the standard labor cost of a typical engine tune-up. The following data have been collected from time and motion studies conducted over the past month. Actual time spent on the tune-up 1.0 hour Hourly wage rate $16 Payroll taxes 10% of wage rate Setup and downtime 10% of actual labor time Cleanup and rest periods 20% of actual labor time 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, LO: 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 203

(15 min.)

(a)

Actual service time Setup and downtime Cleanup and rest periods Standard direct labor hours per tune-up

(b)

Hourly wage rate Payroll taxes ($16  10%) Fringe benefits ($16  25%) Standard direct labor hourly rate

1.0 hours 0.1 hours 0.2 hours 1.3 hours $16.00 1.60 4.00 $21.60

23 - 46 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 203 (c)

(Cont)

Standard direct labor cost per oil change = 1.30 hours  $21.60 per hour = $28.08

Direct labor quantity variance = (1.50 hours  $21.60) – (1.30 hours  $21.60) = $32.40 – $28.08 = $4.32 U Ex. 204 (d)

Riggins, Inc. manufactures one product called tybos. The company uses a standard cost system and sells each tybo for $8. At the start of monthly production, Riggins estimated 9,500 tybos would be produced in March. Riggins has established the following material and labor standards to produce one tybo: Direct materials Direct labor

Standard Quantity 2.5 pounds 0.6 hours

Standard Price $3 per pound $10 per hour

During March 2013, the following activity was recorded by the company relating to the production of tybos: 1. 2. 3. 4.

The company produced 9,000 units during the month. A total of 24,000 pounds of materials were purchased at a cost of $66,000. A total of 24,000 pounds of materials were used in production. 5,000 hours of labor were incurred during the month at a total wage cost of $55,000.

Instructions Calculate the following variances for March for Riggins, Inc. (a) Materials price variance (b) Materials quantity variance (c) Labor price variance (d) Labor quantity variance Ans: N/A, LO: 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 204

(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

Standard Costs and Balanced Scorecard

23 - 47

Ex. 205 The following direct labor data pertain to the operations of Pearce Corp. for the month of November: Actual labor rate Actual hours used Standard labor rate Standard hours allowed

$12.25 per hr. 18,000 $12.00 per hr. 17,100

Instructions Prepare a matrix and calculate the labor variances.

Price Variance

Quantity Variance

Total Labor Variance

Ans: N/A, LO: 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 205

(15–20 min.)

Actual Hours × Actual Rate 18,000 × $12.25 = $220,500

Actual Hours × Standard Rate 18,000 × $12.00 = $216,000

Standard Hours × Standard Rate 17,100 × $12.00 = $205,200

Price Variance

Quantity Variance

$4,500 U

$10,800 U

Total Labor Variance $15,300 U .

23 - 48 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 206 The following direct materials data pertain to the operations of Wright Co. for the month of December. Standard materials price Actual quantity of materials purchased and used

$5.00 per pound 16,500 pounds

The standard cost card shows that a finished product contains 4 pounds of materials. The 16,500 pounds were purchased in December at a discount of 4% from the standard price. In December, 4,000 units of finished product were manufactured. Instructions Prepare a matrix for materials and calculate the materials variances.

Price Variance

Quantity Variance

Total Materials Variance

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Standard Costs and Balanced Scorecard Solution 206

23 - 49

(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 Ex. 207 Seacoast Company provided the following information about its standard costing system for 2013: Standard Data Materials Labor Budgeted production

Actual Data Produced 4,000 units Materials purchased 50,000 lbs. for $215,000 Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000

10 lbs. @ $4 per lbs. 3 hrs. @ $21 per hr. 3,500 units

Instructions Calculate the labor price variance and the labor quantity variance. Ans: N/A, LO: 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 207

(8 min.)

Labor price (rate) variance = (Actual hours x Actual rate) – (Actual hours x Standard rate) = (11,000 × $20) – (11,000 × $21) = $11,000 favorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (11,000 × $21) – (3 × 4,000 × $21) = $21,000 favorable

23 - 50 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 208 Lumberman Manufacturing provided the following information about its standard costing system for 2013: Standard Data Actual Data Materials 10 lbs. @ $4 per lbs. Produced 4,000 units Labor 3 hrs. @ $21 per hr. Materials purchased 50,000 lbs. for $215,000 Budgeted production 3,500 units Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000 Instructions Determine the amount of the materials price variance. By how much will the materials price variances differ if the price variance is determined at the time of production? Ans: N/A, LO: 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 208

(6 min.)

Identification of price variances at the time of purchase: Materials price variance = (Actual quantity purchased × Actual price) – (Actual quantity purchased x Standard price) = (50,000 × $4.30) – (50,000 × $4) = $15,000 Unfavorable

Identification of price variances at the time of production: Materials price variance = (Actual quantity used × Actual price) – (Actual quantity used × Standard price) = (41,000 × $4.30) – (41,000 × $4) = $12,300 Unfavorable

Difference = $15,000 – $12,300 = $2,700 Unfavorable Ex. 209 Shep Corporation 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, LO: 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 209

(8 min.)

Labor price (rate) variance = (Actual hours × Actual rate) – (Actual hours × Standard rate) = (2,900 × $18.40) – (2,900 × $18) = $1,160 Unfavorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (2,900 × $18) – [(6,000 × 1/2 × $18) = $1,800 Favorable

Standard Costs and Balanced Scorecard

23 - 51

Ex. 210 Purvis Manufacturing, which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (6 pounds at $2 per pound) Direct labor (2 hours at $12 per hour)

$12 $24

During the month of April, the company manufactures 300 units and incurs the following actual costs. Direct materials purchased and used (1,850 pounds) Direct labor (620 hours)

$4,070 $7,130

Instructions Compute the total, price, and quantity variances for materials and labor. Ans: N/A, LO: 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 210

(15 min.)

Total materials variance: (AQ  AP ) – (SQ  SP) (1,850  $2.20*) (1,800**  $2) $4,070 – $3,600

= $470 U

Materials price variance: (AQ  AP ) – (AQ  SP) (1,850  $2.20) (1,850  $2) $4,070 – $3,700 = $370 U *$4,070  1,850 **300  6 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 .

23 - 52 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 211 Platt Company produces one product, a putter called PAR-putter. Platt uses a standard cost system and determines that it should take one hour of direct labor to produce one PAR-putter. The normal production capacity for 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. Platt applies overhead on the basis of direct labor hours. During the current year, Platt 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 Platt for the year. (c) Compute the total overhead variance. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

Solution 211

(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

Variable Fixed (b)

– –

Overhead Applied $425,000 (85,000  $5)

Total Overhead = Variance = $35,000 U

Standard Costs and Balanced Scorecard

23 - 53

Ex. 212 Hector Company has developed the following standard costs for its product for 2012: HECTOR 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 2013 and work 90,000 direct labor hours. Actual results for 2013 are as follows: • 31,000 units of Product A were produced. • Actual direct labor costs were $746,200 for 91,000 direct labor hours worked. • Actual direct materials purchased and used during the year cost $346,500 for 126,000 pounds. • Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was $205,000. Instructions Compute the following variances showing all computations to support your answers. Indicate whether the variances are favorable or unfavorable. (a) Materials quantity variance. (b) Total direct labor variance. (c) Direct labor quantity variance. (d) Direct materials price variance. (e) Total overhead variance. Ans: N/A, LO: 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

Solution 212

(20–25 min.)

(a) Materials quantity variance = $6,000 unfavorable. (AQ × SP) – (SQ × SP) = Materials quantity variance (126,000 × $3) – (124,000 × $3) = $378,000 – $372,000 = $6,000 unfavorable SQ = 31,000 × 4 = 124,000 pounds (b) Total direct labor variance = $2,200 unfavorable. (AH × AR) – (SH × SR) = Total direct labor variance (91,000 × $8.20) – (93,000 × $8) = $746,200 – $744,000 = $2,200 unfavorable SH = 31,000 × 3 = 93,000 direct labor hours (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 .

23 - 54 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 212

(Cont.)

(e) Total overhead variance = $12,000 favorable. (Actual overhead) – (Overhead applied) = Total overhead variance ($155,000 + $205,000) – (93,000 × $4) = $360,000 – $372,000 = $12,000 favorable Standard hours = 31,000 × 3 = 93,000 direct labor hours Ex. 213 Dart Company developed the following standard costs for its product for 2013: DART 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 2013 were as follows: • 56,800 units of product were actually produced. • Direct labor costs were $1,092,000 for 112,000 direct labor hours actually worked. • Actual direct materials purchased and used during the year cost $1,108,800 for 231,000 pounds. • Total actual manufacturing overhead costs were $680,000. Instructions Compute the following variances for Dart Company for 2013 and indicate whether the variance is favorable or unfavorable. 1. Direct materials price variance. 2. Direct materials quantity variance. 3. Direct labor price variance. 4. Direct labor quantity variance. a 5. Overhead controllable variance. a 6. Overhead volume variance. Ans: N/A, LO: 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

Standard Costs and Balanced Scorecard Solution 213

23 - 55

(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) = $1,155,000 – $1,136,000 = $19,000 unfavorable SQ = 56,800 products × 4 lbs = 227,200 lbs. 3. Direct labor price variance = $28,000 favorable. (AH × AR) – (AH × SR) = Labor price variance (112,000 × $9.75) – (112,000 × $10) = $1,092,000 – $1,120,000 = $28,000 favorable 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 = 113,000 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

6. Overhead volume variance = $12,800 unfavorable. Volume variance: (120,000 – 113,600) × $2/SH = $12,800 unfavorable

Ex. 214 Flagstaff, Inc. uses standard costing for its one product, baseball bats. The standards call for 3 board-feet of wood at $1.40 per board-foot, and 45 minutes of work at $12 per hour per bat. Total manufacturing overhead costs were estimated at $9,450, of which the variable portion was $0.50 per bat and the fixed portion was $1.00 per bat with an estimate of 6,300 bats to be produced. Flagstaff identifies price variances at the earliest possible point in time. During March, the company had the following results: Direct labor used = 4,800 hours at a cost of $56,400 Actual manufacturing overhead fixed costs = $6,000 Actual manufacturing overhead variable costs = $3,100 Bats produced = 6,000 Instructions Compute the following variances for March. 1. Labor quantity variance 2. Total labor variance a 3. Overhead controllable variance a 4. Overhead volume variance Ans: N/A, LO: 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

23 - 56 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 214

(12 min.)

1. Labor quantity variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (4,800 × $12) – [(3/4 × 6,000) × $12] = $3,600 Unfavorable 2. Total labor variance = (Actual hours × Actual rate) – (Standard hours × Standard rate) = (4,800 × $11.75) – [(3/4 × 6,000) × $12] = $2,400 Unfavorable 3. Overhead controllable variance = Actual overhead – Overhead budgeted = ($3,100 + $6,000) – [($0.50 × 6,000) + $6,300] = $200 Favorable

4. Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(6,300 × 3/4) – 4,500] × $1.33*= $299 Unfavorable *$1.00 ÷ 3/4 hr./bat

Ex. 215 Prescott Manufacturing 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

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, LO: 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

Standard Costs and Balanced Scorecard Solution 215

23 - 57

(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

5. Overhead controllable variance = Actual overhead – Overhead budgeted = [$241,500 + $381,250] – [($24 × 9,600) + ($40 × 10,000)] = $7,650 Favorable

Ex. 216 More Hits Company manufactures aluminum baseball bats that it sells to university athletic departments. It has developed the following per unit standard costs for 2013 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 2013, the company planned to produce 120,000 baseball bats at a level of 60,000 hours of direct labor. Actual results for 2013 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 2013.

Ans: N/A, LO: 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

23 - 58 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 216

(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

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

1,020,900

32,000 880,000

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

Standard Costs and Balanced Scorecard

23 - 59

Ex. 217 The standard cost of Product 245 manufactured by Albert Industries includes 2 pounds of direct materials at $4.00 per pound. During September, 40,000 pounds of direct materials are purchased at a cost of $3.85 per pound, and all of the direct materials are used to produce 19,000 units of Product 245. Instructions (a) Compute the materials price and quantity variances. a

(b) Journalize the purchase of the materials and the issuance of the materials, assuming a standard cost system is used.

Ans: N/A, LO: 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 217

(15–20 min.)

(a) Materials Price Variance: $154,000 – $160,000 = (40,000 × $3.85) (40,000 × $4.00)

$6,000 F

Materials Quantity Variance: $160,000 – $152,000 = (40,000 × $4.00) *(38,000 × $4.00)

$8,000 U

*19,000 × 2 pounds = 38,000 Solution 217

(Cont.)

(b) Raw Materials Inventory ............................................................... Materials Price Variance ...................................................... Accounts Payable ................................................................

160,000

Work in Process Inventory ............................................................ Materials Quantity Variance .......................................................... Raw Materials Inventory .......................................................

152,000 8,000

6,000 154,000

160,000

Ex. 218 Aztec, Inc.'s standard labor cost of producing one unit of product is 2 hours at the rate of $14.00 per hour. During February, 52,000 hours of labor are incurred at a cost of $13.80 per hour to produce 25,000 units of product. Instructions (a) Compute the labor price and labor quantity variances. a

(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production, assuming a standard cost system is used.

Ans: N/A, LO: 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

23 - 60 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 218

(15–20 min.)

(a) Labor Price Variance: $717,600 – $728,000 = $10,400 F (52,000 × $13.80) (52,000 × $14.00) Labor Quantity Variance: $728,000 – $700,000 = $28,000 U (52,000 × $14.00) (50,000 × $14.00) a

(b) Factory Labor ................................................................................ Labor Price Variance ............................................................ Factory Wages Payable .......................................................

728,000

Work in Process Inventory ............................................................ Labor Quantity Variance ............................................................... Factory Labor .......................................................................

700,000 28,000

10,400 717,600

728,000

Ex. 219 The following direct labor data pertain to the operations of Murray Industries for the month of November: Standard labor rate Actual hours incurred

$15.00 per hr. 9,000

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. Instructions (a) Calculate the price, quantity, and total labor variances. a (b) Journalize the entries to record the labor variances. Ans: N/A, LO: 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

Standard Costs and Balanced Scorecard

23 - 61

Solution 219(a) (15–20 min.) Actual Hours × Actual Rate 9,000 × $16.50 = $148,500

Actual Hours × Standard Rate 9,000 × $15.00 = $135,000

Standard Hours × Standard Rate 10,000 × $15.00 = $150,000

Price Variance

Quantity Variance

$13,500 U

$15,000 F

Total Labor Variance $1,500 F a

(b) Factory Labor ............................................................................... Labor Price Variance .................................................................... Factory Wages Payable ................................................................

135,000 13,500

Work in Process Inventory ............................................................ Labor Quantity Variance....................................................... Factory Labor .......................................................................

150,000

148,500

15,000 135,000

Ex. 220

North Coast Manufacturing provided the following information about its standard costing system for 2013: Standard Data Actual Data Labor 2 hrs. @ $21 per hr. Produced 9,000 units Budgeted fixed overhead $100,000 Labor worked 17,000 hrs. costing $340,000 Budgeted variable overhead $30 per unit Actual overhead $375,000 Budgeted production 10,000 units North Coast applies fixed overhead at $10 per unit produced. Instructions Determine the amounts of the overhead variances. Ans: N/A, LO: 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

23 - 62 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Solution 220

(8 min.)

Overhead controllable variance = Actual overhead - Overhead budgeted = $375,000 – [($100,000 + (9,000 × $30)] = $5,000 Unfavorable Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(10,000 × 2) – (9,000 × 2)] × $5/hr. = $10,000 Unfavorable Total overhead variance = Actual overhead – Overhead applied = $375,000 – [($30 + $10) × 9,000] = $15,000 Unfavorable Ex. 221 Caroline, Inc. planned to produce 20,000 units of product and work 100,000 direct labor hours in 2013. 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 2013, 19,000 units of product were actually produced and 98,000 actual direct labor hours were worked. Total actual overhead costs for 2013 were $935,000. Instructions (a) Compute the total overhead variance. a (b) Compute the overhead controllable variance. a (c) Compute the overhead volume variance. Ans: N/A, LO: 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 221

(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

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

Standard Costs and Balanced Scorecard

23 - 63

Ex. 222

Jackson Manufacturing planned to produce 20,000 units of product and work at the 60,000 direct labor hours level of activity for 2013. 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 2013, 21,000 units were actually produced and 61,500 direct labor hours were actually worked. Total actual manufacturing overhead costs were $430,000. Instructions Using a two-variance analysis of manufacturing overhead, calculate the following variances and indicate whether they are favorable or unfavorable: (a) Overhead controllable variance. (b) Overhead volume variance. Ans: N/A, LO: 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 222

(12–17 min.)

(a) Overhead controllable variance = $5,000 favorable. Overhead budgeted for standard hours allowed Variable overhead (63,000 × $5) Fixed overhead

= =

Actual overhead incurred Overhead controllable variance

$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. 223 Adam Corporation prepared the following variance report. ADAM CORPORATION Variance Report—Purchasing Department for Week Ended January 9, 2013 Type of Materials Brown Green White

Quantity Purchased ? lbs. 8,000 oz. 22,000 units

Actual Price $5.25 ? $0.45

Standard Price $5.00 3.25 ?

Price Variance $6,000 ? 1,600 U 660 F

Explanation Price increase Rush order Bought larger quantity

Instructions Fill in the appropriate amounts or letters for the question marks in the report. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

23 - 64 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 223

(15 min.)

ADAM CORPORATION Variance Report – Purchasing Department For Week Ended January 9, 2013 _____________________________________________________________________________ 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. 224 Pepper Industries uses a standard cost accounting system. During March, 2013, 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, 2013. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Standard Costs and Balanced Scorecard Solution 224

23 - 65

(15–20 min.) PEPPER INDUSTRIES Income Statement For the Month Ended March 31, 2013

Sales (15,000 × $18)............................................................................ Cost of goods sold (15,000 × $14) ....................................................... Gross profit (at standard) ..................................................................... Variances: Materials price ............................................................................. Materials quantity ........................................................................ Labor price .................................................................................. Labor quantity ............................................................................. Overhead controllable ................................................................. Overhead volume ........................................................................ Total variances (unfavorable) ............................................. Gross profit (actual) ............................................................................. Selling and administrative expenses .................................................... Net income...........................................................................................

$270,000 210,000 60,000 $(1,600) 2,400 600 2,200 (500) 3,000 6,100 53,900 15,000 $ 38,900

Ex. 225

Howard, Inc. developed the following standards for 2013: Howard, Inc. 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 2013. 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 2013, 116,000 actual units of product were produced. Instructions Prepare the journal entries to record the following transactions for Howard, Inc. during 2013. (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 2013. (e) Manufacturing overhead was applied when the 116,000 units were completed. (f) Transferred the 116,000 completed units to finished goods. Ans: N/A, LO: 9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Cost Management

23 - 66 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition a

Solution 225

(20–25 min.)

(a) Raw Materials Inventory ................................................................ 2,940,000 Materials Price Variance ..................................................... Accounts Payable ............................................................... (To record purchase of materials) (b) Factory Labor ................................................................................ 2,052,000 Labor Price Variance..................................................................... 56,000 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

Ex. 226

Presented below is a flexible manufacturing budget for Ganem Manufacturing, which manufactures fine timepieces: Activity Index: Standard direct labor hours Variable costs Indirect materials Indirect labor Utilities Total variable Fixed costs Supervisory salaries Rent Total fixed Total costs

2,800

3,200

3,600

4,000

$ 5,600 3,220 7,280 16,100

$ 6,400 3,680 8,320 18,400

$ 7,200 4,140 9,360 20,700

$ 8,000 4,600 10,400 23,000

1,000 3,000 4,000 $20,100

1,000 3,000 4,000 $22,400

1,000 3,000 4,000 $24,700

1,000 3,000 4,000 $27,000

Standard Costs and Balanced Scorecard a

Ex. 226

23 - 67

(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. Normal capacity is 3,200 hours. Actual overhead was $20,200. Instructions (a) Compute the controllable and volume overhead variances. a

(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize the overhead variances at the end of the period.

Ans: N/A, LO: 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 226

(16–21 min.)

(a) Computation of variances: Actual overhead – Budgeted overhead $20,200 – [(5,400 × 1/2 × $5.75) + $4,000]

= =

Controllable overhead variance $675 Unfavorable

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. 227 The following information was taken from the annual manufacturing overhead cost budget of Cinnamon Manufacturing: Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in direct labor hours Normal production level in units

$186,000 $124,000 62,000 31,000

During the year, 30,000 units were produced, 64,000 hours were worked, and the actual manufacturing overhead costs were $322,000. The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours.

23 - 68 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Ex. 227

(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, LO: 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 227

(13–18 min.)

(a) Item Variable Overhead Fixed Overhead Total Overhead

Amount $186,000 124,000 $310,000

Hours 62,000 62,000 62,000

Rate $3 2 $5

(b) Total overhead variance: Overhead incurred – Overhead applied ($322,000) (60,000 hours × $5.00)

= $22,000 U

Overhead controllable variance: Overhead incurred – Overhead budgeted = $18,000 U ($322,000) [(60,000 × $3) + $124,000] Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (62,000 – 60,000) × $2/hr = $4,000 U Ex. 228 Monte Industries 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, LO: 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 228

(6 min.)

(1) Volume variance plus controllable variance = total overhead variance $3,600 U + X = $2,000 U; so controllable variance = $1,600 F (2) Overhead applied = $20,000 ($22,000 – $2,000)

Standard Costs and Balanced Scorecard

23 - 69

COMPLETION STATEMENTS 229. A ________________ is expressed as a unit amount, whereas a _________________ is expressed as a total amount. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

230. 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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

231. In developing a standard cost for direct materials used in making a product, consideration should be given to two factors: (1) __________________ per unit of direct materials and (2) the __________________ of direct materials to produce one unit of product. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

232. The difference between actual hours times the actual pay rate and actual hours times the standard pay rate is the labor _________________ variance. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

233. The standard number of hours allowed times the predetermined overhead rate is the amount of ________________ to the products produced. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

234. The difference between actual quantity of materials times the standard price and standard quantity times the standard price is the materials ________________ variance. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

235. 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

236. In using variance reports, top management normally looks for _________________ variances. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

237. A two-variance approach to analyzing overhead variances requires the calculation of the overhead _________________ variance and the overhead ________________ variance.

Ans: N/A, .LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management a

238. The overhead ______________ variance is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate.

Ans: N/A, LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 70 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Answers to Completion Statements 229. 230. 231. 232. 233. 234. 235. 236. a 237. a 238.

standard, budget ideal, normal price, quantity price overhead applied quantity unfavorable, favorable significant controllable, volume volume

MATCHING 239. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. 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, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard

23 - 71

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 240 (a) Explain the similarities and differences between standards and budgets. (b) Contrast the accounting for standard and budgets. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Solution 240 (a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a unit amount and a budget is a total amount. (b)

There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs.

S-A E 241 Star Industries computes variances as a basis for evaluating the performance of managers responsible for controlling costs. For several months, the labor quantity variance has been unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Solution 241 Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar problems that affect efficiency. The management of 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.

23 - 72 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition S-A E 242 In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavorable materials price variance for the month and there was an unfavorable materials quantity variance. Under what circumstances, if any, can the responsibility for each variance be placed on (a) the purchasing department and (b) the production department? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Solution 242 (a)

Purchasing department. The investigation of a materials price variance usually begins with this department. If the price standard has been properly set, purchasing is responsible. However, it should be recognized that in a period of inflation, prices may rise faster than expected. Also, there may be extenuating circumstances such as oil cartel price increases. The purchasing department may be responsible for an unfavorable quantity variance if it purchased 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 243 What are the four perspectives used in the balanced scorecard? Discuss the nature of each, and how the perspectives are linked. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Solution 243 The four perspectives of the balanced scorecard are: financial, customer, internal process, and learning and growth. The financial perspective employs financial measures of performance used by most firms. The customer perspective evaluates the company from the viewpoint of those people who buy its products or services in terms of price, quality, product innovation, customer service, and other dimensions. The internal process perspective evaluates the value chain— product development, production, delivery and after-sale service—to ensure that the company is operating effectively and efficiently. The learning and growth perspective evaluates how well the company develops and retains its employees. The four perspectives are linked in that the results in one perspective influence the results in the next. S-A E 244 (Ethics) Fulmar Manufacturing Co. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Patrick Webb suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "we're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Sharon Berry, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?" .

Standard Costs and Balanced Scorecard

23 - 73

S-A E 244 (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. Sharon, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances. Required: 1. Are ideal standards unethical? Explain briefly. 2. Is it unethical for Sharon to refuse to support the standards? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

Solution 244 1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the case in which employees are denied bonuses or other rewards because of not meeting a standard which was out of their reach. If they are used as a guide to maximum attainable performance, however, and not tied directly to the reward system, they may be ethical. 2. It is unethical for Sharon simply to refuse to accept a particular standard. However, if the company intends to use the standard unethically, she may refuse to hold her workers accountable 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 245 (Communication) Vincent Bassani has come to the accounting department for help in interpreting his variance report. He says that he understands that last month was not a very good one for output, but he really thought everyone put forth good effort, so he is confused about the existence of an unfavorable labor efficiency variance. He cites as an example 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 Vincent explaining the probable cause of the unfavorable labor efficiency variance. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Cost Management

23 - 74 Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Solution 245

Vincent, Last month was a tough one for all of us, wasn't it? Your workers certainly did go the extra mile, no doubt about it. You asked about your efficiency variance. When we calculate it, we count the number of hours it took to get good output. Since we had such high spoilage, we got fewer units, but used more hours. That is why your efficiency variance was negative. It does not imply that you didn't do your best. It just means that we investigate to see what happened. Good luck, and I hope this month is a better one for all of us. (signed)

CHAPTER 24 PLANNING FOR CAPITAL INVESTMENTS SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

6 6 6 7 7

K C K K K

21. 22. 23. 24. 25.

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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. 133.

5 7 3 5 7 2 3 7 8 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7

AP AP AP AP AP AP AP AP AP K K C K C AP K C K C C K AP AP C C C C

134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157.

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K C K AP AP AP C AP K K K AN AN AN AP AP AP K K C AP C K C

164. 165.

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True-False Statements 1. 2. 3. 4. 5.

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K K C C K

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Multiple Choice Questions 26. 27. 28. 29. 30. 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 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

K K K K K K C K K K K C C K K AP AP AP C K K AP C C K K C

53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

2 2 2 2 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 AP AP K K C C AN K C K C K C C C K K K C AN AP AP AN

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Brief Exercises 158. 159.

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160. 161.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Exercises 166. 167.. 168. 169.

* 2,3 2,3,8 2,3,8

E E AP AP

183. 184.

1 2

K K

170. 2,3,7 AN 174. 2,8 AP 178. 3,5,7 171. 2,3,8 AP 175. 3,4 E 179. 3,5,8 172. 2,3,8 E 176. 3,5 E 180. 3,6 173. ** E 177. 3,5 E 181. 3,7 . Completion Statements 185. 3 K 187. 3 K 189. 5 186. 3 K 188. 4 K 190. 6

E E E E

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191. 192.

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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

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TF MC

117. 118.

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Learning Objective 1 MC 32. MC 35. MC 33. MC 36. MC 34. MC 37. Learning Objective 2 MC 50. MC 55. MC 51. MC 112. MC 52. MC 158. MC 53. MC 166. MC 54. MC 167. Learning Objective 3 MC 76. MC 159. MC 77. MC 160. MC 78. MC 161. MC 79. MC 166. MC 106. MC 167. MC 109. MC 168. MC 113. MC 169. Learning Objective 4 MC 83. MC 85. MC 84. MC 86. Learning Objective 5 MC 99. MC 104. MC 100. MC 105. MC 101. MC 107. MC 102. MC 110. MC 103. MC 161. Learning Objective 6 MC 180. Ex MC 190. C

Type

Item

Type

MC MC MC

166. 183.

Ex C

MC MC BE Ex Ex

168. 169. 170. 171. 172.

Ex Ex Ex Ex Ex

173. 174. 184.

Ex Ex C

BE BE BE Ex Ex Ex Ex

170. 171. 172. 173. 175. 176. 177.

Ex Ex Ex Ex Ex Ex Ex

178. 179. 180. 181. 185. 186. 187.

Ex Ex Ex Ex C C C

MC MC

175. 188.

Ex C

MC MC MC MC BE

166. 173. 176. 177. 178.

Ex Ex Ex Ex Ex

179. 189.

Ex C

Planning for Capital Investments

19. 20. 21. 108. 111. 22. 23. 24. 25. 115.

TF TF TF MC MC TF TF TF TF MC

114. 119. 120. 121. 122. 138. 139. 140. 141. 142.

MC MC MC MC MC

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123. 124. 125. 126. 127.

Learning Objective 7 MC 128. MC 133. MC 129. MC 134. MC 130. MC 135. MC 131. MC 136. MC 132. MC 137.

MC MC MC MC MC

164. 166. 170. 173. 178.

BE Ex Ex Ex Ex

181. 182. 191.

Ex Ex C

143. 144. 145. 146. 147.

Learning Objective 8 MC 148. MC 153. MC 149. MC 154. MC 150. MC 155. MC 151. MC 156. MC 152. MC 157.

MC MC MC MC MC

165. 168. 169. 171. 172.

BE Ex Ex Ex Ex

173. 174. 179. 192.

Ex Ex Ex C

MC MC MC MC MC

Note: TF = True-False MC = Multiple Choice

C = Completion BE = Brief Exercise

Ex = Exercise

The chapter also contains one set of eight Matching questions and three Short-Answer Essay questions.

CHAPTER LEARNING OBJECTIVES 1. Discuss capital budgeting evaluation, and explain inputs used in capital budgeting. Management gathers project proposals from each department; a capital budget committee screens the proposals and recommends worthy projects. Company officers decide which projects to fund, and the board of directors approves the capital budget. In capital budgeting, estimated cash inflows and outflows, rather than accrual-accounting numbers, are the preferred inputs. 2. Describe the cash payback technique. The cash payback technique identifies the time period required to recover the cost of the investment. The formula when net annual cash flows are equal is: Cost of capital investment ÷ Estimated net annual cash flow = Cash payback period. The shorter the payback period, the more attractive the investment. 3. Explain the net present value method. The net present value method compares the present value of future cash inflows with the capital investment to determine net present value. The NPV decision rule is: Accept the project if net present value is zero or positive. Reject the project if net present value is negative. 4. Identify the challenges presented by intangible benefits in capital budgeting. Intangible benefits are difficult to quantify and thus are often ignored in capital budgeting decisions. This can result in incorrectly rejecting some projects. One method for considering intangible benefits is to calculate the NPV, ignoring intangible benefits If the resulting NPV is below zero, evaluate whether the benefits are worth at least the amount of the negative net present value. Alternatively, intangible benefits can be incorporated into the NPV calculation, using conservative estimates of their value. 5. Describe the profitability index. The profitability index is a tool for comparing the relative merits of alternative capital investment opportunities. It is computed as: Present value of net cash flows ÷ Initial investment. The higher the index, the more desirable the project.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

6. Indicate the benefits of performing a post-audit. A post-audit is an evaluation of a capital investment’s actual performance. Post-audits create an incentive for managers to make accurate estimates. Post-audits also are useful for determining whether a company should continue, expand, or terminate a project. Finally, post-audits provide feedback that is useful for improving estimation techniques. 7. Explain the internal rate of return method. The objective of the internal rate of return method is to find the interest yield of the potential investment, which is expressed as a percentage rate. The IRR decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return. Reject the project when the internal rate of return is less than the required rate of return. 8. Describe the annual rate of return method. The annual rate of return uses accrual accounting data to indicate the profitability of a capital investment. It is calculated as: Expected annual net income ÷ Amount of the average investment. The higher the rate of return, the more attractive the investment.

TRUE-FALSE STATEMENTS 1.

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

The capital budgeting committee ultimately approves the capital expenditure budget for the year.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

The cash payback technique is a quick way to calculate a project's net present value.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Planning for Capital Investments 8.

24-5

Using the net present value method, a net present value of zero indicates that the project would not be acceptable.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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.

10.

By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

11.

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

12.

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

13.

The profitability index is calculated by dividing the total cash flows by the initial investment.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

14.

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

15.

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

16.

A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

17.

Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

18.

A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

24-6 19.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition The internal rate of return method is, like the NPV method, a discounted cash flow technique.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Applications

20.

The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

21.

Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return.

Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

22.

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

Ans: T, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

23.

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

24.

A major advantage of the annual rate of return method is that it considers the time value of money.

25.

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3. 4.

T F T F

5. 6. 7. 8.

T T T F

9. 10. 11. 12.

F T F T

13. 14. 15. 16.

F T T F

17. 18. 19. 20.

T T T T

21. 22. 23. 24.

F T F F

25.

MULTIPLE CHOICE QUESTIONS 26.

The capital budget for the year is approved by a company's a. board of directors. b. capital budgeting committee. c. officers. d. stockholders.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

Planning for Capital Investments 27.

24-7

All of the following are involved in the capital budgeting evaluation process except a company's a. board of directors. b. capital budgeting committee. c. officers. d. stockholders.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

28.

Most of the capital budgeting methods use a. accrual accounting numbers. b. cash flow numbers. c. net income. d. accrual accounting revenues.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

29.

The first step in the capital budgeting evaluation process is to a. request proposals for projects. b. screen proposals by a capital budgeting committee. c. determine which projects are worthy of funding. d. approve the capital budget.

30.

The capital budgeting decision depends in part on the a. availability of funds. b. relationships among proposed projects. c. risk associated with a particular project. d. all of these.

31.

Capital budgeting is the process a. used in sell or process further decisions. b. of determining how much capital stock to issue. c. of making capital expenditure decisions. d. of eliminating unprofitable product lines.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

32.

Net annual cash flow can be estimated by a. deducting credit sales from net income. b. adding depreciation expense to net income. c. deducting credit purchases from net income. d. adding advertising expense to net income.

Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

24-8 33.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Which of the following is not a typical cash flow related to equipment purchase and replacement decisions? a. Increased operating costs b. Overhaul of equipment c. Salvage value of equipment when project is complete d. Depreciation expense

34.

Capital expenditure proposals are initially screened by the a. board of directors. b. executive committee. c. capital budgeting committee. d. stockholders.

35.

Capital budgeting decisions depend in part on all of the following except the a. relationships among proposed projects. b. profitability of the company. c. company’s basic decision making approach. d. risks associated with a particular project.

36.

The corporate capital budget authorization process consists of how many steps? a. 4 b. 3 c. 2 d. 1

37.

Which of the following is not a capital budgeting decision? a. Constructing new studios b. Replacing old equipment c. Scrapping obsolete inventory d. Remodeling an office building

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

38.

Which of the following is a disadvantage of the cash payback technique? a. It is difficult to calculate b. It relies on the time value of money c. It can only be calculated when there are equal annual net cash flows d. It ignores the expected profitability of a project

Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

39.

The payback period is often compared to an asset’s a. estimated useful life. b. warranty period. c. net present value. d. internal rate of return.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Planning for Capital Investments 40.

24-9

Which of the following ignores the time value of money? a. Internal rate of return b. Profitability index c. Net present value d. Cash payback

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

41.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are: Year 1 2 3 4

Net Annual Cash Flow $ 3,000 8,000 15,000 9,000

The cash payback period is a. 2.29 years. b. 2.60 years. c. 2.40 years. d. 2.31 years. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $3,000 + $8,000 = $11,000; $20,000 − $11,000 = $9,000; $9,000  $15,000 = .6 2 + .6 = 2.6

42.

Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project’s four years are: Expected Annual Year 1 2 3 4

Expected Annual Cash Inflows $30,000 45,000 60,000 50,000

Cash Outflows $12,000 20,000 25,000 30,000

The cash payback period is a. 3.59 years. b. 3.50 years. c. 2.37 years. d. 3.20 years. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($30,000 − $12,000) + ($45,000 − $20,000) + ($60,000 − $25,000) = $78,000; ($88,000 − $78,000)  ($50,000 − $30,000) = .5 3 + .5 = 3.5

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

43.

Jordan Company is considering the purchase of a machine with the following data: Initial cost One-time training cost Annual maintenance costs Annual cost savings Salvage value

$150,000 12,000 15,000 75,000 20,000

The cash payback period is a. 2.70 years. b. 2.50 years. c. 2.37 years. d. 2.17 years. Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($150,000 + $12,000)  ($75,000 − $15,000) = 2.7

44.

If project A has a lower payback period than project B, this may indicate that project A may have a a. lower NPV and be less profitable. b. higher NPV and be less profitable. c. higher NPV and be more profitable. d. lower NPV and be more profitable.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

45.

Which of the following does not consider a company’s required rate of return? a. Net present value b. Internal rate of return c. Annual rate of return d. Cash payback

46.

The cash payback technique a. considers cash flows over the life of a project. b. cannot be used with uneven cash flows. c. is superior to the net present value method. d. may be useful as an initial screening device.

47.

If an asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $40,000 each year, the cash payback period is a. 7 years. b. 6 years. c. 5 years. d. 4 years.

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $240,000  $40,000 = 6

Planning for Capital Investments 48.

24-11

If a payback period for a project is greater than its expected useful life, the a. project will always be profitable. b. entire initial investment will not be recovered. c. project would only be acceptable if the company's cost of capital was low. d. project's return will always exceed the company's cost of capital.

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

49.

The cash payback technique a. should be used as a final screening tool. b. can be the only basis for the capital budgeting decision. c. is relatively easy to compute and understand. d. considers the expected profitability of a project.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

50.

The cash payback period is computed by dividing the cost of the capital investment by the a. annual net income. b. net annual cash inflow. c. present value of the cash inflow. d. present value of the net income.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

51.

When using the cash payback technique, the payback period is expressed in terms of a. a percent. b. dollars. c. years. d. months.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

52.

A disadvantage of the cash payback technique is that it a. ignores obsolescence factors. b. ignores the cost of an investment. c. is complicated to use. d. ignores the time value of money.

53.

Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback period on this investment is a. 20 years. b. 10 years. c. 8 years. d. 4 years.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $240,000  [$6,000 + ($240,000  10)] = 8

24-12 54.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is a. 8.0 years. b. 7.5 years. c. 6.5 years. d. 3.2 years.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $400,000  ($100,000 − $380,000) = 6.5

55.

Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 each year. The cash payback on this investment is a. 15 years. b. 10 years. c. 7.5 years. d. 6 years.

56.

Giraldi Company has identified that the cost of a new computer will be $48,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is: a. 24.0 years. b. 16.0 years. c. 9.6 years. d. 6.0 years.

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $48,000  ($5,000 + $3,000) = 6

57.

Richman Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3. The amount of the initial investment was 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

$20,478. $18,316. $20,116. $18,678.

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($10,000  .893) + ($8,000  .797) + ($6,000  .712) + $900 = $20,478

Planning for Capital Investments 58.

24-13

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 $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years. The net present value of this project is a. $354,340. b. $70,000. c. $35,436. d. $4,340.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($140,000  2,531) − $350,000 = $4,340

59.

The discount rate is referred to by all of the following alternative names except the a. accountin rate of return. b. cutoff rate. c. hurdle rate. d. required rate of return.

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

60.

The rate that a company must pay to obtain funds from creditors and stockholders is known as the a. hurdle rate. b. cost of capital. c. cutoff rate. d. all of these.

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

61.

The higher the risk element in a project, the a. more attractive the investment. b. higher the net present value. c. higher the cost of capital. d. higher the discount rate.

Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

62.

If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the a. project's rate of return exceeds 10%. b. project's rate of return is less than the minimum rate required. c. project earns a rate of return of 10%. d. project earns a rate of return of 0%.

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

24-14 63.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Using the profitability index method, the present value of cash inflows for Project Flower is $88,000 and the present value of cash inflows of Project Plant is $48,000. If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful life, the project that should be accepted is a. Project Flower. b. Project Plant. c. Either project may be accepted. d. Neither project should be accepted.

Ans: b, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $88,000  $90,000 = .98; $48,000  $40,000 = 1.2

64.

The primary capital budgeting method that uses discounted cash flow techniques is the a. net present value method. b. cash payback technique. c. annual rate of return method. d. profitability index method.

65.

When the annual cash flows from an investment are unequal, the appropriate table to use is the a. future value of 1 table. b. future value of annuity table. c. present value of 1 table. d. present value of annuity table.

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

66.

A company's cost of capital refers to the a. rate the company must pay to obtain funds from creditors and stockholders. b. total cost of a capital project. c. cost of printing and registering common stock shares. d. rate of return earned on common stock.

67.

When a capital budgeting project generates a positive net present value, this means that the project earns a return higher than the a. internal rate of return. b. annual rate of return. c. required rate of return. d. profitability index.

68.

A negative net present value indicates that the a. project is acceptable. b. wrong discount rate was used. c. project’s annual rate of return exceeds the discount rate. d. present value of the cash inflows was less than the present value of the cash out flows.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Planning for Capital Investments 69.

24-15

A company’s discount rate is based on the a. cost of capital and the internal rate of return. b. cost of capital and the risk element. c. cut-off rate and the risk element. d. cut-off rate and the internal rate of return.

Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

70.

The discount rate that will result in the lowest net present value for a project is a. any rate lower that the cost of capital. b. any rate higher than the cost of capital. c. the lowest rate used to evaluate the project. d. the highest rate used to evaluate the project.

Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

71.

The discount rate that will result in the highest net present value for a project is a. any rate lower that the cost of capital. b. any rate higher than the cost of capital. c. the lowest rate used to evaluate the project. d. the highest rate used to evaluate the project.

72.

Which of the following will increase the net present value of a project? a. An increase in the initial investment b. A decrease in annual cash inflows c. An increase in the discount rate d. A decrease in the discount rate

73.

A project with a zero net present value indicates that it is a. unacceptable. b. profitable. c. acceptable. d. going to have an acceptable cash payback period.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

74.

Companies often assume that the risk element in the discount rate is a. zero. b. greater that zero. c. less than zero. d. known with certainty.

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

75.

If a project has a salvage value greater than zero, the salvage value will a. have no effect on the net present value. b. increase the net present value. c. increase the payback period. d. decrease the net present value.

24-16 76.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was Year 1 2 3 a. b. c. d.

Present Value of 1 at 15% .870 .756 .658

PV of an Annuity of 1 at 15% .870 1.626 2.283

$45,792. $45,180. $29,232. $38,376.

Ans: b, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($21,000  .870) + ($24,000  .756) + ($27,000  .658) − $9,000 = $45,180

77.

Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company’s required rate of return is 10%. The company uses straight-line depreciation. Year 1 2 3

Present Value of 1 at 10% .909 .826 .751

PV of an Annuity of 1 at 10% .909 1.736 2.487

This project is a. unacceptable because it earns a rate less than 10%. b. acceptable because it has a positive NPV. c. unacceptable because it has a negative NPV. d. acceptable because it has a zero NPV. Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($18,000  2,487) + ($3,000  .751) − $47,019 = 0

78.

Johnson Corp. has an 8% required rate of return. It’s considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is Year 1 2 3 4 5 a. b. c. d.

Present Value of 1 at 8% .926 .857 .794 .735 .681

PV of an Annuity of 1 at 8% .926 1.783 2.577 3.312 3.993

$125,910. $165,600. $199,650. $34,050.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($50,000) (3,993) = $199,650

Planning for Capital Investments 79.

24-17

Benaflek Co. purchased some equipment 3 years ago. The company’s required rate of return is 12%, and the net present value of the project was $(1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment was 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

$40,956. $36,632. $40,232. $37,356.

Ans: a, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($20,000  .893) + ($16,000  .797) + ($12,000  .712) + $1,800 = $40,956

80.

In capital budgeting, intangible benefits should be a. excluded entirely. b. included using optimistic estimated values. c. included using conservative estimated values. d. included only when benefits are known with certainty.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

81.

Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will also reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the reduction in downtime must be worth Year 1 2 3 4 5 a. b. c. d.

Present Value of 1 at 8% .926 .857 .794 .735 .681

PV of an Annuity of 1 at 8% .926 1.783 2.577 3.312 3.993

$23,958 per year. $49,662 per year. $18,264 per year. $45,263 per year.

Ans: d, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [$600,000 − ($105,000  3.993)]  3.993 = $45,263

82.

Intangible benefits in capital budgeting would include all of the following except increased a. product quality. b. employee loyalty. c. salvage value. d. product safety.

24-18 83.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Intangible benefits in capital budgeting a. should be ignored because they are difficult to determine. b. include increased quality or employee loyalty. c. are not considered because they are usually not relevant to the decision. d. have a rate of return in excess of the company’s cost of capital.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

84.

To avoid rejecting projects that actually should be accepted,

a. b. c. d.

1. intangible benefits should be ignored. 2. conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation. 3. calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV. 1 2 3 both 2 and 3 are correct.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

85.

All of the following statements about intangible benefits in capital budgeting are correct except that they a. include increased quality and employee loyalty. b. are difficult to quantify. c. are often ignored in capital budgeting decisions. d. cannot be incorporated into the NPV calculation.

86.

In evaluating high-tech projects, a. only tangible benefits should be considered. b. only intangible benefits should be considered. c. both tangible and intangible benefits should be considered. d. neither tangible nor intangible benefits should be considered.

87.

Using a number of outcome estimates to get a sense of the variability among potential returns is a. financial analysis. b. post-audit analysis. c. sensitivity analysis. d. outcome analysis.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

Planning for Capital Investments 88.

24-19

If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is a. equal to 9%. b. greater than 9%. c. less than 9%. d. unacceptable for investment purposes.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

89.

The profitability index is computed by dividing the a. total cash flows by the initial investment. b. present value of cash flows by the initial investment. c. initial investment by the total cash flows. d. initial investment by the present value of cash flows.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

90.

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the a. cash payback method. b. internal rate of return method. c. net present value method. d. profitability index.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

91.

The profitability index a. does not take into account the discounted cash flows. b. is calculated by dividing total cash flows by the initial investment. c. allows comparison of the relative desirability of projects that require differing initial investments. d. will never be greater than 1.

Ans: c, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

92.

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the a. cash payback method. b. internal rate of return method. c. net present value method. d. profitability index.

93.

The following information is available for a potential investment for Panda Company: Initial investment Net annual cash inflow Net present value Salvage value Useful life

$95,000 20,000 36,224 10,000 10 yrs.

The potential investment’s profitability index is a. 4.75. b. 3.22.

24-20 MC. 93

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition (Cont.) c. 2.62. d. 1.38.

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($95,000 + $36,224)  $95,000 = 1.38

94.

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is a. the discounted cash flow technique. b. the net present value method. c. risk analysis. d. sensitivity analysis.

95.

If a project’s profitability index is greater than 1, then the a. project should always be accepted. b. project’s net present value is negative. c. project’s internal rate of return is less than the discount rate. d. project should be accepted if funds are available.

Ans: d, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

96.

If a project’s profitability index is less than 1, then a. its net present value is zero. b. its net present value is positive. c. it should be rejected. d. its internal rate of return is greater than the discount rate.

97.

If a project’s profitability index is equal to 1, then a. its net present value is zero. b. its net present value is positive. c. it should be rejected. d. its internal rate of return is greater than the discount rate.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

98.

A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is a. $78,400. b. $86,730. c. $56,497. d. $70,000.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $70,000  1.293 = $86,730

Planning for Capital Investments 99.

24-21

A project with a profitability index of 1.156 also has net cash flows with a present value of $69,360. The project’s internal rate of return was 10%. The initial investment was a. $66,000. b. $80,180. c. $60,000. d. $62,424.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $69,360  1.156 = $60,000

100.

Selma Inc. is comparing several alternative capital budgeting projects as shown below:

Initial investment Present value of net cash flows

Projects A B C $80,000 $120,000 $160,000 90,000 110,000 200,000

Using the profitability index, the projects rank as a. A, C, B. b. A, B, C. c. C, A, B. d. C, B, A. Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $90,000  $80,000 = 1.13; $110,000  $120,000 = .91; $200,000  $160,000 = 1.25

101.

Selma Inc. is comparing several alternative capital budgeting projects as shown below:

Initial investment Present value of net cash flows

Projects A B C $80,000 $120,000 $160,000 90,000 110,000 200,000

Using the profitability index, how many of the projects are acceptable? a. 3 b. 2 c. 1 d. 0 Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $90,000  $80,000 = 1.13; $110,000  $120,000 = .91; $200,000  $160,000 = 1.25

102.

If a project has a negative net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable.

24-22

103.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

If a project has a positive net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable.

104.

If a project has a zero net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

105.

If a project has a profitability index of 1.20, then the project’s internal rate of return is a. equal to the discount rate. b. less than the discount rate. c. greater than the discount rate. d. equal to 20%.

106.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straightline over its useful life with no salvage value. Cleaners 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. $27,600 b. $3,583 c. $1,772 d. $5,496 Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($14,600  4.355) − $60,000 = $3,583

Planning for Capital Investments

107.

24-23

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 profitability index associated with this equipment? a. 1.23 b. 1.03 c. 1.06 d. .73 Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($14,600  4.355)  $60,000 = 1.06

108.

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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $14,600  4.111 = $60,020

109. Periods 1 2 3

Present Value of an Annuity of 1 8% 9% 10% .926 .917 .909 1.783 1.759 1.736 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is a. $212,604. b. $42,000. c. $21,261. d. $2,604. Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($84,000  2.531) − $210,000 = $2,604

24-24

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

110. Periods 1 2 3

Present Value of an Annuity of 1 8% 9% 10% .926 .917 .909 1.783 1.759 1.736 2.577 2.531 2.487

A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $25,000 at the end of each year for three years. The profitability index for this project is a. .80. b. 1.00. c. 1.24. d. 1.27. Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($25,000  2.487)  $50,000 = 1.24

111. Periods 1 2 3

Present Value of an Annuity of 1 8% 9% 10% .926 .917 .909 1.783 1.759 1.736 2.577 2.531 2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $91,116 and is expected to generate cash inflows of $36,000 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($36,000) (2.531) = $91,116

Planning for Capital Investments 112.

24-25

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Soup Project Nuts Initial investment $400,000 $600,000 Annual net income 30,000 46,000 Net annual cash inflow 110,000 146,000 Estimated useful life 5 years 6 years Salvage value -0-0The 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 Nuts is a. 13.3 years. b. 6.7 years. c. 5.0 years. d. 4.1 years. Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $600,000  $146,000 = 4.1

113.

Present Value of an Annuity of 1 9% 10% 11% 12% 3.890 3.791 3.696 3.605 4.486 4.355 4.231 4.111

The net present value for Project Nuts is a. $635,830. b. $200,330. c. $100,000. d. $35,830. Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($146,000  4.355) − $600,000 = $35,830

24-26

114.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

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 internal rate of return for Project Nuts is approximately a. 11%. b. 12%. c. 10%. d. 9%. Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($146,000) (4.111) = $600,206

115.

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 Soup is a. 7.5%. b. 15.0%. c. 27.5%. d. 55%. Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $30,000  [($200,000 + 0)  2] = 15

Planning for Capital Investments

116.

24-27

A post-audit should be performed using a. a different evaluation technique than that used in making the original decision. b. the same evaluation technique used in making the original decision. c. estimated amounts instead of actual figures. d. an independent CPA.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

117.

A thorough evaluation of how well a project's actual performance matches the projections made when the project was proposed is called a a. pre-audit. b. post-audit. c. risk analysis. d. sensitivity analysis.

118.

Performing a post-audit is important because a. managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results. b. it provides a formal mechanism by which the company can determine whether existing projects should be terminated. c. it improves the development of future investment proposals because managers improve their estimation techniques by evaluating their past successes and failures. d. all of these.

Ans: d, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

119.

A capital budgeting method that takes into consideration the time value of money is the a. annual rate of return method. b. return on stockholders' equity method. c. cash payback technique. d. internal rate of return method.

Ans: d, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

120.

The internal rate of return is the interest rate that results in a a. positive NPV. b. negative NPV. c. zero NPV. d. positive or negative NPV.

Ans: c, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

121.

In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash inflows were $18,000. The initial investment in the project must have been a. $18,000. b. $4,500. c. $72,000. d. $36,000.

Ans: c, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods/ Solution: 4  $18,000 = $72,000

24-28

122.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

The capital budgeting technique that finds the interest yield of the potential investment is the a. annual rate of return method. b. internal rate of return method. c. net present value method. d. profitability index method.

Ans: b, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

123.

All of the following statements about the internal rate of return method are correct except that it a. recognizes the time value of money. b. is widely used in practice. c. is easy to interpret. d. can be used only when the cash inflows are equal.

Ans: d, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

124.

If the internal rate of return is used as the discount rate in the net present value calculation, the net present value will be a. zero. b. positive. c. negative. d. undeterminable.

Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

125.

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was a. $80,000. b. less than $80,000. c. greater than $80,000. d. undeterminable.

Ans: a, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

126.

If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project’s internal rate of return was a. less than 8%. b. equal to 8%. c. greater than 8%. d. undeterminable.

Ans: b, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

127.

The internal rate of return factor is equal to the a. capital investment divided by the net cash flows. b. present value of net cash flows divided by the capital investment. c. present value of net cash flows divided by the profitability index. d. capital investment divided by the present value of the net cash flows.

Planning for Capital Investments 128.

24-29

If a 2-year capital project has an internal rate of return factor equal to 1.690 and net annual cash flows of $60,000, the initial capital investment was a. $101,400. b. $35,503. c. $50,700. d. $71,007.

Ans: a, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($60,000) (1.690) = $101,400

129.

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are a. $25,770. b. $30,000. c. $10,000. d. $38,655.

Ans: b, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $77,310  2.577 = $30,000

130.

If the internal rate of return exceeds the discount rate, then the net present value of a project is a. positive. b. negative. c. zero. d. one.

Ans: a, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

131.

If the internal rate of return is less than the discount rate, then the net present value of a project is a. positive. b. negative. c. zero. d. one.

Ans: b, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

132.

If a project has a negative net present value, the internal rate of return will be a. less than the discount rate. b. greater than the discount rate. c. equal to the discount rate. d. a negative rate of return.

133.

If a project has a zero net present value, then the internal rate of return will be a. less than the discount rate. b. greater than the discount rate. c. equal to the discount rate. d. a negative rate of return.

24-30 134.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition Which of the following will cause the internal rate of return to increase? a. An increase in the annual cash inflows b. A decrease in the annual cash inflows c. An increase in the discount rate d. A decrease in the discount rate

135.

If project A has a lower internal rate of return than project B, then project A will have a a. lower NPV and a shorter payback period. b. higher NPV and a longer payback period. c. lower NPV and a longer payback period. d. higher NPV and a shorter payback period.

136.

The internal rate of return factor is also the a. annual rate of return. b. profitability index. c. cash payback period. d. present value factor for a single amount.

Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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 8%. It is considering investing in a project that costs $379,650 and is expected to generate cash inflows of $150,000 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, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($150,000) (2.531) = $379,650

138.

A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is a. 22.1%. b. 44.3%. c. 9.6%. d. 19.3%.

Ans: d, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: [$100,000 − $38,000 − ($240,000  8)]  ($240,000  2) = 19.3

Planning for Capital Investments 139.

24-31

A company projects an increase in net income of $135,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment? a. 15.0% b. 22.5% c. 30.0% d. 34.5%

Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $135,000  [($900,000 + $300,000)  2] = 22.5

140.

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000. If annual expected income is $28,000, the denominator in computing the annual rate of return is a. $320,000. b. $160,000. c. $168,000. d. $336,000.

Ans: c, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($320,000 + $16,000)  2 = $168,000

141.

Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is: a. 6.0%. b. 10.2%. c. 12.0%. d. 15.0%.

Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $15,000  ($250,000  2) = 12

142.

Discounted cash flow techniques include all of the following except a. profitability index. b. annual rate of return. c. internal rate of return. d. net present value.

Ans: b, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

143.

Which of the following is based directly on accrual accounting data rather than cash flows? a. Profitability index b. Internal rate of return c. Net present value d. Annual rate of return

Ans: d, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

24-32 144.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition When calculating the annual rate of return, the average investment is equal to a. (initial investment plus $0) divided by 2. b. initial investment divided by life of project. c. initial investment divided by 2. d. (initial investment plus salvage value) divided by 2.

145.

A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, was a. $42,000. b. $33,000. c. $47,700. d. $18,000.

Ans: b, LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: ($120,000  2) (.15) + ($120,000  5) = $33,000

146.

A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was a. $7,020. b. $6,480. c. $4,680. d. $4,320.

Ans: a, LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: [($75,000 + $3,000)  2]  .18 = $7,020

147.

A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was a. $400,000. b. $500,000. c. $1,000,000. d. $800,000.

Ans: d, LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: [($80,000 − $20,000)  .15]  2 = $800,000

148.

A project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is a. 15%. b. 50.3%. c. 16%. d. 17%.

Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: [$21,375 − ($80,000 − $5,000)  5]  ($80,000 + $5,000)  2 = 15

Planning for Capital Investments

24-33

149. A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this equipment is a. 40.0%. b. 7.5%. c. 15.0%. d. 20.0%. Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $135,000 − $39,000 − ($480,000  8)  ($480,000  2) = 15

150. A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. The cash payback period on the equipment is a. 13.3 years. b. 8.0 years. c. 5.0 years. d. 2.5 years. Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $480,000  ($135,000 − $39,000) = 5

151.

The capital budgeting technique that indicates the profitability of a capital expenditure is the a. profitability index method. b. net present value method. c. internal rate of return method. d. annual rate of return method.

152.

The annual rate of return method is based on a. accounting data. b. the time value of money data. c. market values. d. cash flow data.

Ans: a, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

153.

Disadvantages of the annual rate of return method include all of the following except that a. it relies on accrual accounting numbers instead of actual cash flows. b. it does not consider the time value of money. c. no consideration is given as to when the cash inflows occur. d. management is unfamiliar with the information used in the computation.

Ans: d, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

24-34 154.

Test Bank for Accounting, Tools for Business Decision Making Fifth Edition A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $100,000. What is the annual rate of return on this investment? a. 10% b. 15% c. 20% d. 25%

155.

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is a. $240,000. b. $120,000. c. $126,000. d. $252,000.

Ans: c, LO: 8, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods Solution: $(240,000 + $12,000) / 2 = 126,000

156.

The annual rate of return is computed by dividing expected annual a. cash inflows by average investment. b. net income by average investment. c. cash inflows by original investment. d. net income by original investment.

157.

All of the following statements about the annual rate of return method are correct except that it a. indicates the profitability of a capital expenditure. b. ignores the salvage value of an investment. c. does not consider the time value of money. d. compares the annual rate of return to management’s minimum rate of return.

Ans: b, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Planning for Capital Investments

24-35

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

a d b a d c b d c b a c d a d b b a c

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63.

d d b b c b c d c c c d a d a b d c b

64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

a c a c d b d c d c a b b d c a c d c

83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101.

b d d c c b b d c d d d d c a b c c b

102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

c b a c b c d d c b d d b b b b d d c

121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139.

c b d a a b a a b a b a c a c c b d b

140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157.

c c b d d b a d a c c d a d b c b b

BRIEF EXERCISES BE 158 Diamond Company is considering investing in new equipment that will cost $1,400,000 with a 10year useful life. The new equipment is expected to produce annual net income of $90,000 over its useful life. Depreciation expense, using the straight-line rate, is $140,000 per year. Instructions Compute the cash payback period. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 158

(5 min.)

$1,400,000 ÷ ($90,000 + $140,000) = 6.1 years

BE 159 Madeline Company is proposing to spend $200,000 to purchase a machine that will provide annual cash flows of $38,000. The appropriate present value factor for 10 periods is 5.65. Instructions Compute the proposed investment’s net present value and indicate whether the investment should be made by Madeline Company. Ans: N/A, LO: 3, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Solution 159

(5 min.)

Cash inflows ($38,000 × 5.65) Cash outflow—investment ($200,000 × 1.00) Net present value

Present Value $214,700 200,000 $ 14,700

The investment should be made because the net present value is positive.

BE 160 LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company’s borrowing rate is 8%, while its cost of capital is 10%. Instructions Calculate the net present value of the dock and indicate whether LakeFront should make the investment. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 160

(5 min.)

Present value of annual cash flows Present value of salvage value

Cash Flows × 10% Discount Factor $110,000 × 3.79079 300,000 × .62092

Capital investment Net present value Since the net present value is positive, LakeFront should accept the project.

= = =

Present Value $416,987 186,276 603,263 560,000 $ 43,263

BE 161 Mobil Company has hired a consultant to propose a way to increase the company’s revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each project: Project Turtle Project Snake Capital investment $1,105,000 $625,000 Annual cash flows 180,000 105,000 Estimated useful life 10 years 10 years Mobil Company uses a discount rate of 9% to evaluate both projects. Instructions (a) Calculate the net present value of both projects. (b) Calculate the profitability index for each project. (c) Which project should Mobil accept? Ans: N/A, LO: 3,5, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Planning for Capital Investments Solution 161

24-37

(10–15 min.)

Project Turtle (a) and (b) Present value of annual cash flows Present value of salvage value

Cash Flows × 9% Discount Factor $180,000 × 6.41766 0 × .42241

= = =

Present Value $1,155,179 0 1,155,179 1,105,000 $ 50,179

= = =

Present Value $673,854 0 673,854 625,000 $ 48,854

Capital investment Net present value Profitability index = $1,155,179 ÷ $1,105,000 = 1.05 Project Snake (a) and (b) Present value of annual cash flows Present value of salvage value

Cash Flows × 9% Discount Factor $105,000 × 6.41766 0 × .42241

Capital investment Net present value Profitability index = $673,854 ÷ $625,000 = 1.08

(c) Project Snake has a lower net present value than Project Turtle, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project Snake should be accepted. Ex. 162 Carlson Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $300,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $52,500. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 9% Ans: N/A, LO: 7, Bloom: E, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 162 (8 min.) Present value of annual cash flows Present value of salvage value Capital investment Net present value

Cash Flows × 9% Discount Factor $52,500 × 5.53482 0 × .50817

= = =

Present Value $290,578 0 290,578 (300,000) $ (9,422)

The reduction in downtime would have to have a present value of at least $9,422 in order for the project to be acceptable.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 163 Stanton Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $490,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $90,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $510,000, will have a useful life of 11 years, and will produce net annual cash flows of $77,000 per year. Evaluate the success of the project. Assume a discount rate of 10% Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 163 (12–15 min.) Original estimate Present value of net annual cash flows Present value of salvage value

Cash Flows × 10% Discount Factor

Present Value

$90,000 0

= =

$518,312 0 518,532 490,000 $ 28,312

Cash Flows × 10% Discount Factor

Present Value

$77,000 0

= =

500,120 0 500,120 510,000 $ 9,880

× ×

5.75902 .42410

Capital investment Net present value Revised estimate Present value of net annual cash flows Present value of salvage value

× ×

6.49506 .42410

Capital investment Net present value

The original net present value was projected to be a positive $28,312; however, the revised estimate is a negative $9,880. The project is not a success. BE 164 Mint Company is contemplating an investment costing $135,000. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $25,305. Instructions What is the approximate internal rate of return associated with this investment? Ans: N/A, LO: 3,4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 164

(5 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. $135,000 ÷ $25,305 = 5.33 By tracing across on the 8-year row, we see that the discount factor of 10% is 5.33493. Thus the internal rate of return on this project is approximately 10%.

Planning for Capital Investments

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BE 165 Salt Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $220,000, but it will also increase annual expenses by $160,000. The facility will cost $980,000 to build, and it will have a $20,000 salvage value at the end of its useful life. Instructions Calculate the annual rate of return on this facility. Ans: N/A, LO: 8, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 165

(5 min.)

The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s annual income is $220,000 – $160,000 = $60,000. Its average investment is ($980,000 + $20,000) ÷ 2 = $500,000. Therefore, it annual rate of return is $60,000 ÷ $500,000 = 12%.

EXERCISES Ex. 166 Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $215,000. In addition, Austin estimates that the new machine will increase the company’s annual net cash inflows by $33,000. The machine will have a 12-year useful life and no salvage value. Instructions (a) Calculate the cash payback period. (b) Calculate the machine’s internal rate of return. (c) Calculate the machine’s net present value using a discount rate of 10%. (d) Assuming Corn Doggy, Inc.’s cost of capital is 10%, is the investment acceptable? Why or why not? Ans: N/A, LO: 1,2,3,5,7, Bloom: E, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 166

(13–18 min.)

(a) Cash payback period: $215,000 ÷ $33,000 = 6.5 years (b) Internal rate of return: Scanning the 12-year line, a factor of 6.5 represents an internal rate of return of approximately 11%. (c) Net present value using a discount rate of 10%: Time Period -01-12

Cash Flow PV Factor $(215,000) 1.00000 33,000 6.81369 Net Present Value

Present Value $(215,000) 224,852 $ 9,852

(d) Yes, the investment is acceptable. Indications are that the investment will earn a greater return than 10%. The internal rate of return is estimated to be 11%, and the net present value is positive.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 167 Cepeda Manufacturing Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following cash 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. Cepeda uses straight-line depreciation. Cepeda will not accept any project with a payback period over 2 years. Cepeda's minimum required rate of return is 12%. Instructions (a) Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.) Ans: N/A, LO: 2,3,5,7,8, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 167

(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 2.40 years $22,000 – $16,000 = $6,000 $6,000 ÷ $15,000 = .40 BB 22,000 ÷ (28,500 ÷ 3) = 2.32 years CC Year 1 2 3

$11,000 10,000 9,000

Cash payback 2.1 years $22,000 – 21,000 = $1,000 $1,000 ÷ $9,000 = .1

$11,000 21,000 30,000

Planning for Capital Investments Solution 167

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(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 2.1 years. (b) AA

Discount Year Factor 1 .89286 2 .79719 3 .71178 Total present value Investment Net present value

Net Annual Cash Flow $ 7,000 9,000 15,000

Present Value $ 6,250 7,175 10,677 24,102 22,000 $ 2,102

Net Annual Cash Flow $9,500 9,500 9,500

Present Net Cash Value Flow $ 8,482 $11,000 7,573 10,000 6,762 9,000 22,817(1) 22,000 $ 817

Present Value $ 9,821 7,972 6,406 24,199 22,000 $ 2,199

(1) This total may also be obtained from Table 4: $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. 168 Gantner Company is considering a capital investment of $300,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $27,000 and $87,000, respectively. Gantner has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. Instructions (Round to two decimals.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. (b) Using the discounted cash flow technique, compute the net present value. Ans: N/A, LO: 2,3,8, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 168 (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

Present Value $313,616 300,000 $ 13,616

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 169 Top Growth Farms, a farming cooperative, is considering purchasing a tractor for $551,500. The machine has a 10-year life and an estimated salvage value of $36,000. Delivery costs and set-up charges will be $12,100 and $400, respectively. Top Growth uses straight-line depreciation. Top Growth estimates that the tractor will be used five times a week with the average charge to the individual farmers of $400. Fuel is $50 for each use of the tractor. The present value of an annuity of 1 for 10 years at 9% is 6.418. Instructions For the new tractor, compute the: (a) cash payback period. (b) net present value. (c) annual rate of return. Ans: N/A, LO: 2,3,8, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 169

(16–22 min.)

(a) Cost of the tractor: $551,500 + $12,100 + $400 = $564,000 Annual Cash Flow: Number of uses: 52 × 5 = 260 Contribution margin per use: $400 – $50 = $350 Total annual cash flow: 260 × $350 = $91,000 $564,000 Cash payback: ———— = 6.2 years $91,000 (b) Present value of cash flow ($91,000 × 6.418) = Capital investment Net present value (c)

$584,038 564,000 $ 20,038

$564,000 + $36,000 Average Investment: ————————— = $300,000 2 $564,000 – $36,000 Annual Depreciation: ————————— = $52,800 10 years Annual Net Income: $91,000 – $52,800 = $38,200 $38,200 Average Annual Rate of Return: ———— = 12.73% $300,000

Planning for Capital Investments

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Ex. 170 Tom Bat became a baseball enthusiast at a very early age. All of his baseball experience has provided him valuable knowledge of the sport, and he is thinking about going into the batting cage business. He estimates the construction of a state-of-the-art building and the purchase of necessary equipment will cost $840,000. Both the facility and the equipment will be depreciated over 12 years using the straight-line method and are expected to have zero salvage values. His required rate of return is 9% (present value factor of 7.1607). Estimated annual net income and cash flows are as follows: Revenue Less: Utility cost Supplies Labor Depreciation Other Net income

$350,500 40,000 8,000 141,000 70,000 38,500

297,500 $ 53,000

Instructions For this investment, calculate: (a) The net present value. (b) The internal rate of return. (c) The cash payback period. Ans: N/A, LO: 2,3,7, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 170

(12–16 min.)

(a) Net present value of the investment: Item Initial Investment Revenue $350,500 Expense (227,500)*

Present Value Cash Flow $(840,000) 123,000

Factor 1.0000

7.1607 Net Present Value

Present Value $(840,000) 880,766 $ 40,766

*$40,000 + $8,000 + $141,000 + $38,500 (b) Internal rate of return of the investment: $840,000 ÷ $123,000 = 6.8293 Scanning the 12-year line, a factor of 6.8293 represents an IRR of approximately 10%. (c) Cash payback period of the investment: $840,000 ÷ $123,000 = 6.83 years.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 171 Mimi Company is considering a capital investment of $275,000 in new equipment. The equipment is expected to have a 5-year useful life with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $25,000 and $80,000, respectively. Mimi's minimum required rate of return is 10%. The present value of 1 for 5 periods at 10% is .621 and the present value of an annuity of 1 for 5 periods at 10% is 3.791. Instructions Compute each of the following: (a) cash payback period. (b) net present value. (c) annual rate of return. Ans: N/A, LO: 2,3,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 171

(10–15 min.)

(a) Cash payback period = $275,000 ÷ $80,000 = 3.44 years (b) Present value of cash inflows ($80,000 × 3.791) = $303,280 Capital investment 275,000 Net present value $ 28,280 (c) Annual rate of return = $25,000 ÷ [($275,000 + $0) ÷ 2] = 18.2%

Ex. 172 Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows: Project Red Project Blue Capital investment $440,000 $640,000 Annual net income 25,000 60,000 Estimated useful life 8 years 8 years Depreciation is computed by the straight-line method with no salvage value. Savanna requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods is 5.747. Instructions (a) Compute the cash payback period for each project. (b) Compute the net present value for each project. (c) Compute the annual rate of return for each project. (d) Which project should Savanna select? Ans: N/A, LO: 2,3,8, Bloom: E, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Planning for Capital Investments Solution 172

24-45

(14–18 min.)

(a)

Project Red $ 25,000 55,000* $ 80,000

Annual net income Annual depreciation Annual cash inflow *($440,000 ÷ 8)

Project Blue $ 60,000 80,000** $140,000

**($640,000 ÷ 8)

Cash payback period:

$440,000 ———— = 5.5 years $80,000

(b) Present value of cash inflows: Capital investment Net present value

Project Red $459,760* 440,000 $19,760

*($80,000 × 5.747)

**(140,000 × 5.747)

Project Red $25,000 ————————— = 11.4% ($440,000 + $0) ÷ 2

$640,000 ———— = 4.6 years $140,000 Project Blue $804,580** 640,000 $164,580

Project Blue $60,000 ————————— = 18.8% ($640,000 + $0) ÷ 2

(d) Savanna should select Project Blue because it has a larger positive net present value and a higher annual rate of return. In addition, Project Blue has a slightly shorter cash payback period. Ex. 173 Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $22,000 and $62,000, respectively. Yappy requires a 10% return on all new investments. Period 8

8% 5.747

Present Value of an Annuity of 1 9% 10% 11% 12% 5.535 5.335 5.146 4.968

15% 4.487

Instructions (a) Compute each of the following: 1. Cash payback period. 2. Net present value. 3. Profitability index. 4 Internal rate of return. 5. Annual rate of return. (b) Indicate whether the investment should be accepted or rejected. Ans: N/A, LO: 2,3,5,7,8, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Solution 173 (a) 1.

(b)

(15–20 min.)

Cash payback period: $320,000 ÷ $62,000 = 5.16 years

Present value of cash inflows ($62,000 × 5.335) Capital investment Net present value

$330,770 320,000 $ 10,770

Profitability index: $330,770 ÷ $320,000 = 1.03

Internal rate of return factor: $320,000 ÷ $62,000 = 5.16 Internal rate of return = 11% (5.146 factor)

Annual rate of return: $22,000 ÷ [($320,000 + $0) ÷ 2] = 13.75%

Yappy should accept the investment, since its net present value is positive and its internal rate of return of 11% is greater than the company's required rate of return of 10%. In addition, its cash payback period of 5.16 years is significantly shorter than the equipment's useful life of 8 years.

Ex. 174 Laramie Service Center just purchased an automobile hoist for $16,900. The hoist has a 5-year life and an estimated salvage value of $1,250. Installation costs were $3,770, and freight charges were $960. Laramie uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $85 installed. The cost of a muffler is $46, and the labor cost to install a muffler is $13. Instructions (a) Compute the payback period for the new hoist. (b) Compute the annual rate of return for the new hoist. (Round to one decimal.) Ans: N/A, LO: 2,8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 174

(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 ($85 – $46 – $13) Total net annual cash flow: (a) × (b) Cash payback = $21,630 ÷ $5,408 = 4. years.

(a) (b)

208 $ 26 $5,408

(b) Average investment: ($21,630 + $1,250) ÷ 2 = $11,440. Annual depreciation: ($21,630 – $1,250) ÷ 5 = $4,076. Annual net income: $5,408 – $4,076 = $1,332. Average annual rate of return = $1,332 ÷ $11,440 = 11.6% (rounded).

Planning for Capital Investments

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Ex. 175 Sophie’s Pet Shop is considering the purchase of a new delivery van. Sophie Smith, owner of the shop, has compiled the following estimates in trying to determine whether the delivery van should be purchased: Cost of the van Annual net cash flows Salvage value Estimated useful life Cost of capital Present value of an annuity of 1 Present value of 1

$35,000 6,000 4,000 8 years 10% 5.335 .467

Sophie's assistant manager is trying to convince Sophie that the van has other benefits that she hasn't considered in the initial estimates. These additional benefits, including the free advertising the store's name painted on the van's doors will provide, are expected to increase net cash flows by $500 each year. Instructions (a) Calculate the net present value of the van, based on the initial estimates. Should the van be purchased? (b) Calculate the net present value, incorporating the additional benefits suggested by the assistant manager. Should the van be purchased? (c) Determine how much the additional benefits would have to be worth in order for the van to be purchased. Ans: N/A, LO: 3,4, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 175

(15–19 min.)

(a) Present value of annual cash flows ($6,000 × 5.335) Present value of salvage value ($4,000 × .467) Capital investment Net present value

$32,010 1,868 $33,878 35,000 $( 1,122)

Based on the negative net present value of $1,122, the van should not be purchased. (b) Present value of annual cash flows [($6,000 + $500) × 5.335] Present value of salvage value ($4,000 × .467) Capital investment Net present value

$34,678 1,868 $36,546 35,000 $ 1,546

Incorporating the additional benefits of $500/year into the calculation produces a positive net present value of $1,546. Therefore, the van should be purchased. (c) The additional benefits would need to have a total present value of at least $1,122 in order for the van to be purchased.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 176 Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows: Year 1 2 3

Cool $ 38,000 43,000 48,000 $129,000

Hot $ 42,000 42,000 42,000 $126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%. Present value data are as follows: Present Value of 1 Period 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) Compute the profitability index of each project. (c) Which project should be selected? Why? Ans: N/A, LO: 3,5, Bloom: E, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 176 (a) Year 1 2 3

(12–16 min.) Project Cool Annual Cash Inflows Present Value of 1 $ 38,000 .893 43,000 .797 48,000 .712 $129,000

Present Value $ 33,934 34,271 34,176 $102,381

Present value of cash inflows Capital investment Net present value

$102,381 97,000 $ 5,381

Project Hot Present value of cash inflows ($42,000 × 2.402) Capital investment Net present value

$100,884 97,000 $ 3,884

(b) Profitability index:

Cool $102,381 ÷ $97,000 = 1.06

Hot ($100,884 ÷ $97,000) = 1.04

(c) Both projects are acceptable because both show a positive net present value. Project Cool is the preferred project because its net present value is greater than project Hot's net present value and it has a slightly higher profitability index.

Planning for Capital Investments

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Ex. 177 KSU Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below. Machine A Original cost $106,000 Estimated life 8 years Salvage value -0Estimated annual cash inflows $30,000 Estimated annual cash outflows $10,000

Machine B $ 175,000 8 years -0$45,000 $15,000

Instructions Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased? Ans: N/A, LO: 3,5, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 177

(15–20 min.)

Machine A

Present value of net annual cash flows Present value of salvage value

Cash Flows × 9% Discount Factor

Present Value

$20,000 0

= =

$110,696 0 110,696 106,000 $ 4,696

Cash Flows × 9% Discount Factor

Present Value

$30,000 0

= =

$166,045 0 166,045 175,000 $( 8,955)

× ×

5.53482 .50187

Capital investment Net present value Profitability index = 110,696/106,000 = 1.04 Machine B

Present value of net annual cash flows Present value of salvage value Capital investment Net present value

× ×

5.53482 .50187

Profitability index = 166,045/175,000 = .95 Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and machine A should be purchased.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 178 Santana Company is considering investing in a project that will cost $151,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $40,000 each year. The company requires a 9% rate of return and uses the following compound interest table: Present Value of an Annuity of 1 Period 5

6% 4.212

8% 3.993

9% 3.890

10% 3.791

11% 3.696

12% 3.605

15% 3.352

Instructions (a) Compute (1) the net present value and (2) the profitability index of the project. (b) Compute the internal rate of return on this project. (c) Should Santana invest in this project? Ans: N/A, LO: 3,5,7, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 178

(10–18 min.)

(a) (1)

Present value of cash inflows ($40,000 × 3.890) Capital investment Net present value

(2)

Profitability index: $155,600 ÷ $151,000 = 1.03

(b)

$155,600 151,000 $ 4,600

Capital Investment —————————— = Internal Rate of Return Factor Net Annual Cash Inflow $151,000 ———— = 3.78 $40,000 Since the calculated internal rate of return factor of 3.78 is very near the factor 3.791 for five periods and 10% interest, this project has an approximate interest yield of 10%.

(c) Santana should invest in this project because it has a positive net present value, a profitability index above 1, and its internal rate of return of 10% is greater than the company's 9% required rate of return.

Planning for Capital Investments

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Ex. 179 Johnson Company is considering purchasing one of two new machines. The following estimates are available for each machine: Machine 1 $152,000 50,000 15,000 6 years

Initial cost Annual cash inflows Annual cash outflows Estimated useful life

Machine 2 $169,000 60,000 20,000 6 years

The company's minimum required rate of return is 9%.

Period 6

8% 4.623

Present Value of an Annuity of 1 9% 10% 11% 12% 4.486 4.355 4.231 4.111

15% 3.784

Instructions (a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each machine. (b) Which machine should be purchased? Ans: N/A, LO: 3,5,8, Bloom: E, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 179

(12–16 min.)

(a) (1) Present value of net cash flows Capital investment Net present value *($35,000 × 4.486) **($40,000 × 4.486)

Machine 1 $157,010* 152,000 $ 5,010

Machine 2 $179,440** 169,000 $ 10,440

Machine 1 $157,010 ———— = 1.03 $152,000

Machine 2 $179,440 ———— = 1.06 $169,000

Internal rate of return factor

Machine 1 $152,000 ———— = 4.34 $35,000

Machine 2 $169,000 ———— = 4.23 $40,000

Internal rate of return

10% (4.355 factor)

11% (4.231 factor)

(2) Profitability index (3)

(b) Both machines are acceptable because both show a positive net present value, have a profitability index above 1, and have an internal rate of return greater than the company's minimum required rate of return. Machine 2 is preferred because its net present value, profitability index, and internal rate of return are all greater than Machine 1's amounts.

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 180 Platoon Company is performing a post-audit of a project that was estimated to cost $420,000, have a useful life of 6 years with a zero salvage value, and result in net cash inflows of $100,000 per year. After the investment was in operation for a year, revised figures indicate that it actually cost $470,000, will have a 9-year useful life, and will produce net cash inflows of $77,000. The present value of an annuity of 1 for 6 years at 10% is 4.355 and for 9 years is 5.759. Instructions Determine whether the project should have been accepted based on (a) the original estimates and then on (b) the actual amounts. Ans: N/A, LO: 3,6, Bloom: E, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 180

(8–12 min.)

(a) Present value of the estimated net cash inflows ($100,000 × 4.355) Estimated capital investment Net present value

$435,500 420,000 $ 15,500

Yes, Platoon Company should have invested in the project based on the original estimates, since the net present value is positive. (b) Present value of the actual net cash inflows ($77,000 × 5.759) Actual capital investment Net present value

$443,443 470,000 $ (26,557)

Platoon should not have invested in the project based on the actual amounts, since the net present value is negative. The decrease of $42,057 in net present value was caused due to a decrease of $23,000 per year in net cash inflows and a $50,000 increase in the cost of the capital investment. This more than offsets the 3-year increase in useful life.

Ex. 181 Shilling Corp. is thinking about opening a baseball camp in Florida. In order to start the camp, the company would need to purchase land, build five baseball fields, and a dormitory-type sleeping and dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in Florida have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Shilling can sell the property for more than it was originally purchased for. The following amounts have been estimated: Cost of land Cost to build dorm and dining facility Annual cash inflows assuming 100 players and 10 weeks Annual cash outflows Estimated useful life Salvage value Discount rate Present value of an annuity of 1 Present value of 1

$ 630,000 2,100,000 2,520,000 2,260,000 20 years 4,400,000 10% 8.514 .149

Planning for Capital Investments Ex. 181

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(Cont.)

Instructions (a) Calculate the net present value of the project. (b) To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be $2,085,000 and expenses will be $1,865,000. What is the net present value using these alternative estimates? Discuss your findings. (c) Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 12% discount rate is more appropriate? The present value of 1 at 12% is .104 and the present value of an annuity of 1 is 7.469. Ans: N/A, LO: 3,7, Bloom: E, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 181

(15–20 min.)

(a) Present value of net cash flows ($260,000 × 8.514) Present value of salvage value ($4,400,000 × .149) Capital investment ($630,000 + $2,100,000) Net present value (b) Present value of net cash flows ($220,000 × 8.514) Present value of salvage value Capital investment Net present value

$2,213,640 655,600 $2,869,240 2,730,000 $ 139,240 $1,873,080 655,600 $2,528,680 2,730,000 $ (201,320)

If the number of campers attending each week is only 80 instead of 100, the net present value decreases by $340,560 (from a positive $139,240 to a negative $201,320). This indicates that the camp should not be invested in unless the number attending is closer to 100. (c) Present value of net cash flows ($260,000 × 7.469) Present value of salvage value ($4,400,000 × .104) Capital investment Net present value

$1,941,940 457,600 $2,399,540 2,730,000 $ (330,460)

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Ex. 182 Ace Corporation recently purchased a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $250,000 in annual cash flows for a period of five years. The required rate of return is 8%. The new machine is expected to have zero salvage value at the end of the five-year period. Instructions Calculate the internal rate of return. (Table 4 from Appendix C is needed.) Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 182

(4 min.)

IRR = Capital investment ÷ Annual cash inflows = Factor $950,000 ÷ $250,000 = 3.80. This factor is found in the PVA table at n = 5 periods. IRR = 10%

COMPLETION STATEMENTS 183. For purposes of capital budgeting, estimated ____________ and outflows are preferred for inputs into the capital budgeting decision tools. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

184. The technique which identifies the time period required to recover the cost of the investment is called the ________________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

185. The two discounted cash flow techniques used in capital budgeting are (1) the _______________________ method and (2) the ______________________ method. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

186. Under the net present value method, the interest rate to be used in discounting the future cash inflows is the ________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

187. In using the net present value approach, a project is acceptable if the project's net present value is ____________ or_______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Planning for Capital Investments

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188. A project’s ________________, such as increased quality or safety, are often incorrectly ignored in capital budgeting decisions. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

189. The _______________ is a method of comparing alternative projects that takes into account both the size of the investment and its discounted future cash flows. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

190. A well-run organization should perform an evaluation, called a _____________, of its investment projects after their completion. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

191. The internal rate of return method differs from the net present value method in that it results in finding the ___________________ of the potential investment. Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

192. A major limitation of the annual rate of return approach is that it does not consider the _______________ of money. Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Completion Statements 183. 184. 185. 186. 187. 188. 189. 190. 191. 192.

cash inflows cash payback net present value, internal rate of return required rate of return zero, positive intangible benefits profitability index post-audit interest yield time value

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

MATCHING 193. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D.

Profitability index Internal rate of return method Discounted cash flow techniques Capital budgeting

E. F. G. H.

Annual rate of return method Cash payback technique Cost of capital Net present value method

____

1. A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual cash inflow produced by the investment.

____

2. Capital budgeting techniques that consider 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. A method of comparing alternative projects that take into account both the size of the investment and its discounted cash flows.

____

5. A method used in capital budgeting that results in finding the interest yield of the potential investment.

____

6. The average rate of return that the firm must pay to obtain borrowed and equity funds.

____

7. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment.

____

8. The process of making capital expenditure decisions in business.

Ans: N/A, LO: 1-5,7, Bloom: K, Difficulty: Easy, Min: 4, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Matching 1. 2. 3. 4.

F C H A

5. 6. 7. 8.

B G E D

Planning for Capital Investments

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SHORT-ANSWER ESSAY QUESTIONS S-A E 194 Management uses several capital budgeting methods in evaluating projects for possible investment. Identify those methods that are more desirable from a conceptual standpoint, and briefly explain what features these methods have that make them more desirable than other methods. Also identify the least desirable method and explain its major weaknesses. Ans: N/A, LO: 2,3, Bloom: , Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics

Solution 194 From a conceptual standpoint, the discounted cash flow methods (net present value and internal rate of return) are considered more desirable because they consider both the estimated cash flows and the time value of money. The time value of money is critical because of the long-term impact of capital budgeting decisions. Capital budgeting methods which do not consider the time value of money include annual rate of return and cash payback. The cash payback method is the least desirable because it also ignores the expected profitability of the project. S-A E 195 Manny Perez is trying to understand the term "cost of capital." Define the term, and indicate its relevance to the decision rule under the annual rate of return technique. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics

Solution 195 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 196 (Ethics) Sam Stanton is on the capital budgeting committee for his company, Canton Tile. Ed Rhodes is an engineer for the firm. Ed expresses his disappointment to Sam that a project that was given to him to review before submission looks extremely good on paper. "I really hoped that the cost projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven't sent it on yet, though I probably should." "You can keep it if it's really that bad," assures Sam. "Anyway, you can probably get it shot out of the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those sessions. Your engineering genius need never know. He'll just think someone else's project was even better than his." Required: 1. Who are the stakeholders in this situation? 2. Is it ethical to adjust the figures to compensate for risk? Explain. 3. Is it ethical to change the proposal before submitting it? Explain. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Decision Analysis

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Test Bank for Accounting, Tools for Business Decision Making Fifth Edition

Solution 196 1. The stakeholders include: Ed Rhodes Canton Tile the engineer who submitted the proposal. 2. It is ethical, in general, to adjust projections to compensate for risk. However, it should be clearly stated that the projections have been adjusted for risk, and the method used should be available for review. Otherwise, the entire selection process is undermined, and it becomes entirely subjective. 3. It is probably not ethical to modify a proposal at all; certainly not in the way described. The person submitting the proposal should have the right to know about any changes that were made, and should have the right to review those changes. S-A E 197

(Communication)

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows:

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, LO: 3, Bloom: , Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Quantitative Methods

Solution 197 The company should accept Option #1, to purchase upgrades to its present system and to buy a more efficient printer. In the first place, the changes will be easier to implement because the equipment is similar to that which is already in use. Secondly, the company will have less money invested in the project, which decreases the risk of loss should the project fail. Option #2 appears to be too risky.

APPENDIX D TIME VALUE OF MONEY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4.

1 1 1 1

K K K K

5. 6. 7. 8.

2 2 3 3

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

1 1 1 1 2 2 2,3 2 2 2 2 2

K K AP C AP AP AP K AP K K AP

33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

3 3 3 3 3 3 3 4 4 4 5 5

80. 81. 82. 83.

2 2 2,3 2,3

AP AP AP AP

84. 85. 86. 87.

3 3 5 5

98. 99.

1 2

K K

100. 101.

3 3

106.

1-6

Item

True-False Statements K 9. 4 K 13. K 10. 4 K 14. K 11. 5 K 15. K 12. 5 K 16. Multiple Choice Questions AP 45. 5 AP 57. AP 46. 5 AP 58. K 47. 5 K 59. AP 48. 5 AP 60. C 49. 5 AP 61. AP 50. 5 AP 62. K 51. 5 C 63. K 52. 5 AP 64. K 53. 5 AP 65. K 54. 5 AP 66. AP 55. 5 AP 67. AP 56. 5 AP 68. Brief Exercises AP 88. 5 AP 92. AP 89. 5 AP 93. AP 90. 6 AP 94. AP 91. 6 AP 95. Completion Statements K 102. 4 K 104. K 103. 5 K 105. Matching

Item

6 6 6 6

K K K K

17. 18. 19. 20.

7 7 7 7

K C K K

5 5 5 5 6 6 6 6 6 7 6 6

AP AP AP AP AP AP AP AP K AP AP AP

69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

6 7 7 7 7 7 7 7 7 7 7

AP AP AP K K K K AP AP AP AP

6,7 6,7 7 7

AP AP AP AP

96. 97.

7 7

AP AP

6 7

K K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

1. 2.

TF TF

3. 4.

TF TF

21. 22.

MC MC

23. 24.

MC MC

98.

MC Be Be

82.

83.

MC Be Be

84.

85.

100.

Item

Type

99.

101.

Learning Objective 2

5. 6. 25.

TF TF MC

26. 27. 28.

MC MC MC

29. 30. 31.

MC MC MC

32. 80. 81.

Learning Objective 3

7. 8. 27.

TF TF MC

33. 34. 35.

MC MC MC

36. 37. 38.

MC MC MC .

39. 82. 83.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

D-2

Learning Objective 4 Item

Type

Item

Type

10.

Item

40.

Type

Item

Type

41.

Item

Type

Item

Type

102.

42.

MC MC MC MC MC

86.

87. 88. 89. 103.

Be Be Be C

MC MC MC

69.

92.

90. 91.

Be Be

93.

MC MC Be Be

96.

97. 105.

Be C

Learning Objective 5

11. 12. 43. 44. 45.

TF TF MC MC MC

46. 47. 48. 49. 50.

MC MC MC MC MC

51. 52. 53. 54. 55.

MC MC MC MC MC

56. 57. 58. 59. 60.

Learning Objective 6

13. 14. 15.

TF TF TF

16. 61. 62.

TF MC MC

63. 64. 65.

MC MC MC

66. 67. 68.

Learning Objective 7

17. 18. 19. 20.

TF TF TF TF

70. 71. 72. 73.

MC MC MC MC

Note: TF = True-False MC = Multiple Choice Ma = Matching

74. 75. 76. 77.

MC MC MC MC

78. 79. 94. 95.

C = Completion Ex = Exercise

CHAPTER LEARNING OBJECTIVES 1. Distinguish between simple and compound interest. Simple interest is computed on the principal only while compound interest is computed on the principal and any interest earned that has not been withdrawn. 2. Solve for future value of a single amount. Prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. 3. Solve for future value of an annuity. Prepare a time diagram of the problem. Identify the amount of the periodic payments, the number of compounding periods, and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of periods and the interest rate. 4. Identify the variables fundamental to solving present value problems. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). 5. Solve for present value of a single amount. Prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. .

Time Value of Money

D-3

6. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of discounting periods, and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. 7. Compute the present value of notes and bonds. Determine the present value of the principal amount: Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Determine the present value of the series of interest payments: Multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond.

TRUE-FALSE STATEMENTS 1.

Interest is the difference between the amount borrowed and the principal.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Compound interest is computed on the principal and any interest earned that has not been withdrawn.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The amount of interest involved in any financing transaction is based on two elements, principal and interest rate.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Compound interest uses the accumulated balance—principal plus interest to date—at each year-end to compute interest in the succeeding year.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The formula for the future value of a single amount is p × (1 + i)/n.

Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The future value of a single amount is the value at a future date of a given amount invested assuming compound interest.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity of 1 table.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

D-4 8.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

In computing the future value of an annuity, it is necessary to know the interest rate, the number of compounding periods, and the amount of the periodic payments or receipts.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

The present value is based on two variables—the dollar amount to be received and the length of time until the amount is received.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

10.

The process of determining the present value is referred to as discounting the future amount.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

11.

A higher discount rate produces a higher present value.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

12.

The formula for the present value of a single amount is FV / (1 + i)N.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

13.

In computing the present value of an annuity, it is necessary to know only the discount rate and the amount of the periodic receipts or payments.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

14.

A series of equal periodic receipts or payments are called annuities.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

15.

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

16.

Discounting may be done on an annual basis or over shorter periods of time such as semiannually.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

17.

The present value of a bond is a function of two variables: (1) the payment amounts and (2) the discount rate.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

18.

When the discount rate is equal to the contractual rate, the present value of the bonds will equal the bonds' face value.

Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

19.

The present value of a long-term note is based on the payment amounts, the length of time until the amounts are paid, and the discount rate.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Time Value of Money

20.

D-5

To compute the present value of a bond, both the interest payments and the principal amount must be discounted using the bond’s contractual interest rate.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Answers to True-False Statements 1. 2. 3.

F T F

4. T 5. F 6. T

7. F 8. T 9. F

10. T 11. F 12. T

13. F 14. T 15. F

16. T 17. F 18. T

19. T 20. F

MULTIPLE CHOICE QUESTIONS Note: Students will need time value of money tables for some questions. 21.

Compound interest is the return on principal a. only. b. for one or more periods. c. for two or more periods. d. for one period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

22.

The difference between the amount borrowed (or invested) and the amount repaid (or collected) is commonly known as a. simple interest. b. an annuity. c. interest d. present value.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

23.

Ken Corsig invested $20,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Ken withdrew the accumulated amount of money. What amount did Ken withdraw, assuming the investment earns simple interest? a. $25,600 b. $44,000 c. $30,000 d. $24,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($20,000  .08  15) + $20,000

D-6 24.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Parks Blair invested $5,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to withdraw the accumulated amount of money. Parks has found the following values in various tables related to the time value of money. Present value of 1 for 15 periods at 8% 0.31524 Future value of 1 for 15 periods at 8% 3.17217 Present value of an annuity of 1 for 15 periods at 8% 8.55948 Future value of an annuity of 1 for 15 periods at 8% 27.15211 Which factor would he use to compute the amount he would withdraw, assuming that the investment earns interest compounded annually? a. 0.31524 b. 3.17217 c. 8.55948 d. 27.15211

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

25.

Parks Blair invested $5,000 at 8% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to withdraw the accumulated amount of money. Parks has found the following values in various tables related to the time value of money. Present value of 1 for 15 periods at 8% 0.31524 Future value of 1 for 15 periods at 8% 3.17217 Present value of an annuity of 1 for 15 periods at 8% 8.55948 Future value of an annuity of 1 for 15 periods at 8% 27.15211 To the closest dollar, which amount would he withdraw, assuming that the investment earns interest compounded annually? a. $42,797 b. $75,000 c. $1,576 d. $15,861

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $5,000  3.17218

26.

Brenda Draper borrowed $120,000 on June 1, 2013. This amount plus accrued interest at 8% compounded annually is to be repaid on June 1, 2026. Brenda has obtained the following values related to the time value of money to help her with her financing process and compounded interest decisions. Present value of 1 for 13 periods at 8% 0.36770 Future value of 1 for 13 periods at 8% 2.71962 Present value of an annuity of 1 for 13 periods at 8% 7.90378 Future value of an annuity of 1 for 13 periods at 8% 21.49530 To the closest dollar, how much will Brenda have to repay on June 1, 2026? a. $44,124 b. $948,454 c. $261,554 d. $326,354

Time Value of Money

27.

D-7

Jim and Aneta O'Connor invested $12,000 in a savings account paying 5% annual interest when their son, Austin, was born. They also deposited $500 on each of his birthdays until he was 20 (including his 20th birthday). Jim and Aneta have obtained the following values related to the time value of money to help them with their planning process for their compounded interest decisions. Present value of 1 for 20 periods at 5% 0.37689 Future value of 1 for 20 periods at 5% 2.65330 Present value of an annuity of 1 for 20 periods at 5% 12.46221 Future value of an annuity of 1 for 20 periods at 5% 33.06595 To the closest dollar, how much was in the savings account on his 20th birthday (after the last deposit)? a. $33,166 b. $48,373 c. $22,000 d. $28,533

Ans: B, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($12,000  2.65330) + ($500  33.06595)

28.

The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

29.

If $30,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $25,644 b. $36,000 c. $35,096 d. $36,500 Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (30,000 X 1.21665 = $36,500).

30.

The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

31.

All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

D-8 32.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If $10,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $8,220 b. $12,000 c. $12,155 d. $12,167

33.

Common Ground Corporation issued $8,000,000, 10-year bonds and agreed to make annual sinking fund deposits of $620,000. The deposits are made at the end of each year into an account paying 6% annual interest. Common Ground has the following values related to the time value of money and compounded interest decisions. Present value of 1 for 10 periods at 6% 0.55839 Future value of 1 for 10 periods at 6% 1.79085 Present value of an annuity of 1 for 10 periods at 6% 7.36009 Future value of an annuity of 1 for 10 periods at 6% 13.18079 To the closest dollar, what amount will be in the sinking fund at the end of 10 years? a. $4,467,120 b. $4,563,256 c. $8,172,090 d. $12,800,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $620,000  13.18079

34.

If $13,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compound annually, what will be the balance of the account at the end of 10 years? a. $13,650 b. $211,757 c. $163,512 d. $136,500

35.

Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Time Value of Money

36.

D-9

SCI Company deposits $15,000 in a fund at the end of each year for 7 years. The fund pays interest of 3% compounded annually. The balance in the fund at the end of 7 years is computed by multiplying a. $15,000 by the future value of 1 factor. b. $75,000 by 1.07. c. $75,000 by 1.70. d. $15,000 by the future value of an annuity factor.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

37.

The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

38.

If $22,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $23,100 b. $231,000 c. $276,714 d. $303,600

39.

Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

40.

In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

41.

Present value is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. all of these answer choices are correct.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

D - 10 42.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond b. The determination of the declining-balance depreciation expense c. The determination of the amount to report for long-term notes payable d. The determination of the amount to report for lease liability

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

43.

If you are able to earn a 6% rate of return, what amount would you need to invest to have $6,500 one year from now? a. $6,011.79 b. $6,132.10 c. $5,817.50 d. $6,190.47

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $6,500  .94340

44.

If you are able to earn a 15% rate of return, what amount would you need to invest to have $6,500 one year from now? a. $6,435.65 b. $5,687.50 c. $5,525.00 d. $5,652.20

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $6,500  .86957

45.

If the single amount of $12,500 is to be received in 2 years and discounted at 11%, its present value is a. $11,363.75. b. $10,145.25. c. $11,261.25. d. $10,330.63.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $12,500  .81162

46.

If the single amount of $5,000 is to be received in 3 years and discounted at 6%, its present value is a. $4,198.10. b. $4,717.30. c. $4,450.00. d. $4,395.45.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $5,000  .83962

Time Value of Money

47.

D - 11

Which of the following discount rates will produce the smallest present value? a. 6% b. 7% c. 8% d. 3%

Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

48.

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 5% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,591,520. b. $2,518,860. c. $2,670,000. d. $3,000,000.

49.

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $2,000 for a down payment 5 years from now on a new Vintage Convertible Mustang is a. $400. b. $1,494.52. c. $1,492.44. d. $1,400.00.

50.

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $15,000 for your first tuition payment when you start college in 3 years is a. $13,350. b. $12,957.60. c. $12,594.30. d. $13,289.40.

51.

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

D - 12 52.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Mango Madness Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $40,000 Year 2 $30,000 Mango Madness requires a minimum rate of return of 10%. What is the maximum price Mango Madness should pay for this equipment? a. $61,157.10 b. $36,363.60 c. $70,000 d. $35,000

53.

If Jane Key invests $15,501.28 now and she will receive $40,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (FINANCIAL CALCULATOR INPUTS: N =11, I= ?, PV = -7,750.64, FV = 20,000, PMT = 0). Solution: (financial calculator inputs): N = 11, I =?, PV = 15,501.28, FV = 40,000, PMT = 0.

54.

Patrick Mazzeo has been offered the opportunity of investing $89,278.45 now. The investment will earn 8% per year and at the end of its life will return $250,000 to Patrick. How many years must Patrick wait to receive the $250,000? a. 1011 b. 1112 c. 1213 d. 1314

55.

Suppose you have a winning lottery ticket and you are given the option of accepting $7,000,000 three years from now or taking the present value of the $7,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $5,877,340. b. $6,046,880. c. $6,230,000. d. $7,000,000.

Time Value of Money

56.

D - 13

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $20,000 for a down payment 5 years from now on a new Ferrari 458 is a. $4,000.00. b. $14,945.20. c. $14,924.40. d. $14,000.00.

57.

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $18,000 for your first tuition payment when you start law school in 3 years is a. $15,300.00. b. $14,094.00. c. $15,549.12. d. $15,947.28.

58.

Akers Company is considering purchasing a machine. The machine will produce the following cash flows: Year 1 $30,000 Year 2 $45,000 Akers requires a minimum rate of return of 10%. What is the maximum price Akers should pay for this machine? a. $64,462.95 b. $27,272.70 c. $75,000.00 d. $37,500.00

59.

Koppernaes Corporation earns 12% on an investment that will return $1,350,000, 7 years from now. Below is some of the time value of money information that Koppernaes has compiled that might help in planning compounded interest decisions. Present value of 1 for 7 periods at 12% 0.45235 Future value of 1 for 7 periods at 12% 2.21068 Present value of an annuity of 1 for 7 periods at 12% 4.56376 Future value of an annuity of 1 for 7 periods at 12% 10.08901 To the closest dollar, what is the amount Koppernaes should invest now to earn this rate of return? a. $298,442 b. $610,673 c. $1,134,,000 d. $616,107

D - 14 60.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Dodd Company is considering an investment, which will return a lump sum of $675,000 four years from now. Below is some of the time value of money information that Dodd has compiled that might help in planning compounded interest decisions. Present value of 1 for 4 periods at 10% 0.68301 Future value of 1 for 4 periods at 10% 1.46410 Present value of an annuity of 1 for 4 periods at 10% 3.16986 Future value of an annuity of 1 for 4 periods at 10% 4.64100 To the closest dollar, what amount should Dodd Company pay for this investment to earn a 10% return? a. $405,000 b. $270,000 c. $461,032 d. $534,914

61.

Montz Company is considering investing in an annuity contract that will return $80,000 annually at the end of each year for 12 years. Montz has obtained the following values related to the time value of money to help in its planning process and compounded interest decisions. Present value of 1 for 12 periods at 9% 0.35554 Future value of 1 for 12 periods at 9% 2.81267 Present value of an annuity of 1 for 12 periods at 9% 7.16073 Future value of an annuity of 1 for 12 periods at 9% 20.14072 To the closest dollar, what amount should Montz Company pay for this investment if it earns a 9% return? a. $994,132 b. $1,185,014 c. $1,611,258 d. $572,858

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (40,000  7.16073 = $286,429). Solution: $80,000  7.16073

62.

Ando Company earns 11% on an investment that pays back $660,000 at the end of each of the next 5 years. Ando finance department has the following values related to the time value of money to help in its planning process and compounded interest decisions. Present value of 1 for 5 periods at 11% 0.59345 Future value of 1 for 5 periods at 11% 1.68506 Present value of an annuity of 1 for 5 periods at 11% 3.69590 Future value of an annuity of 1 for 5 periods at 11% 6.22780 To the closest dollar, what is the amount Ando invested to earn the 11% rate of return? a. $1,112,139 b. $391,677 c. $2,439,294 d. $178,577

Time Value of Money

63.

D - 15

Wiggins Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $50,000; Year 2, $90,000; Year 3, $130,000. Below is some of the time value of money information that Wiggins has compiled that might help them in their planning and compounded interest decisions. Present value of 1 Future value of 1 Present value of an annuity of 1 Future value of an annuity of 1

1 period, 11% 0.90090 1.11000 0.90090 1.00000

2 periods, 11% 0.81162 1.23210 1.71252 2.12000

3 periods, 11% 0.73119 1.36763 2.44371 3.37440

Wiggins requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Wiggins should pay for the equipment? a. $219,137 b. $213,146 c. $218,099 d. $208,499 Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions.((50,000  .90090) + (90,000  .81162) + (120,000  0.73119) = $205,834). Solution: ($50,000  .90090) + ($90,000  .81162) + ($130,000  .73119)

64.

Travis Tucker invests $10,655.04 now for a series of $1,500 annual returns beginning one year from now. Travis will earn 10% on the initial investment. How many annual payments will Travis receive? a. 10 b. 12 c. 13 d. 15

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. (CALCULATOR INPUTS: N = ?, I = 10%, PV = −21,310.08, PMT = 3,000, FV = 0). Solution: (financial calculator inputs): N = ?, I =10%, PV = 10,655.04, PMT = 1,500, FV = 0.

65.

In order to compute the present value of an annuity, it is necessary to know the 1. discount rate. 2. number of discount periods and the amount of the periodic payments or receipts. a. 1. b. 2. c. Both 1 and 2. d. Something in addition to 1 and 2.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions.

66.

A $30,000, 8%, 10-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations? a. 10 interest periods, 8% interest b. 40 interest periods, 8% interest c. 40 interest periods, 2% interest d. 10 interest periods, 2% interest

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

D - 16 67.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Porter Company has just purchased equipment that requires annual payments of $22,500 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $64,237 b. $90,000 c. $35,404 d. $81,107

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $22,500  2.85498

68.

Potter Company has purchased a patent that requires annual payments of $31,250 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the patent? a. $187,500 b. $128,482 c. $172,679 d. $120,469

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: $31,250  4.11141

69.

Mergenthaler Company has just purchased machinery that requires annual payments of $50,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $142,749 b. $200,000 c. $58,719 d. $225,201

70.

Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Glover expect to receive from the sale of these bonds? a. $2,768,338 b. $3,000,000 c. $3,243,315 d. $3,231,660

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .61391) + ($120,000  7.72173)

71.

Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 10%, payable semiannually. The discount rate for such securities is 8%. How much can Valente expect to receive from the sale of these bonds? a. $2,768,338 b. $3,000,000 c. $3,243,315 d. $3,231,660

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .67556) + ($150,000  8.11090)

Time Value of Money

72.

D - 17

If a bond has a contract rate of interest of 6%, but the discount rate of interest is 8%, the bond a. will sell at a discount (less than face value). b. will sell at a premium (more than face value). c. may sell at either a premium or a discount. d. will sell at its face value.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions.

73.

When determining the proceeds received when issuing a bond, the factor applied to the amount of the interest payments is determined from the table of the a. present value of 1. b. present value of an annuity of 1. c. future value of 1. d. future value of an annuity of 1.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

74.

When determining the proceeds received when issuing a bond, the factor applied to the amount of the bond principal is determined from the table of the a. present value of 1. b. present value of an annuity 1. c. future value of 1. d. future value of an annuity 1.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

75.

If a bond has a contract rate of 10% and is discounted at 10%, then the proceeds received at issuance will be a. equal to the face value of the bonds. b. greater than the face value of the bonds. c. less than the face value of the bonds. d. zero.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

76.

Rhode Company is about to issue $4,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Rhode expect to receive from the sale of these bonds? a. $3,691,117 b. $4,000,000 c. $4,324,440 d. $3,308,880

D - 18 77.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Hale Corporation issues an 8%, 9-year mortgage note on January 1 2014, to obtain financing for new equipment. The terms provide for semiannual installment payments of $32,900. The following values related to the time value of money were available to Hale to help them with their planning process and compounded interest decisions. Present value of 1 for 9 periods at 8% 0.50025 Present value of 1 for 18 periods at 4% 0.49363 Future value of 1 for 9 periods at 8% 1.99900 Future value of 1 for 18 periods at 4% 2.02582 Present value of an annuity of 1 for 9 periods at 8% 6.24689 Present value of an annuity of 1 for 18 periods at 4% 12.65930 Future value of an annuity of 1 for 9 periods at 8% 12.48756 Future value of an annuity of 1 for 18 periods at 4% 25.64541 To the closest dollar, what were the cash proceeds received from the issuance of the note? a. $205,523 b. $236,880 c. $416,491 d. $410,841

78.

Chenard Company is about to issue $3,000,000 of 8-year bonds paying a 12% interest rate with interest payable semiannually. The discount rate for such securities is 10%. Below are time value of money factors that Chenard uses to calculate compounded interest.

Present value 1 Future value 1 Present value of an annuity of 1 Future value of an annuity of 1

8 periods, 10% 0.46651 2.14359 5.33493 11.43589

16 periods, 5% 0.45811 2.18287 10.83777 23.65749

8 periods, 12% 0.40388 2.47596 4.96764 12.29969

16 periods, 6% 0.39365 2.54035 10.10590 25.67253

To the closest dollar, how much can Chenard expect to receive for the sale of these bonds? a. $3,193,390 b. $2,293,710 c. $3,325,130 d. $5,400,000 Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($3,000,000  .45811) + ($180,000  10.83777)

Time Value of Money

79.

D - 19

Patterson Company is about to issue $8,000,000 of 10-year bonds paying an 8% interest rate with interest payable semiannually. The discount rate for such securities is 10%. Below are time value of money factors that Patterson uses to calculate compounded interest. 10 periods, 8% 0.46319 2.15892 6.71008 14.48656

Present value 1 Future value 1 Present value of an annuity of 1 Future value of an annuity of 1

20 periods, 4% 0.45639 2.19112 13.59033 29.77808

10 periods, 10% 0.38554 2.59374 6.14457 15.93743

20 periods, 5% 0.37689 2.65330 12.46221 33.06595

To the closest dollar, how much can Patterson expect to receive for the sale of these bonds? a. $7,003,027 b. $5,852,740 c. $16,000,000 d. $28,110,060 Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions. Solution: ($8,000,000  .37689) + ($320,000  12.46221)

Answers to Multiple Choice Questions 21. c 22. c 23. b 24. b 25. d 26. d 27. b 28. a 29. d

30. 31. 32. 33. 34. 35. 36. 37. 38.

b d d c c b d b c

39. 40. 41. 42. 43. 44. 45. 46. 47.

d d d b b d b a c

48. 49. 50. 51. 52. 53. 54. 55.

a b b a a c d a

56. 57. 58. 59. 60. 61. 62. 63.

b c a b c d c b

64. 65. 66. 67. 68. 69. 70. 71.

c c c a b a a c

72. 73. 74. 75. 76. 77. 78. 79.

a b a a a c c a

BRIEF EXERCISES Be. 80 David Jones deposited $6,500 in an account paying interest of 5% compounded annually. What amount would be in the account at the end of 4 years? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 80

(5 min.)

Use future value of 1 table data. $6,500 × 1.21551 (4 periods and 5%) = $7,900.82 Be. 81 Balentyne Company borrowed $95,000 on January 2, 2014. This amount plus accrued interest of 5% compounded annually will be repaid at the end of 3 years. What amount will Balentyne repay at the end of the third year? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

D - 20

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 81

(5 min.)

Use future value of 1 table data. $95,000 × 1.15763 (3 periods and 5%) = $109,974.85 Be. 82 Fischer Company has decided to begin accumulating a fund for plant expansion. The company deposited $20,000 in a fund on January 2, 2012. Fischer will also deposit $60,000 annually at the end of each year, starting in 2012. The fund pays interest at 5% compounded annually. What is the balance of the fund at the end of 2016 (after the 2016 deposit)? Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 82

(8 min.)

Use future value of 1 table data and future value of an annuity of 1 table data. $20,000 × 1.27628 (5 periods and 5%; future value of 1) = $25,525.60 $60,000 × 5.52563 (5 periods and 5%; Use future value of an annuity of 1 table) = $331,537.80 Fund Balance at 12-31-16 $357,063.40 Be. 83 Gwen and Steve Jones Jeter invested $10,000 in a savings account paying 4% annual interest when their daughter, Larrisa was born. They also deposited $5,000 on each of her birthdays until she was 18 (including her 18th birthday). How much was in the savings account on her 18th birthday (after the last deposit)? Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 83

(8 min.)

FV = p  FV of 1 factor + (p  FV of an annuity factor) = ($10,000  2.02582) + ($5,000  25.64541) = $20,258.20 + $128,227.05 = $148,485.25 Be. 84 Winek Company deposited $12,500 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 84

(5 min.)

Use future value of an annuity of 1 table data. $12,500 × 6.80191 (6 periods and 5%) = $85,023.88 Be. 85 Toub Company issued $4,000,000, 10-year bonds and agreed to make annual deposits of $303,500 to a fund. The deposits are made at the end of each year to a fund paying 6% interest compounded annually. What amount will be in the fund at the end of the 10 years? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Time Value of Money

Solution 85

D - 21

(5 min.)

Use future value of an annuity of 1 table data. $303,500 × 13.18079 (10 periods and 6%) = $4,000,369.70 Be. 86 (a) (b)

What is the present value of $32,000 due 7 years from now, discounted at 8%? What is the present value of $70,000 due 5 years from now, discounted at 15%?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 86

(8 min.)

Use present value of 1 table data. (a) $32,000 × 0.58349 (7 periods and 8%) = $18,671.68 (b) $70,000 × 0.49718 (5 periods and 15%) = $34,802.60 Be. 87 Sauls Company is considering an investment that will return a lump sum of $1,250,000 six years from now. What amount should Sauls Company pay for this investment to earn a 12% return? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 87

(5 min.)

Use present value of 1 table data. $1,250,000 × 0.50663 (6 periods and 12%) = $633,288 Be. 88 Lewis Company earns 12% on an investment that will return $500,000 eleven years from now. What is the amount that Lewis Company should invest now to earn this rate of return? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 88

(5 min.)

Use present value of 1 table data. $500,000 × 0.28748 (11 periods and 12%) = $143,740 Be. 89 If Claude Summers invests $14,962.50 now, she will receive $50,000 at the end of 14 years. What annual rate of return will Claude earn on his investment? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 89

(5 min.)

Use present value of 1 table data. Answer: 9% $14,962.50 ÷ $50,000 = 0.29925 Read across the 14-period row in the present value of 1 table to find 0.29925 in the 9% column.

D - 22

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 90 Wando Company is considering investing in an annuity contract that will return $55,000 annually at the end of each year for 20 years. What amount should Wando Company pay for this investment if it earns a 6% return? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 90

(5 min.)

Use present value of an annuity of 1 table data. $55,000 × 11.46992 (20 periods and 6%) = $630,846 Be. 91 Kenny Corsig purchased an investment for $9,818.15. From this investment, he will receive $1,000 annually for the next 20 years starting one year from now. What rate of interest will Kenny be earning on his investment? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 91

(5 min.)

Use present value of an annuity of 1 table data. Answer: 8% ($9,818.15 ÷ $1,000) = 9.81815 Read across the 20-period row in present value of an annuity of 1 to find 9.81815 in the 8% column. Be. 92 Sebastian Hale owns a garage and is contemplating purchasing a tire retreading machine for $18,150. After estimating costs and revenues, Sebastian projects a net cash flow from the retreading machine of $3,300 annually for 8 years. Sebastian hopes to earn a return of 10 percent on such investments. What is the present value of the retreading operation? Should Sebastian purchase the retreading machine? Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 92

(8 min.) i = 10% ? $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300

Discount rate from present value of an annuity of 1 table is 5.33493. Present value of 8 payments of 3,300 each discounted at 10% is therefore $17,605.27 ($3,300  5.33493). Sebastian Hale should not purchase the tire retreading machine because the present value of the future cash flows is less than the $18,150 purchase price of the retreading machine.

Time Value of Money

D - 23

Be. 93 Appalachian Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $50,000; Year 2, $60,000; Year 3, $75,000. Appalachian requires a minimum rate of return of 10%. What is the maximum price Appalachian should pay for this equipment? Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 93

(8 min.) i = 10% ?

$50,000

$60,000 $75,000

To determine the present value of the future cash flows, discount the future cash flows at 10%, using present value of 1 table data. Year 1 ($50,000  0.90909) = Year 2 ($60,000  0.82645) = Year 3 ($75,000  0.75132) = Present value of future cash flows

$45,454.50 49,587.00 56,349.00 $151,390.50

To achieve a minimum rate of return of 10%, Appalachian Company should pay no more than $151,390.50. If Appalachian pays less than $151,390.50 its rate of return will be greater than 10%. Be. 94 Tweetsie Railroad Co. is about to issue $800,000 of 10-year bonds paying a 9% interest rate, with interest payable semianually. The discount rate for such securities is 10%. How much can Tweetsie expect to receive for the sale of these bonds? Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 94

(8 min.)

The bonds will set at a discount (for less than $800,000). This may be proven as follows: Present value of principal to be received at maturity: $800,000 × 0.37689 (PV of $1 due in 20 periods at 5% from present value of 1 table data) ..........................................

$301,512

Present value of interest to be received periodically over the term of the bonds: $36,000 × 12.46221 (PV of $1 due each period for 20 periods at 5% from present value of an annuity of 1 table) .......................................

448,640

Present value of bonds .............................................................................

$750,152*

*Rounded.

D - 24

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Be. 95 The Chocolate Tree Company receives a $150,000, 6-year note bearing interest of 6% (paid annually) from a customer at a time when the discount rate is 8%. What is the present value of the note received by The Chocolate Tree? Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 95

(8 min.) i = 8% ? Diagram for Principal

$150,000

i = 8% ? $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 Diagram for Interest 0

Present value of principal to be received at maturity: $150,000 × 0.63017 (PV of $1 due in 6 periods at 8% from present value of 1 table) ..................................................

$94,525.50

Present value of interest to be received annually over the term of the note: $9,000 × 4.62288 (PV of $1 due each period for 6 periods at 8% from present value of an annuity of 1 table) .......................................

41,605.92

Present value of note received ..................................................................

$136,131.42

Be. 96 Beaufort Company issued $400,000, 10%, 2-year bonds that pay interest semiannually. Compute the amount at which the bonds would sell if investors required a rate of return of 8%. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 96

(8 min.)

Present value of the principal: $400,000 × 0.85480 (Present value of 1, 4 periods - 4%) Present value of the interest payments: $400,000 × 0.05 = $20,000 $20,000 × 3.62990 (Present value of an annuity of 1, 4 periods - 4%) Proceeds from issuance of bonds

$341,920

72,598 $414,518

Time Value of Money

D - 25

Be. 97 SBB Company issued 11%, 5-year, $600,000 face value bonds that pay interest semi-annually on October 1 and April 1. The bonds are dated April 1, 2014, and are issued on that date. The discount rate of interest for such bonds on April 1, 2014, is 10%. What cash proceeds did SBB Company receive from issuance of the bonds? Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 97

(8 min.)

Present value of the interest payments: $600,000 × 11% x 6/12 = $33,000 $33,000 × PV of 1 due periodically for 10 periods at 5% $33,000 × 7.72173 (Present value of an annuity of 1) = $254,817.09 Present value of the principal: $600,000 × PV of 1 due in 10 periods at 5% $600,000 × 0.61391 (Present value of 1) = $368,346 Proceeds = $254,817.09 + $368,346.00 = $623,163.09

COMPLETION STATEMENTS 98.

Compound interest is computed on the_____________ and on any _______________ earned that has not been paid or withdrawn.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

99.

The future value of a ________________ is the value at the future date of a given amount invested, assuming compound interest.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

100.

Payments or receipts of equal dollar amounts are referred to as __________________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

101.

The _____________________ of an annuity is the sum of all the payments plus the accumulated compound interest on them.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

102.

The process of determining the present value is referred to as _________________ the future amount.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

103.

The further removed from the present the future value is, the smaller the ____________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

D - 26 104.

In computing the present value of an annuity, it is necessary to know the _____________ rate and the _____________ of discount periods.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

105.

To compute the present value of a bond, both the _______________ payments and the ________________ amount must be discounted.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Answers to Completion Statements 98. 99. 100. 101.

principal, interest single amount annuities future value

102. 103. 104. 105.

discounting present value discount, number interest, principal

MATCHING 106.

Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity

D. Present value of a single amount E. Present value of an annuity

_____ 1. The value today of a future amount to be received or paid. _____ 2. The value at a future date of a given amount invested. _____ 3. Return on principal for two or more periods. _____ 4. Value today of a series of future amounts to be received or paid. _____ 5. The sum of all the payments or receipts plus the accumulated compound interest on them. Ans: N/A, LO: 1-7, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

Answers to Matching 1. D 2. B 3. A

4. E 5. C

APPENDIX E REPORTING AND ANALYZING INVESTMENTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5. 6. 7. 8.

1 1 1 1 1 2 2 2

K K K K K K K K

9. 10. 11. 12. 13. 14. 15. 16.

2 2 3 3 3 3 3 3

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.

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 2

K K K K K K K K AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP AP

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.

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 3

169. 170.

2 3

AP AP

171. 172.

3 3

175. 176. 177.

2 2 2, 3

AP AP AP

178. 179. 180.

3 3 3

190. 191. 192.

1 2 3

K K K

193. 194. 195.

3 3 4

Item

True-False Statements C 17. 3 C 25. K 18. 3 K 26. C 19. 3 C 27. K 20. 3 K 28. K 21. 3 K 29. C 22. 3 C 30. K 23. 3 K 31. C 24. 4 K 32. Multiple Choice Questions AP 93. 3 AP 119. AP 94. 3 K 120. AP 95. 3 C 121. AP 96. 3 C 122. AP 97. 3 K 123. K 98. 3 C 124. AP 99. 3 K 125. K 100. 3 K 126. AP 101. 3 K 127. AP 102. 3 K 128. AP 103. 3 K 129. AP 104. 3 C 130. AP 105. 3 K 131. K 106. 3 AP 132. AP 107. 3 AP 133. K 108. 3 AP 134. AP 109. 3 AP 135. AP 110. 3 AP 136. K 111. 3 AP 137. AP 112. 3 AP 138. AP 113. 3 AP 139. AP 114. 3 AP 140. AP 115. 3 K 141. AP 116. 3 K 142. AP 117. 3 K 143. AP 118. 3 K 144. Brief Exercises AP 173. 3 AP AP 174. 5 AP Exercises AP 181. 3 AP 184. AP 182. 3 AP 185. AP 183, 3 AP 186. Completion Statements K 196. 5 K 199. AP 197. 5 K 200. K 198. 5 K 201.

Item

4 4 5 5 5 5 5 5

K K C C K K K C

33. 34. 35. 36. 37. 38. 39. 40.

5 5 5 5 6 6 6 6

K C C C K K K K

3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5

K C C C C AP K K AP AP AP K K K K K C K C K K AP K K K AP

145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6

AP AP AP K C K C K K AP AP AP AP K AP AP K C C K K K K K

3 3 3, 5

AP AP AP

187. 188. 189.

3, 5, 3, 5, 5, 6

AP AP AP

5 5 6

K K K

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-2

Matching 202.

1-6

203. 204.

1 3

K K

205. 206.

3 3

C C

Short-Answer Essay 207. 4 C 209. 208. 5 K 210.

5 5

C C

211. 212.

5 5

E C

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item 1. 2. 3.

Type TF TF TF

Item 4. 5. 41.

Type TF TF MC

6. 7. 8. 9. 10. 48. 49.

TF TF TF TF TF MC MC

50. 51. 52. 53. 54. 55. 56.

MC MC MC MC MC MC MC

11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 75. 76. 77.

TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC

78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

24. 25. 26.

TF TF TF

130. 131. 132.

MC MC MC

Learning Objective 1 Item Type Item Type 42. MC 45. MC 43. MC 46. MC 44. MC 47. MC Learning Objective 2 57. MC 64. MC 58. MC 65. MC 59. MC 66. MC 60. MC 67. MC 61. MC 68. MC 62. MC 69. MC 63. MC 70. MC Learning Objective 3 94. MC 110. MC 95. MC 111. MC 96. MC 112. MC 97. MC 113. MC 98. MC 114. MC 99. MC 115. MC 100. MC 116. MC 101. MC 117. MC 102. MC 118. MC 103. MC 119. MC 104. MC 120. MC 105. MC 121. MC 106. MC 122. MC 107. MC 123. MC 108. MC 124. MC 109. MC 125. MC Learning Objective 4 133. MC 136. MC 134. MC 195. C 135. MC 202. Ma

Item 190. 202. 203.

Type C Ma SA

Item

Type

71. 72. 73. 74. 169. 175. 176.

MC MC MC MC Be Ex Ex

177. 191. 202.

Ex C Ma

126. 127. 128. 129. 170. 171. 172. 173. 177. 178. 179. 180. 181. 182. 183. 184.

MC MC MC MC Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex

185. 186. 187. 188. 192. 193. 194. 202. 204. 205. 206.

Ex Ex Ex Ex C C C Ma SA SA SA

207.

Reporting and Analyzing Investments

Item 27. 28. 29. 30. 31. 32. 33. 34. 35.

Type TF TF TF TF TF TF TF TF TF

Item 36. 137. 138. 139. 140. 141. 142. 143. 144.

Type TF MC MC MC MC MC MC MC MC

37. 38.

TF TF

39. 40.

TF TF

Note: TF = True-False MC = Multiple Choice Ma = Matching

Learning Objective 5 Item Type Item Type 145. MC 154. MC 146. MC 155. MC 147. MC 156. MC 148. MC 157. MC 149. MC 158. MC 150. MC 159. MC 151. MC 160. MC 152. MC 161. MC 153. MC 162. MC Learning Objective 6 163. MC 165. MC 164. MC 166. MC

E-3

Item 174. 186. 187. 188. 189. 196. 197. 198. 199.

Type Be Ex Ex Ex Ex C C C C

Item 200. 202. 208. 209. 210. 211. 212.

Type C Ma SA SA SA SA SA

167. 168.

MC MC

201. 202.

C Ma

C = Completion Ex = Exercise

CHAPTER LEARNING OBJECTIVES 1. Identify the reasons corporations invest in stocks and debt securities. Corporations invest for three common reasons: (a) They have excess cash. (b) They view investment income as a significant revenue source. (c) They have strategic goals such as gaining control of a competitor or supplier or moving into a new line of business. 2. Explain the accounting for debt investments. Entries for investments in debt securities are required when companies purchase bonds, receive or accrue interest, and sell bonds. 3. Explain the accounting for stock investments. Entries for investments in common stock are required when companies purchase stock, receive dividends, and sell stock. When ownership is less than 20%, the cost method is used–the investment is recorded at cost. When ownership is between 20% and 50%, the equity method should be used–the investor records its share of the net income of the investee in the year it is earned. When ownership is more than 50%, consolidated financial statements should be prepared. 4. Describe the purpose and usefulness of consolidated financial statements. When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. These statements are especially useful to the stockholders, board of directors, and management of the parent company. 5. Indicate how debt and stock investments are valued and reported in the financial statements. Investments in debt and stock securities are classified as trading, available-forsale, or held-to-maturity for valuation and reporting purposes. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Available-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. .

E-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

6. Distinguish between short-term and long-term investments. Short-term investments are securities held by a company that are readily marketable and intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.

TRUE-FALSE STATEMENTS 1.

Corporations purchase investments in debt or equity securities generally for one of two reasons.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance

A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Ans: T , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance

Pension funds and mutual funds are corporations that regularly invest for strategic reasons.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance

The purchase of a company that is in the same industry, but involved in a different activity, is called a vertical acquisition.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Corporate Finance

When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance

In accordance with the historical cost principle, brokerage fees should be added to the cost of an investment.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The accounting for short-term debt investments and for long-term debt investments is similar.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Investments

10.

E-5

Debt investments are investments in government and corporation bonds.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

Dividends received on investments are accounted for in the same way under the cost and the equity method.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14.

If the cost method is used to account for an investment in stock, the Stock Investments account is increased by the amount of dividends received during the period.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

Under the equity method the investor records a proportionate share of the investee’s income in the year when it is earned.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16.

When the cost method is used to account for an investment in stock, dividends received are accounted for as a reduction in the investment account.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17.

Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18.

If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

Ans: T, LO: 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 Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

E-6 21.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

23.

In accounting for stock investments of less than 20%, the equity method is typically used.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

24.

Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26.

Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27.

If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28.

The Fair Value Adjustment account can only have a credit balance or a zero balance.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

Unrealized gains and losses are recognized on trading securities.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30.

Trading securities are valued on the balance sheet at market value.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31.

Unrealized gains and losses on available-for-sale securities are reported on the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32.

The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Reporting and Analyzing Investments

33.

E-7

An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34.

For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35.

The account Fair Value Adjustment-Trading appears as a contra account in the income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36.

A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

37.

To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

38.

An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39.

An investment is readily marketable if it is management's intent to sell the investment.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

Stocks traded on the New York Stock Exchange are considered readily marketable.

Ans: T, LO: 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 True-False Statements 1. 2. 3. 4. 5. 6. 7.

F T F T F T F

8. 9. 10. 11. 12. 13. 14.

T F T F F T F

15. 16. 17. 18. 19. 20. 21.

T F T T T T F

22. 23. 24. 25. 26. 27. 28.

F F F F T F F

29. 30. 31. 32. 33. 34. 35.

T T F T F T F

36. 37. 38. 39. 40.

T T F F T

E-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

MULTIPLE CHOICE QUESTIONS 41.

Corporations invest in other companies for all of the following reasons except to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. increase trading of the other companies’ stock.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

42.

When investing excess cash for short periods of time, corporations invest in a. stocks of companies in a related industry. b. debt securities. c. low-risk, highly liquid securities. d. stock securities.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Investment Decisions

43.

The purchase of a company that is in the same industry but involved in a different activity is called a a. controlling acquisition. b. horizontal acquisition. c. parent acquisition. d. vertical acquisition.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

44.

The purchase of a company that is in the same industry and involved in the same activity is called a a. controlling acquisition. b. horizontal acquisition. c. parent acquisition. d. vertical acquisition.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

45.

Why do corporations generally invest in debt or equity securities? a. They have excess cash. b. They want to generate earnings from investment income. c. They invest for strategic reasons. d. All of these answer choices are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

46.

Why do pension and mutual funds invest in debt and equity securities? a. They have excess cash. b. They want to generate earnings from investment income. c. They invest for strategic reasons. d. They invest for speculative reasons.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

Reporting and Analyzing Investments

47.

E-9

Which is not a strategic reason to invest? a. There has been a change in the economic climate. b. To establish a presence in a related industry. c. To exercise some influence over a customer or supplier. d. To enter a new industry without starting from scratch.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

48.

Which of the following is a debt security? a. IBM stock. b. Treasury stock. c. Treasury bills. d. None of these answer choices are correct.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

49.

Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. The journal entry to record this investment includes a debit to a. Debt Investments for $88,000. b. Debt Investments for $80,000. c. Cash for $80,000. d. Stock Investments for $80,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

50.

Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. Assume Dodd’s pays interest semiannually and the July 1 entry was done correctly. Mazzeo’s journal entry at December 31, 2014 would include a credit to a. Interest Receivable for $4,000. b. Interest Revenue for $8,000. c. Interest Expense for $8,000. d. Interest Revenue for $4,000.

51.

Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. If Mazzeo sells all of its Dodd’s Bonds for $78,400 what gain or loss is recognized? a. Loss of $9,600 b. Loss of $1,600 c. Gain of $1,600 d. Gain of $9,600

E-10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

52.

At the time of acquisition of a debt investment a. no journal entry is required. b. the historical cost principle applies. c. the Stock Investments account is debited when bonds are purchased. d. the investment account is credited for its cost plus brokerage fees.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

53.

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on July 1, 2014, is a. Cash 20 Interest Revenue 20 b. Cash 40 Interest Revenue 40 c. Interest Receivable 20 Interest Revenue 20 d. Interest Receivable 40 Interest Revenue 40

54.

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The adjusting entry on December 31, 2014, is a. not required. b. Cash 20 Interest Revenue 20 c. Interest Receivable 20 Interest Revenue 20 d. Interest Receivable 20 Debt Investments 20

55.

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 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

Reporting and Analyzing Investments

56.

E-11

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the receipt of interest on July 1, 2014, is a. Cash 60 Interest Revenue 60 b. Cash 30 Interest Revenue 30 c. Interest Receivable 30 Interest Revenue 30 d. Interest Receivable 60 Interest Revenue 60

57.

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The adjusting entry on December 31, 2014, is a. not required. b. Cash 30 Interest Revenue 30 c. Interest Receivable 30 Interest Revenue 30 d. Interest Receivable 30 Debt Investments 30

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .03 = $30

58.

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 is a. Cash 60 Interest Revenue 60 b. Cash 60 Interest Receivable 60 c. Cash 30 Interest Revenue 30 d. Cash 30 Interest Receivable 30

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .03 = $30

E-12 59.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The adjusting entry on June 30, 2014, is a. not required. b. Cash 35 Interest Revenue 35 c. Interest Receivable 35 Interest Revenue 35 d. Interest Receivable 35 Debt Investments 35

60.

On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The adjusting entry on December 31, 2014, is a. not required. b. Cash 70 Interest Revenue 70 c. Interest Receivable 70 Interest Revenue 70 d. Interest Receivable 70 Debt Investments 70

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .07 = $70

61.

On January 1, 2014, Tri-State Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 is a. Cash 70 Interest Revenue 70 b. Cash 70 Interest Receivable 70 c. Cash 35 Interest Revenue 35 d. Cash 35 Interest Receivable 35

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .07 = $70

62.

Vangaurd Co. purchased 50, 6% McLaughlin Company bonds for $50,000 cash. Interest is payable semiannually on July 1 and January 1. The entry to record the purchase would include debit to a. Debt Investments for $51,500. b. Cash for $53,000. c. Debt Investments for $50,000. d. Stock Investments for $50,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Investments

63.

E-13

Charleston Co. purchased 60, 6% APS Company bonds for $60,000 cash. 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 $1,800. b. credit to Interest Revenue for $1,800. c. credit to Interest Revenue for $3,600. d. credit to Debt Investments for $1,800.

64.

Charleston Co. purchased 60, 6% APS Company bonds for $60,000 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 $1,800. b. debit to Interest Revenue for $1,800. c. credit to Interest Revenue for $3,600. d. debit to Debt Investments for $1,800.

65.

Cedar Co. purchased 120, 6% LKN Company bonds for $120,000 cash. Interest is payable semiannually on July 1 and January 1. If 60 of the securities are sold July 1 for $61,500 the entry would include a credit to Gain on Sale of Debt Investments of a. $1,000. b. $1,800. c. $3,600. d. $1,500.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 $120,000   = $1,500 2  

Solution: $61,500 − 

66.

On January 1, Vega Company purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,080 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 1,080 Debt Investments 1,080 b. Cash 1,100 Debt Investments 1,000 Gain on Sale of Debt Investments 80 Interest Revenue 20 c. Cash 1,100 Debt Investments 1,080 Interest Revenue 20 d. Cash 1,100 Debt Investments 1,000 Interest Revenue 100

E-14 67.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, U.K. Enterprise purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on September 1 for $1,100 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,100 Debt Investments 1,100 b. Cash 1,100 Debt Investments 1,000 Gain on Sale of Debt Investments 100 Interest Revenue 10 c. Cash 1,110 Debt Investments 1,100 Interest Revenue 10 d. Cash 1,100 Debt Investments 1,000 Interest Revenue 160

68.

On January 1, Connid Company purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1 and July 1. What is the entry to record the interest payment on July 1? a. Cash 80 Debt Investments 80 b. Cash 80 Interest Revenue 80 c. Cash 40 Interest Revenue 40 d. Cash 40 Debt Investments 40

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .09 = $40

69.

On January 1, Belvedere Company purchased as an investment a $1,000, 7% bond for $1,000. 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 70 Interest Revenue 70 b. Debt Investments 35 Interest Revenue 35 c. Interest Receivable 35 Interest Revenue 35 d. Debt Investments 25 Interest Revenue 25

Reporting and Analyzing Investments

70.

E-15

On January 1, Waverly Company purchased as an investment a $1,000, 6% bond for $1,000. 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 30 Interest Revenue 30 b. Debt Investments 30 Interest Revenue 30 c. Interest Receivable 60 Interest Revenue 60 d. Debt Investments 60 Interest Revenue 60

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .03 = $30

71.

On January 1, Bay View Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on September 1 for $1,050 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 1,050 Debt Investments 1,050 b. Cash 1,060 Debt Investments 1,000 Gain on Sale of Debt Investments 50 Interest Revenue 10 c. Cash 1,060 Debt Investments 1,050 Interest Revenue 10 d. Cash 1,050 Debt Investments 1,000 Interest Revenue 50

72.

Which of the following is not a true statement about the accounting for long-term debt investments? a. The investment is initially recorded at cost. b. The cost includes any brokerage fees. c. Debt investments include investment in government and corporation bonds. d. The cost includes any accrued interest.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

73.

If a debt investment is sold, the investment account is a. debited for the book value of the bonds at the sale date. b. credited for the cost of the bonds at the sale date. c. credited for the fair value of the bonds at the sale date. d. debited for the cost of the bonds at the sale date.

Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

E-16 74.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Porter Brothers Company purchased debt investment for $80,000 on January 1, 2014. On July 1, 2014, Jamison received cash interest of $2,905. Assuming no interest has been accrued, which of the following correctly presents the journals entries for the purchase and the receipt of interest? a. Jan 1 Debt Investments 80,000 Cash 80,000 July 1 Cash 2,905 Interest Revenue 2,905 b. Jan 1 Cash 80,000 Debt Investments 80,000 July 1 Interest Revenue 2,905 Cash 2,905 c. Jan 1 Debt Investments 80,000 Cash 80,000 July 1 Interest Revenue 2,905 Cash 2,905 d. Jan 1 Cash 80,000 Debt Investments 80,000 July 1 Cash 2,905 Interest Revenue 2,905

Ans: A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

75.

On August 1, Basil Company buys 2,000 shares of Zingo common stock for $61,500 cash. On December 1, the stock investments are sold for $76,000 in cash. Which of the following are the correct journal entries of record for the purchase and sale of the common stock? a. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec. 1 Cash 76,000 Stock Investments 61,500 Gain on Sale of Stock Investments 14,500 b. Aug. 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Cash 76,000 Stock Investments 61,500 Gain on Sale of Stock Investments 14,500 c. Aug 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Stock Investment 76,000 Cash 60,000 Gain on Sale of Stock Investments 16,000 d. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec 1 Stock Investments 76,000 Cash 61,500 Gain on Sale of Stock Investments 14,500

Reporting and Analyzing Investments

76.

E-17

Buford Industries owns 45% of Appalachian Company. For the current year, Appalachian reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of the following correctly presents the journal entries to record Buford’s equity in Appalachian net income and the receipt of dividends from Appalachian? a. Dec. 31 Stock Investments 112,500 Revenue from Stock Investments 112,500 Dec. 31 Cash 31,500 Stock Investments 31,500 b. Dec. 31 Stock Investments 112,500 Revenue from Stock Investments 112,500 Dec. 31 Cash 70,000 Stock Investments 70,000 c. Dec. 31 Stock Investments 81,000 Revenue from Stock Investments 81,000 d. Dec. 31 Revenue from Stock Investments 112,500 Stock Investments 112,500 Dec. 31 Stock Investments 31,500 Cash 31,500

77.

On January 1, 2014, Chic Corp. paid $1,200,000 for 100,000 shares of Toto Company's common stock, which represents 40% of Toto’s outstanding common stock. Toto reported income of $300,000 and paid cash dividends of $80,000 during 2014 Chic should report the investment in Toto Company on its December 31, 2014, balance sheet at a. $1,200,000 b. $1,320,000 c. $1,232,000 d. $1,288,000

78.

McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb. What amount should SFX show in the investment account at December 31, 2014 if the beginning of the year balance in the account was $100,000? a. $300,000 b. $200,000 c. $280,000 d. $400,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 70   70  × $900,000  −  × $300,000  = $300,000 210 210    

Solution: 100,000 + 

E-18 79.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFXl Corporation owns 70,000 of the 210,000 outstanding shares of McComb. How much revenue from investment should Cornwell report in 2014? a. $100,000 b. $200,000 c. $300,000 d. $400,000

80.

All of the following factors would be signs of an investor's significant influence over an investee except a. the investor has representation on the investee's board of directors. b. the investor participates in the investee's policy-making process. c. there are immaterial transactions between the investor and the investee. d. the common stock held by other stockholders is dispersed.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

81.

On January 1, 2014, Orleans industries acquired a 15% interest in Florida Corporation through the purchase of 12,000 shares of Florida Corporation common stock for $320,000. During 2014, Florida Corp. paid $80,000 in dividends and reported a net loss of $100,000. Orleans is able to exert significant influence on Florida. However, Orleans 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 Orlean’s investment using the equity method? Investment Net Account Earnings (loss) a. $100,000 ($20,000) b. $293,000 ($15,000) c. $305,000 ($15,000) d. $305,000 ($3,000)

82.

When a company holds stock of several different corporations, the group of securities is identified as a(n) a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Investments

83.

E-19

CGS Corporation makes an investment in 200 shares of Bama Company's common stock. The stock is purchased for $53 a share. The entry for the purchase is: a. Debt Investments 10,000 Cash 10,000 b. Stock Investments 10,600 Cash 10,600 c. Stock Investments 10,000 Cash 10,000 d. Cash 10,600 Stock Investments 10,600

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

84.

Gulf Coast Corporation makes an investment in 100 shares of Eta Company's common stock. The stock is purchased for $52 a share. The entry for the purchase is a. Debt Investments 5,200 Cash 5,200 b. Stock Investments 5,200 Cash 5,200 c. Stock Investments 5,000 Cash 5,000 d. Cash 5,200 Stock Investments 5,200

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

85.

For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor. b. the extent of an investor's influence over the operating and financial affairs of the investee. c. whether the stock has paid dividends in past years. d. whether the acquisition of the stock by the investor was "friendly" or "hostile."

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

86.

Outer Banks Corporation sells 200 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $40 a share. Outer Banks sold the shares for $43 a share. The entry to record the sale is a. Cash 8,000 Loss on Sale of Stock Investments 600 Stock Investments 8,600 b. Cash 8,600 Gain on Sale of Stock Investments 600 Stock Investments 8,000 c. Cash 8,600 Stock Investments 8,600 d. Stock Investments 8,000 Loss on Sale of Stock Investments 600 Cash 8,600

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (200 × $43) − (200 × $40) = $600

E-20 87.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ashland Corporation sells 100 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $30 a share. Ashl and Keller sold the shares for $38 a share. The entry to record the sale is a. Cash 3,000 Loss on Sale of Stock Investments 800 Stock Investments 3,800 b. Stock Investments 3,800 Cash 3,800 c. Cash 3,800 Gain on Sale of Stock Investments 800 Stock Investments 3,000 d. Cash 3,800 Stock Investments 3,800

88.

Crosby Corporation sells 300 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $50 a share. Crosby sold the shares for $46 a share. The entry to record the sale is: a. Cash 13,800 Loss on Sale of Stock Investments 1,200 Stock Investments 15,000 b. Cash 15,000 Gain on Sale of Stock Investments 1,200 Stock Investments 13,800 c. Cash 13,800 Stock Investments 13,800 d. Stock Investments 13,800 Loss on Sale of Stock Investments 1,200 Cash 15,000

89.

A purchase of common stock of Blue Wave Corporation for $14,500 was sold three months later for $15,000. The entry to record the sale would include a a. debit to Cash of $14,500. b. credit to Gain on Sale of Stock Investments of $500. c. credit to Stock Investments of $15,000. d. credit to Interest Revenue of $500.

Reporting and Analyzing Investments

90.

E-21

Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 2,500 shares of Raley Company (10%) for $44,500 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 1,000 shares of Raley stock for 19,500. Dec. 1 Received cash dividends of $2 per share on Reley stock. The entry to record the purchase of the Raley stock would include a a. debit to the Stock Investments account for $43,500. b. credit to Cash for $43,500 c. debit to the Stock Investments account for $44,500. d. debit to Investment Expense for $1,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $43,500 cost

91.

Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 2,500 shares of Raley Company (10%) for $44,500 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 1,000 shares of Raley stock for $19,500. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the receipt of the dividends June 1 would include a a. debit to Stock Investments of $2,500. b. credit to Dividend Revenue of $2,500. c. debit to Dividend Revenue of $2,500. d. credit to the Stock Investments of $2,500.

92.

Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 2,500 shares of Raley Company (10%) for $44,500 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 1,000 shares of Raley stock for $19,500. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the sale of the stock would include a a. debit to Cash for $17,800. b. credit to Gain on Sale of Stock Investments for $680. c. debit to Stock Investment for $17,800. d. credit to Gain on Sale of Stock Investments of $1,700.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 $44,500  ×1,000  = $1,700 2,500  

Solution: $19,500 − 

E-22 93.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 2,500 shares of Raley Company (10%) for $44,500 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 1,000 shares of Raley stock for $19,500. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the receipt of the dividends Dec. 1 would include a a. debit to Stock Investments of $3,000. b. credit to Dividend Revenue of $3,000. c. debit to Dividend Revenue of $3,000. d. credit to the Stock Investments of $3,000.

94.

If an investor owns less than 20% of the common stock of another corporation as an investment a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

95.

If the cost method is used to account for an investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

96.

Under the cost method of accounting for dividends a. Investment Revenue is credited when dividends are received. b. the Investment account is credited when the investee reports a net income. c. the Investment account is credited when dividends are received. d. Investment Revenue is credited when the investee reports a net income.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

97.

If 10% of the common stock of an investee company is purchased as an investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. c. the preparation of consolidated financial statements. d. determined by agreement with whomever owns the remaining 90% of the stock.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

Reporting and Analyzing Investments

98.

E-23

When the cost method is used to account for a stock investment the carrying value of the investment is affected by a. the earnings of the investee. b. the dividend distributions of the investee. c. the earnings and dividend distributions of the investee. d. neither the earnings nor the dividends of the investee.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

99.

The cost method of accounting for investments in stock should be employed when the a. investor owns more than 50% of the investee's stock. b. investor has significant influence on the investee and the stock held by the investor are marketable equity securities. c. market value of the shares held is greater than their historical cost. d. investor's influence on the investee is insignificant.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

100.

The equity method should generally be used to account for an investment in stock when the level of ownership is a. less than 10%. b. between 10% and 20%. c. between 20% and 50%. d. 10% or more.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

101.

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

102.

The cost method of accounting for investments in stock should be used when the investment is a. influential and controlling. b. influential and noncontrolling. c. controlling. d. non-influential and noncontrolling.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

E-24 103.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as a. significant influence. b. control. c. a combination. d. influence and control.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

104.

Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company a. the Dividend Revenue account is credited. b. the Stock Investments account is increased. c. the Stock Investments account is decreased. d. no entry is necessary.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

105.

The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used? a. Cost method. b. Equity method. c. Combination method. d. Market method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

106.

Bing Company owns 30% interest in the stock of Yeti Corporation. During the year, Yeti pays $60,000 in dividends to Bing, and reports $320,000 in net income. Bing Company’s investment in Yeti l will increase Bing net income by a. $96,000. b. $78,000. c. $60,000. d. $18,000.

107.

Chopper Company owns 10% interest in the stock of Elton Corporation. During the year, Elton pays $10,000 in dividends to Chopper, and reports $400,000 in net income. Chopper Company’s investment in Elton will increase Chopper net income by a. $10,000. b. $30,000. c. $40,000. d. $1,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Reporting and Analyzing Investments

108.

E-25

Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $20,000 in dividends to Barcelona, and reports $150,000 in net income. Barcelona Company’s investment in ABX will increase Barcelona net income by a. $52,000. b. $60,000. c. $64,000. d. $8,000.

109.

110.

Jambon Company owns 10% interest in the stock of Fanth Corporation. During the year, Fanth pays $8,000 in dividends to Jambon, and reports $200,000 in net income. Jambon Company’s investment in Fanth will increase Jambon net income by a. $20,000. b. $2,000. c. $8,000. d. $12,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

111.

Eglin Company owns 30% interest in the stock of Bosco Corporation. During the year, Rhodes pays $10,000 in dividends to Eglin, and reports a net loss of $250,000. Eglin Company’s investment in Bosco will affect Eglin net income by a a. $10,000 increase. b. $75,000 increase. c. $75,000 decrease. d. $10,000 decrease.

112.

FTX Company owns 10% interest in the stock of Zip Corporation. During the year, Zip pays $4,000 in dividends to FTX, and reports a net loss of $100,000. FTX Company’s investment in Zip will affect FTX net income by a a. $4,000 increase. b. $10,000 increase. c. $10,000 decrease. d. $4,000 decrease.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

E-26 113.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

On January 1, 2014, Valentine Corporation purchased 25% of the common stock outstanding of Betz Corporation for $100,000. During 2014, Betz Corporation reported net income of $40,000 and paid cash dividends of $24,000. The balance of the Stock Investments—Betz account on the books of Valentine Corporation at December 31, 2014, is a. $100,000. b. $104,000. c. $110,000. d. $96,000.

114.

On January 1, 2014, the Express Corporation purchased 30% of the common stock outstanding of the Bangor Corporation for $200,000. During 2014, the Bangor Corporation reported net income of $80,000 and paid cash dividends of $20,000. The balance of the Stock Investments—Bangor account on the books of Express Corporation at December 31, 2014, is a. $200,000. b. $220,000. c. $280,000. d. $218,000.

115.

Under the equity method, the Stock Investments account is increased when the a. investee company reports net income. b. investee company pays a dividend. c. investee company reports a loss. d. stock investment is sold at a gain.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

116.

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? % of Investor Ownership Presumed Influence a. Less than 20% Short-term b. Between 20%-50% Significant c. More than 50% Long-term d. Between 20%-50% Controlling

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

117.

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments? % of Investor Ownership Accounting Guidelines a. Less than 20% Cost method b. Between 20%-50% Cost method c. More than 50% Cost or equity method d. Between 20%-50% Consolidated financial statements

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Investments

118.

E-27

If the cost method is used to account for an investment in common stock a. it is presumed that the investor has significant influence on the investee. b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor. c. net income of the investee is not considered earned by the investor until dividends are declared by the investee. d. the investment account may be at times greater than the acquisition cost.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

119.

If a company acquires a 40% common stock interest in another company a. the equity method is usually applicable. b. all influence is classified as controlling. c. the cost method is usually applicable. d. the ability to exert significant influence over the activities of the investee does not exist.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

120.

If a stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other Revenue and Gain section of the income statement. d. contributes to gross profit on the income statement.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

121.

If the equity method is being used, cash dividends received a. are credited to the Dividend Revenue account. b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books. c. are credited to the Stock Investments account. d. are credited to the Revenue from Investment in Stock account.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122.

If the equity method is being used, the Revenue from Investment in Stock account is a. just another name for a Dividend Revenue account. b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

123.

Under the equity method, the Stock Investments account is credited when the a. investee reports net income. b. investee reports a net loss. c. investment is originally acquired. d. investee reports net income and when the investment is originally acquired.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

E-28 124.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

King Corporation purchased 1,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were Cost Gain or Loss a. $50,000 $27,000 loss b. $50,000 $27,600 gain c. $73,000 $4,000 loss d. $73,000 $4,000 gain

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (1,000 × $73) − (1,000 × $77) = $4,000

125.

Which of the following is not a method of accounting for stock investments? a. Cost method. b. Stock method. c. Consolidated financial statements. d. Equity method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

126.

In order to use the cost method of accounting for stock investments, how much stock must the investor own? a. Less than 20%. b. More than 50%. c. Between 20% and 50%. d. The cost method is always used for stock investments of any size.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

127.

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. If Celdon declares and pays $100,000 in total dividends on February 14th, the journal entry would include a credit to a. Dividend Revenue for $100,000. b. Dividend Revenue for $30,000. c. Stock Investments for $30,000. d. No entry is necessary.

128.

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. The journal entry on Oslo’s books assuming Celdon’s net income for 2014 was $500,000 would include a debit to a. No entry is necessary. b. Cash for $500,000. c. Cash for $150,000. d. Stock Investments for $150,000.

Reporting and Analyzing Investments

129.

E-29

Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a a. loss of $6,000 under “Other expenses and losses.” b. loss of $6,000 under “Operating expenses.” c. gain of $6,000 under “Other revenues and gains.” d. gain of $6,000 under “Operating revenues.”

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

130.

Consolidated financial statements are useful to all of the following except a. creditors of subsidiary companies. b. management of the parent company. c. stockholders of the parent company. d. board of directors of the parent company.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131.

When a company owns more than 50% of the common stock of another company a. consolidated financial statements are usually prepared. b. the cost method of accounting is used. c. they are referred to as the subsidiary. d. they recognize revenue when dividends are received.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132.

The company whose stock is owned by the parent company is called the a. controlled company. b. subsidiary company. c. investee company. d. sibling company.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

133.

A company that owns more than 50% of the common stock of another company is known as the a. charge company. b. subsidiary company. c. parent company. d. management company.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

134.

If one company owns more than 50% of the common stock of another company a. the cost method should be used to account for the investment. b. a partnership exists. c. a parent–subsidiary relationship exists. d. the company whose stock is owned must be liquidated.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

E-30 135.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? Legal Economic a. 3 3 b. 1 2 c. 3 1 d. 2 1

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

When a company owns more than 50% of the common stock of another company a. affiliated financial statements are prepared. b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137.

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because a. management intends to realize this loss in the near future. b. the securities have not been sold. c. the stock market is volatile. d. management cannot determine the exact amount of the loss in value.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

138.

Which of the following statements is true about investments classified as trading securities? a. The investor’s intent and ability is to hold them to maturity. b. They are valued on the balance sheet at cost. c. They can consist of debt, but not equity, securities. d. Changes in market value are reflected as part of net income.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

139.

The Fair Value 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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

Reporting and Analyzing Investments

140.

E-31

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show? a. A reduction of an asset of $5,000 and a realized loss of $5,000. b. A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’ equity section. c. A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under “Other expenses and losses.” d. A reduction of an asset of $5,000 in the current assets section and a realized loss of $75,000 under “Other expenses and losses.”

141.

Trading securities are reported on the balance sheet at a. fair value. b. cost. c. cost, adjusted for the effects of interest. d. lower of cost or market.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142.

The Fair Value Adjustment account is a(n) a. offset account. b. adjustment account. c. valuation allowance account. d. opposite account.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143.

Reporting investments at fair value is a. applicable to equity securities only. b. applicable to debt securities only. c. applicable to both debt and equity securities. d. a conservative approach because only losses are recognized.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

144.

Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Market Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 At the end of the year, Deutsche Corporation should a. set up a Fair Value Adjustment account for Common Stock B. b. set up a Fair Value Adjustment account for the portfolio. c. recognize an Unrealized Gain or Loss—Income for $6,000. d. report a loss on the income statement for $6,000 under "Other Expenses and Losses."

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

E-32 145.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Market Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 The year-end adjusting entry to reflect a decrease in the value of stock trading securities includes a a. credit to Fair Value Adjustment—Trading. b. debit to Fair Value; Market Adjustment—Trading. c. debit to Unrealized Gain—Income. d. credit to Stock Investments.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

146.

Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Market Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 Deutsche subsequently sells Common Stock B for $17,000. What entry is made to record the sale? a. Cash 17,000 Stock Investments 17,000 b. Cash 17,000 Market Adjustment 4,000 Stock Investments 13,000 c. Cash 17,000 Stock Investments 13,000 Gain on Sale of Stock Investments 4,000 d. Cash 17,000 Stock Investments 7,000 Gain on Sale of Stock Investments 10,000

147.

A stock investment classified as trading securities is purchased for $73,500. At year end, when the market value of the stock is $65,000, the adjusting entry includes a a. credit to Stock Investments. b. debit to Loss on Sale of Stock Investment. c. credit to Fair Value-Adjustment—Trading. d. credit to Unrealized Loss—Income.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

148.

Which of the following would not be reported under "Other Revenues and Gains" on the income statement? a. Unrealized gain on available-for-sale securities. b. Dividend revenue. c. Interest revenue. d. Gain on sale of debt investments.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Investments

149.

E-33

If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to recognize the loss a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account. c. will show a credit to a valuation allowance account that appears in the stockholders’ equity section of the balance sheet. d. will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.

Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

150.

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, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

151.

Assume that Chapman’s Inc.’s trading securities have a total cost of $185,000 and a total fair value of $215,000 at year end. The related adjusting entry would include a debit to a. Unrealized Gain for $30,000. b. Fair Value Adjustment – Trading for $30,000. c. No adjustment since only realized gains are recorded. d. Fair Value Adjustment – Trading for $215,000.

Ans: B, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $215,000 − $185,000 = $30,000

152.

Which of the following is not a category used for valuing and reporting investments? a. Securities held for investing purposes. b. Trading securities. c. Held-to-maturity securities. d. Available-for-sale securities.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

153.

Unrealized gains or losses on available-for-sale securities are reported where in the financial statements? a. Nowhere since only realized gains are reported. b. In the “Other revenues and gains” or “Other expenses and losses” sections of the income statement. c. Below extraordinary items in the income statement. d. In the stockholders’ equity section of the balance sheet.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

E-34 154.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Market Draper Corporation $ 46,400 $ 50,000 Edmunds Inc. 62,000 55,800 Feazell Corporation 80,000 76,000 $188,400 $181,800 The unrealized loss to be recognized under the fair value method is a. $4,400. b. $10,200. c. $6,600. d. $4,000.

155.

At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Market Draper Corporation $ 46,400 $ 50,000 Edmunds Inc. 62,000 55,800 Feazell Corporation 80,000 76,000 $188,400 $179,800 In the following year, the Edmunds Bolen common stock is sold for cash proceeds of $57,000. The gain or loss to be recognized on the sale is a a. gain of $1,200. b. loss of $5,000. c. gain of $7,000. d. loss of $1,200.

156.

At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. Total fair value is $250,000. The financial statements should show a. an addition to an asset of $5,000 and a realized gain of $5,000. b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’ equity section. c. an addition to an asset of $5,000 in the current assets section and an unrealized gain of $5,000 in “Other revenues and gains.” d. an addition to an asset of $5,000 in the current assets section and a realized gain of $5,000 in “Other revenues and gains.”

Reporting and Analyzing Investments

157.

E-35

Giphons Corp. has common stock of $3,000,000, Retained Earnings of $1,800,000, unrealized gains on trading securities of $60,000 and unrealized losses on available-forsale securities of $110,000. What is the total amount of their stockholders’ equity? a. $4,690,000. b. $4,800,000. c. $4,740,000. d. $4,630,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000,000 + $1,800,000 − $110,000 = $4,690,000

158.

Cost and fair value data for the trading securities of Beltway Company at December 31, 2014, are $100,000 and $84,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a. Dec. 31 Unrealized Loss⎯Income 16,000 Trading Securities 16,000 b. Dec. 31 Unrealized Gain⎯Income 16,000 Trading Securities 16,000 c. Dec. 31 Unrealized Loss⎯Income 16,000 Market Adjustment⎯Trading 16,000 d. Dec. 31 Fair Value Adjustment - Trading 16,000 Unrealized Gain-Income 16,000

Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100,000 − $84,000 = $16,000

159.

At December 31, 2014, the trading securities for Blue Bell, Inc. are as follow Fair Value Security Cost 12/31/14 X-tra $ 90,000 $ 92,000 Yeti 150,000 142,000 Zeta 30,000 28,000 Blue Bell should report the following amount related to the securities transactions in its 2014 income statement a. $2,000 gain. b. $8,000 realized loss. c. $8,000 unrealized loss. d. $10,000 unrealized loss.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($90,000 + $150,000 + $30,000) − ($92,000 + $142,000 + $28,000) = $8,000

E-36 160.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

At December 31, 2014, Grey beard Inc. has these data on its security investments Fair Value Security Cost 12/31/14 Trading $140,000 $192,000 Available-for-sale 137,000 127,000 If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value? a. Securities 42,000 Unrealized Gain⎯Income 42,000 b. Unrealized Loss⎯Income 10,000 Securities 42,000 Unrealized Gain⎯Income 52,000 c. Fair Value Adjustment⎯Trading 52,000 Unrealized Gain⎯Income 52,000 Unrealized Gain or Loss⎯Equity 10,000 Fair Value Adjustment⎯Available-for-sale 10,000 d. Unrealized Gain – Income 52,000 Fair Value Adjustment⎯Trading 52,000 Fair Value Adjustment – Available-for-sale 10,000 Unrealized Gain or Loss⎯Equity 10,000

161.

All of the following statements about financial statement gains and losses on investments are true except a. the account "Fair Value Adjustment – Available-For-Sale" is reported on the balance sheet. b. unrealized losses on trading securities are reported on the income statement. c. unrealized losses on available-for-sale securities are reported on the income statement. d. the account "Fair Value Adjustment – Trading" is reported on the balance sheet.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

162.

Baggles Company owns stock in Hampshire Industries, which it intends to hold indefinitely because of some negative tax consequences if sold. Which of the following statements is true regarding Jonathan's reporting of the stock? a. The stock would be classified as trading securities. b. The stock would be classified as available-for-sale securities. c. The stock requires no market adjustments since there are no plans to sell it. d. Any losses on the stock are recorded in the income statement.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

163.

All of the following statements about short-term investments are true except a. short-term investments are also call marketable securities. b. trading securities are always classified as short-term investments. c. short-term investments are listed below accounts receivable in the current asset section of the balance sheet. d. short-term assets must be readily marketable.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Investments

164.

E-37

Short-term investments are listed on the balance sheet immediately below a. cash. b. inventory. c. accounts receivable. d. prepaid expenses.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

165.

Short-term investments should be valued on the balance sheet at a. the lower of cost or fair value. b. the higher of cost or fair value. c. cost. d. fair value.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

166.

Which one of the following would not be classified as a short-term investment? a. Marketable equity securities. b. Marketable merchandise. c. Marketable debt securities. d. Short-term paper.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

167.

Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions

168.

Which of the following would not be classified as a short-term investment? a. Short-term commercial paper. b. Idle cash in a bank checking account. c. Marketable equity securities. d. Marketable debt securities.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-38

Answers to Multiple Choice Questions 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

d c d b d d a c b d b b a c d b

57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

c d a c b c b a d b b c c a b d

73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.

b a b a d a c c b c b b b b c a

89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

b c b d b c b a a d d c d d a c

105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

b a a b d c c a b d a b a c a c

121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136.

c c b d b a c d a a a b c c c b

137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.

b d b c a c c b a c c a d c b a

153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.

d c b c a c c c c b c a d b d b

BRIEF EXERCISES Be. 169 Ingles Company had the following transactions pertaining to debt securities held as an investment. Jan. 1

Purchased 60, 8%, $1,000 Omega Company bonds for $60,000 cash. Interest is payable semiannually on July 1 and January 1.

July 1

Received $2,400 semiannual interest on Omega Company bonds.

Instructions Journalize the purchase and the receipt of interest. Assume no interest has been accrued. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 169 (a) Jan. 1 July

(5-8 min.) Debt Investments ......................................................... Cash .................................................................... Cash .......................................................................... Interest Revenue .................................................

60,000 60,000 2,400 2,400

Reporting and Analyzing Investments

E-39

Be. 170 The following transactions were made by Aquavore Company. Assume all investments are temporary. July

Purchased 400 shares of Delta Corporation common stock for $35 per share.

Received a cash dividend of $1.25 per share from the Delta Corporation.

Sept. 15

Sold 80 shares of Delta Corporation stock for $38 per share.

Instructions Journalize the transactions. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 170 July

Sept. 15

(5-8 min.)

Stock Investments ............................................................ Cash ...................................................................... (To record purchase of 400 shares of Dean Corporation common stock)

14,000

Cash ................................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)

500

Cash ................................................................................. Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of Dean Corporation stock)

3,040

14,000

500

2,800 240

Be. 171 Cupcake Company had the following transactions pertaining to its temporary stock investments. Jan.

Purchased 600 shares of La Crema Company stock for $7,050 cash .

June

Received cash dividends of $0.40 per share on the La Crema Company stock.

Sept. 15

Sold 300 shares of the La Crema Company stock for $3,400 cash.

E-40

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 171 Jan.

June 1

Sept. 15

(5 min.) Stock Investments ....................................................... Cash ...................................................................

7,050

Cash (600 × $0.40) ..................................................... Dividend Revenue ..............................................

240

7,050

Cash ................................................................................... 3,400 Loss on Sale of Stock Investments ............................. 125 Stock Investments .............................................. [300 × ($7,050 ÷ 600)]

240

3,525

Be. 172 On January 1, 2014, Redwood Creek Company purchased 5,000 shares of Monticello Company stock for $300,000. Redwood Creek investment represents 30 percent of the total outstanding shares of Monticello. During 2014, Monticello paid total dividends of $100,000 and reported net income of $290,000. What revenue does Garr report related to this investment and what is the amount to be reported as an investment in Monticello stock at December 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 172

(5-8 min.)

Revenue for 2014 ($290,000 x 0.30)

$87,000

Balance in Investment account Purchase price Less dividend receipt ($100,000 x 0.30) Plus Investment Revenue ($290,000 x 0.30) Ending balance Investment in Monticello

$300,000 − 30,000 + 87,000 $357,000

Be. 173 On January 1, Ollinger Company purchased a 25% equity investment in Fava Company for $300,000. At December 31 Fava declared and paid a $20,000 dividend and reported net income of $120,000. Instructions (a) Journalize the transactions (b) Determine the amount to be reported as an investment in Fava stock at December 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Investments

Solution 173 (a)

(b)

(8–12 minutes) Stock Investments……………………………………….. Cash……………………………………………….

300,000

Dec. 31 Cash ($20,000 x .25)……………………………………… Stock Investments………………………………..

5,000

Dec. 31 Stock Investments ($120,000 x .25)……………………. Revenue from Stock Investments…………..

30,000

Jan. 1

E-41

300,000

5,000

30,000

Investment in Fava, January 1 Less: Dividend received Plus: Share of reported income Investment in Fava, December 31

$300,000 (5,000) 30,000 $325,000

Be. 174 At January 1, 2014, the available-for-sale securities portfolio held by Darma Corporation consisted of the following investments: 1. 2,500 shares of H2 common stock purchased for $43 per share. 2. 1,500 shares of Krypto common stock purchased for $50 per share. At December 31, 2014, the fair values per share were H2 $36 and Krypto $54. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2014. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2014. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 174 (a)

(b)

Security H2 Krypto Totals Dec. 31

(8-10 min.) Cost $ 107,500 75,000 $182,500

Fair Value $ 90,000 81,000 $171,000

(2,500 × $36) (1,500 × $54)

Unrealized Gain or Loss—Equity .............................. Fair Value Adjustment—Available-for-Sale .....

11,500 11,500

E-42

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

EXERCISES Ex. 175 Le Tourneau Company had the following transactions pertaining to debt securities held as a I short – term investment. Jan. 1

Purchased 90, 6%, $1,000 Lido Company bonds for $90,000 cash. Interest is payable semiannually on July 1 and January 1.

July 1

Received semiannual interest on Lido Company bonds.

Oct. 1

Sold 45 Lido Company bonds for $46,400 plus accrued interest.

Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 175 (a) Jan. 1

(10-15 min.) Debt Investments ......................................................... Cash ....................................................................

90,000

Cash ($90,000 × 6% × 1/2) .......................................... Interest Revenue .................................................

2,700

Cash ($46,400 + $675) ............................................... Debt Investments ................................................. Interest Revenue ................................................. Gain on Sale of Debt Investments ....................... ($45,000 × 6% × 3/12 = $675) ($46,400 - $45,000 = $1,400)

47,075

(b) Interest Receivable ....................................................................... Interest Revenue ...................................................................

1,350

July

Oct.

($45,000 × 6% × 1/2 = $1,350)

90,000

2,700

45,000 675 1,400

1,350

Reporting and Analyzing Investments

E-43

Ex. 176 Trafton Company had the following transactions pertaining to debt securities held as an investment. Jan. 1 Purchased 60, 8%, $1,000 Hammond Company bonds for $60,000 cash. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Hammond Company bonds. Sept. 1 Sold 30 Hammond Company bonds for $32,000 plus accrued interest. Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 176 (a) Jan. 1

(10-15 min.) Debt Investments ......................................................... Cash ....................................................................

60,000

Cash ($60,000 × 8% × 1/2) .......................................... Interest Revenue .................................................

2,400

Cash ($32,000 + $400) ............................................... Debt Investments ................................................ Interest Revenue ................................................. Gain on Sale of Debt Investments ....................... ($30,000 × 8% × 2/12 = $400) ($32,000 − $30,000 = $2,000)

32,400

(b) Interest Receivable ...................................................................... Interest Revenue ..................................................................

1,200

July

Sept. 1

($30,000 × 8% × 1/2 = $1,200)

60,000

2,400

30,000 400 2,000

1,200

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-44 Ex. 177

The following transactions were made by Coral Company. Assume all investments are short-term. June

Purchased 600 shares of Schmidt Corporation common stock for $45 per share.

July

Purchased 210 Dantzler Corporation bonds for $210,000.

Received a cash dividend of $2.25 per share from the Schmidt Corporation.

Sept. 15

Sold 120 shares of Schmidt Corporation stock for $50 per share.

Dec. 31

Received semiannual interest check for $9,240 from the Dantzler Corporation.

Received a cash dividend of $2.25 per share from the Schmidt Corporation.

Instructions Journalize the transactions. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 177 June

July

Sept. 15

Dec. 31

(15-20 min.)

Stock Investments ............................................................ Cash ....................................................................... (To record purchase of 600 shares of Schmidt Corporation common stock)

27,000

Debt Investments .............................................................. Cash ....................................................................... (To record purchase of 210 Dantzler Corporation bonds)

210,000

Cash

27,000

210,000

............................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)

1,350

............................................................................. Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of Schmidt Corporation stock)

6,000

............................................................................. Interest Revenue .................................................... (To record receipt of interest on Dantzler Corporation bonds)

9,240

............................................................................. Dividend Revenue .................................................. (To record receipt of cash dividend on remaining Brock stock (600 - 120 X $2.25)

1,080

1,350

5,400 600

9,240

1,080

Reporting and Analyzing Investments

E-45

Ex. 178 Eaton Company had the following transactions pertaining to its short-term stock investments. Jan.

Purchased 900 shares of Stafford Company stock for $11,880 cash.

June

Received cash dividends of $0.60 per share on the Stafford Company stock.

Sept. 15

Sold 450 shares of the Stafford Company stock for $5,200.

Dec.

Received cash dividends of $0.60 per share on the Stafford Company stock.

Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 178 (a) Jan.

June 1

Sept. 15

Dec.

(10-15 min.) Stock Investments ...................................................... Cash ..................................................................

11,880

Cash (900 × $0.60) .................................................... Dividend Revenue .............................................

540

Cash ........................................................................ Loss on Sale of Stock Investments ............................. Stock Investments ............................................. [450 × ($11,880 ÷ 900)]

5,200 740

Cash (450 × $0.60) .................................................... Dividend Revenue .............................................

270

11,880

540

5,940

270

(b) Dividend Revenue is reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-46 Ex. 179

Grafton Company had the following transactions pertaining to its short-term stock investments. Jan.

Purchased 2,000 shares of Hortez Company stock for $101,100 cash.

June

Received cash dividends of $2.70 per share on the Hortez Company stock.

Sept. 15

Sold 1,000 shares of the Hortez Company stock for $49,600.

Dec. 31

The fair values of the securities were $50,800. Prepare the adjusting entry to report the portfolio at fair value.

Solution 179 (10-15 min.) (a) Jan.

June 1

Sept. 15

Dec. 31

Stock Investments ....................................................... Cash ...................................................................

101,100

Cash (2,000 × $2.70) .................................................. Dividend Revenue ..............................................

5,400

Cash ......................................................................... Loss on Sale of Stock Investments ............................. Stock Investments .............................................. [1,000 × ($101,100 ÷ 1,000)]

49,600 950

Fair Value Adjustment—Trading .................................. Unrealized Gain—Income ................................... {($101,100 – $50,550) - $50,800}

250

101,100 5,400

50,550

250

(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.

Reporting and Analyzing Investments

E-47

Ex. 180 Crespo Company purchased 42,000 shares of common stock of the Paive Corporation as an investment for $1,000,000. During the year, Paive Corporation reported net income of $400,000 and paid dividends of $100,000. Instructions (a)

Assuming that the 42,000 shares represent a 15% interest in Paive Corporation: 1. Prepare the journal entry to record the investment in Paive stock. 2. Prepare any entries that Crespo Company should make in accounting for its investment in Paive stock during the year. 3. What is the balance of the Stock Investments account on Crespo Company's books at the end of the year?

(b)

Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in Paive Corporation.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 180 (16-21 min.) (a)

Cost Method 1. Stock Investments ................................................................ 1,000,000 Cash ............................................................................ (To record purchase of 42,000 shares of Paive Corporation stock)

1,000,000

2. Cash ..................................................................................... 15,000 Dividend Revenue ........................................................ [(To record dividends received); $100,000 × 15% = $15,000]

15,000

3. The Stock Investments account balance at the end of the year is $1,000,000. (b)

Equity Method 1. Stock Investments ................................................................ 1,000,000 Cash ............................................................................ (To record purchase of 42,000 shares of Paive Corporation stock) 2. Stock Investments ................................................................ Revenue from Stock Investments ................................. (To record 25% equity in Paive net income) $400,000 × 25% = $100,000

100,000

Cash ..................................................................................... 25,000 Stock Investments ........................................................ [(To record dividends received); $100,000 × 25% = $25,000] 3. The Stock Investments account balance at the end of the year is $1,075,000 ($1,000,000 + $100,000 - $25,000).

1,000,000

100,000

25,000

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-48 Ex. 181

Information pertaining to stock investments in 2012 by Com-ex Corporation follows: Acquired 15% of the 200,000 shares of common stock of Buffalo Company at a total cost of $9 per share on January 1, 2014. On July 1, Buffalo Company declared and paid a cash dividend of $1.90 per share. On December 31, Bufflo reported net income was $675,000 for the year. Obtained significant influence over Eta Company by buying 30% of Eta's 120,000 outstanding shares of common stock at a total cost of $25 per share on January 1, 2014. On June 15, Eta Company declared and paid a cash dividend of $2.50 per share. On December 31, Eta's reported net income was $330,000. Instructions Prepare all necessary journal entries for 2012 for Com-ex Corporation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 181 Jan.

June 15

July

Dec. 31

(15-20 min.)

Stock Investments .............................................................. Cash .......................................................................... (200,000 × 15% × $9 = $270,000)

270,000

Stock Investments .............................................................. Cash .......................................................................... (30% × 120,000 × $25 = $900,000)

900,000

Cash (36,000 × $2.50) ....................................................... Stock Investments .....................................................

90,000

Cash (30,000 × $1.90) ....................................................... Dividend Revenue .....................................................

57,000

Stock Investments .............................................................. Revenue from Stock Investments .............................. ($330,000 × 30% = $99,000)

99,000

270,000

900,000

90,000

57,000

99,000

Reporting and Analyzing Investments

E-49

Ex. 182 Sandafor Company had these transactions pertaining to stock investments: Feb

Purchased 2,400 shares of BFF common stock (2% of outstanding shares) for $16,500 cash.

July

Received cash dividends of $0.80 per share on BFF common stock.

Sept.

Sold 800 shares of BFF common stock for $7,900

Dec.

Received cash dividends of $.80per share on BFF common stock.

Instructions Journalize the transactions. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 182 (8 min.) Feb.

July

Sept. 1

Dec.

Stock Investments ...................................................... Cash ...................................................................

16,500

Cash (2,400 × $.80) ................................................... Dividend Revenue .............................................

1,920

Cash ............................................................................ Stock Investments ($16,500 × 800/2,400) ....................................... Gain on Sale of Stock Investments ($7,900 – $5,500) ...............................................

7,900

Cash (1,600 × $.80) .................................................... Dividend Revenue ..............................................

1,280

16,500

1,920

5,500 2,400

1,280

Ex. 183 PWAT Inc. had these transactions pertaining to investments in common stock: Jan

Purchased 2,000 shares of Pasco Corporation common stock (5% of outstanding shares) for $96,500 cash.

July

Received a cash dividend of $1.70 per share.

Dec.

Sold 800 shares of Pasco Corporation common stock for $40,200.

Received a cash dividend of $1.70 per share.

E-50

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 183 Jan. July

Dec.

1 1

Dec. 31

(8 min.) Stock Investments ....................................................... Cash ...................................................................

96,500

Cash (2,000 × $1.70) .................................................. Dividend Revenue ..............................................

3,400

Cash ........................................................................ Gain on Sale of Stock Investments .......................... Stock Investments (96,500 × 600/1,500) ...........................................

40,200

Cash (1,200 × $1.70) .................................................. Dividend Revenue ...................................................

2.040

96,500 3,400

1,600 38,600 2,040

Ex. 184 Ultra Cosmetics acquired 10% of the 200,000 shares of common stock of Kardashian Fashion at a total cost of $14 per share on March 18, 2014. On June 30 Kardashian declared and paid a $96,000 dividend. On December 31 Kardashian reported net income of $244,000 for the year. At December 31 the market price of Kardashian Fashion was $16 per share. The stock is classified as available-for-sale. Instructions Prepare all the necessary entries for 2014 for Ultra Cosmetics. Ans: N/A, LO: 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 Mar. 18 June 30

Dec. 31

(5 min.) Stock Investments ....................................................... Cash (200,000 × 10% × $14) ..............................

280,000

Cash ............................................................................ Dividend Revenue (96,000× 10%) .................................................

9,600

Fair Value Adjustment— Available-for-Sale .................................................... Unrealized Gain or Loss—Equity ($320,000 – $280,000) ....................................

280,000

9,600 40,000 40,000

Ex. 185 La Bouisse Inc. obtained significant influence over E-Stock Corporation by buying 40% of E-Stock 30,000 outstanding shares common stock at a total cost of $11 per share on January 1, 2014. On June 15 E-Stock declared and paid a cash dividend of $32,000. On December 31 E-Stock reported a net income of $120,000 for the year. Instructions Prepare all the necessary journal entries for 2014 for La Bouisse Inc. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Reporting and Analyzing Investments

E-51

Solution 185 (5 min.) Jan.

June 15

Dec. 31

Stock Investments ...................................................... Cash (30,000 × 40% × $11) ...............................

132,000

Cash ............................................................................ Stock Investments ($32,000 × 40%) .............................................

12,800

Stock Investments ....................................................... Revenue from Stock Investments ($120,000 × 40%)..................................................

48,000

132,000

12,800

48,000

Ex. 186 Cantor Corporation's balance sheet at December 31, 2013, showed the following: Short-term investments, at fair value $46,500 Cantor Corporation's trading portfolio of stock investments consisted of the following at December 31, 2013: Investment Interstate Common Stock Danforth Preferred Stock Georgin Common Stock

Number of Shares 200 400 300

Cost $30,000 6,000 9,000 $45,000

During 2014, the following transactions took place: Feb. 5 Mar. 30 Sept. 9

Sold 50 shares of Interstate common stock for $7,900. Purchased 25 shares of Georgia common stock for $850. Purchased 50 shares of Georgia common stock for $2,000.

At year end on December 31, 2014, the fair values per share were: Interstate Common Stock Danforth Delta Preferred Stock Georgin Common Stock

Market Value Per Share $151.00 $ 13.00 $ 33.00

Instructions (a)

Prepare the journal entries to record the 2014 stock transactions.

(b)

On December 31, 2014, prepare any adjusting entry that might be necessary relative to the trading portfolio.

(c)

Show how the stock investments will appear on Cantor Corporation's balance sheet at December 31, 2014.

Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-52

Solution 186 (a)

Feb.

Mar. 30

Sept. 9

(b)

(15-20 min.) Cash

....................................................................... 7,900 Stock Investments ............................................. Gain on Sale of Stock Investments ................... (To record sale of 50 shares of Interstate common stock)

Stock Investments ..................................................... Cash ................................................................. (To record purchase of 25 shares of Georgia common stock)

850

2,000

Investment Interstate Common Stock Danforth Preferred Stock Georgia Common Stock

Number of Shares 150 400 375

Cost $22,500 6,000 11,850 $40,350

Unrealized Loss—Income [($40,350 - $40,225) + $1,500*] ......... Fair Value Adjustment—Trading ........................................ *($46,500 fair value - $45,000 cost) (c)

7,500 400

850

2,000

Market Value $22,650 5,200 12,375 $40,225 1,625

Short-term investments, at fair value

1,625

$40,225

Ex. 187 On January 5, 2012, JBC Company purchased the following stock investments: 300 shares Getz Corporation common stock for $4,800. 500 shares Keller Corporation common stock for $10,000. 600 shares R-tel Corporation common stock for $18,000. Assume that JBC 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, 2014, JBC Company received the following cash dividends: Getz Corporation.......................................... Keller Corporation ....................................... R-tel Corporation .........................................

$2.00 per share $3.00 per share $1.50 per share

On November 15, 2014, JBC Company sold 100 shares of R-tel Corporation common stock for $3,600.

Reporting and Analyzing Investments

Ex. 187

E-53

(Cont.)

On December 31, 2014, the fair value of the securities held by JBC Company is as follows: Per Share Getz Corporation common stock $12 Keller Corporation common stock 16 R-tel Corporation common stock 33 Instructions Prepare the appropriate journal entries that the JBC Company should make on the following dates: January 5, 2014 June 30, 2014 November 15, 2014 December 31, 2014 Ans: N/A, LO: 3, 5,, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 187

(20-25 min.)

January 5, 2014 Stock Investments ...................................................................... Cash .................................................................................. (To record purchase of equity securities as a long-term investment) June 30, 2014 Cash ........................................................................................... Dividend Revenue ............................................................. (To record cash dividends received) *300 × $2 = $600; 500 × $3 = $1,500; and 600 × $1.50 = $900. November 15, 2014 Cash ........................................................................................... Stock Investments ............................................................. Gain on Sale of Stock Investments .................................... (To record sale of 100 shares of Riggs Corporation common stock) December 31, 2014 Unrealized Gain or Loss—Equity ................................................ Fair Value Adjustment—Available-for-Sale ........................ (To value long-term investments at fair value)

32,800 32,800

3,000* 3,000

3,600 3,000 600

1,700 1,700

Investment Portfolio Investment Getz Corporation Keller Corporation R-tel Corporation Total

Shares 300 500 500

Cost $ 4,800 10,000 15,000 $29,800 .

Fair Value $ 3,600 8,000 16,500 $28,100

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-54 Ex. 188

Santos Corporation has the following trading portfolio of stock investments as of December 31, 2013. Security Cost Fair Value A $17,000 $16,000 B 23,000 25,000 C 32,000 28,000 $72,000 $69,000 On January 22, 2014, Santos Corporation sold security C for $30,000. Instructions (a)

Prepare the adjusting entry for Santos Corporation on December 31, 2013 to report the portfolio at fair value.

(b)

Indicate the balance sheet and income statement presentation of the fair value data for the Santos Corporation at December 31, 2013.

(c)

Prepare the journal entry for the 2014 sale.

Ans: N/A, LO: 3, 5,, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 188 (a) Dec. 31

(b)

(12-17 min.) 2013 Unrealized Loss—Income ........................................... Fair Value Adjustment—Trading .........................

3,000 3,000

On the balance sheet, the short-term investments are reported in the current assets section as follows: Current Assets Short-term Investments, at fair value

$69,000

The unrealized loss account is reported under Other Expenses and Losses in the income statement.

2014 Cash ........................................................................... Loss on Sale of Stock Investments ............................. Stock Investments ..............................................

Ex. 189 King George Company has these data at December 31, 2014: Securities Cost Fair Value Trading $110,000 $119,000 Available-for-sale 100,000 95,000 The available-for-sale securities are held as a long-term investment.

30,000 2,000 32,000

Reporting and Analyzing Investments

Ex. 189

E-55

(Cont.)

Instructions (a)

Prepare the adjusting entries to report each class of securities at fair value.

(b)

Indicate the statement presentation of each class of securities and the related unrealized gain (loss) accounts.

Ans: N/A, LO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 189 (a)

(5 min.)

Fair Value Adjustment—Trading ($122,000 – $110,000) ....................................................... Unrealized Gain—Income ........................................... Unrealized Gain or Loss—Equity .............................................. Fair Value Adjustment—Available-for-Sale .........................

(b)

9,000 9,000 5,000 5,000

Balance Sheet Current Assets Short-term Investments, at fair value .................................. Investments Investments in stock of less than 20% owned companies, at fair value Stockholders' equity Less: Unrealized loss on available-for-sale securities .........

$119,000

Income Statement Other revenues and gains Unrealized gain—income ....................................................

95,000 $ (5,000)

$ 9,000

COMPLETION STATEMENTS 190. The purchase of a company in the same industry that does the same activity is called a ______________ acquisition. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

191. Debt investments are investments in government and _____________ bonds. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

192. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has _______________ influence over the investee and therefore, the appropriate method of accounting for this type of investment is the _______________ method. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

193. Under the cost method, dividends received from an investee company are credited to the _______________ account, whereas under the equity method, dividends received from an investee company are credited to the _______________ account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

194. At the beginning of the year, Dynamite Corporation acquired 15% of Tuesday Company common stock for $600,000. Tuesday Company reported net income for the year of $60,000 and paid $20,000 cash dividends during the year. The balance of the Stock Investments account on the books of the Dynamite Corporation at the end of the year should be $______________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

195. A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

196. _______________ securities are bought and held primarily for sale in the near future. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Investment Decisions

197. Fair Value Adjustment is a valuation ____________ account, which is _______________ to (from) the cost of the investments. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

198. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an ______________ that is reported on the _________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Investment Decisions

199. An unrealized loss on trading securities is reported under Other ____________________ in the income statement. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

200. An unrealized gain or loss on available-for-sale securities is reported as a separate component of _________________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

201. Short-term investments are securities that are _____________ and ______________ to be converted into cash within the next year. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Investment Decisions

Reporting and Analyzing Investments

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Answers to Completion Statements 190. horizontal 191. corporation 192. significant, equity 193. Dividend Revenue, Stock Investments 194. 600,000 195. parent, consolidated

196. 197. 198. 199. 200. 201.

Trading allowance, added (subtracted) unrealized loss, income statement Expenses and Losses stockholders’ equity readily marketable, intended

MATCHING 202.

Match the items below by entering the appropriate code letter in the space provided. A. Available-for-sale securities B. Subsidiary company C. Equity method D. Unrealized Gain or Loss—Equity E. Fair value

F. Consolidated financial statements G. Controlling interest H. Fair Value Adjustment I. Vertical acquisition 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. ____ 6. Financial statements that present the assets and liabilities controlled by the parent and the aggregate profitability of the affiliated companies. ____ 7. The Stock Investments account is adjusted for net income and dividends received. ____ 8. Purchase of a company in the same industry but involved in a different activity. ____ 9. Entity whose stock is owned by the parent company. ____ 10. An account that is reported in the stockholders' equity section. Ans: N/A, LO: 1-6, 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.

H E G A J

6. 7. 8. 9. 10.

F C I B D

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 203 1. What are the reasons that corporations invest in securities? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Investment Decisions

Solution 203 Companies invest because (1) they have excess cash for a short period of time, or (2) they want to generate investment income or (3) they have strategic reasons such as controlling a competitor or supplier or entering a new industry. S-A E 204 (a) When should a long-term investment in common stock be accounted for by the equity method? (b)

When is revenue recognized under the equity method?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 204 (a) Whenever the investor's influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20% or more ownership interest. Companies are required to use judgement, however, rather than blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another organization would not indicate significant influence. (b)

Revenue is recognized as it is earned by the investee.

S-A E 205 If a company has a stock investment that is properly accounted for by the equity method, what will be the effect on the financial statements when they receive a dividend from its investee? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 205 There will be no effect on the income statement. However, on the balance sheet Cash will be increased by the same amount that the Investment account is decreased. S-A E 206 Distinguish between the cost and equity methods of accounting for investments in stocks. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Investment Decisions

Reporting and Analyzing Investments

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Solution 206 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 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 207 A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why 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, LO: 4, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 207 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 208 The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 208 The Fair Value Adjustment account is a valuation allowance account for temporary and long-term investments. The Fair Value Adjustment account is increased when the difference between the investments’ fair value and cost increases. When specific securities are sold, the Fair Value Adjustment account is ignored because the account relates to the entire portfolio and not the specific securities. S-A E 209 When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 209 The unrealized loss would be reported in the Other Expenses and losses section of the Income Statement and the assets would be decreased by a credit balance in the Fair Value Adjustment— Trading valuation account.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

S-A E 210 When a year-end adjustment is made to reduce the available-for-sale securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 210 There would be no effect on the income statement related to this adjustment. The unrealized loss would be reported as a reduction in the stockholders’ equity section of the balance sheet and the assets would be decreased by a credit balance in the Fair Value Adjustment—Available-For-Sale valuation account. S-A E 211 (Ethics) High Country Stables, Inc., operates several dog-racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for High Country are received from April through October. These funds are usually invested in temporary, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Vendable, Inc. a company specializing in automatic vending equipment. The company decided not to sell its Vendable stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as temporary until the takeover is accomplished, so that less attention will be directed to it. (Presently, High Country has no long-term investment in stock at all.) Required: 1. Is it ethical for High Country to attempt to take over another company? Explain. 2. Is it ethical for High Country to leave its investment in the temporary investment category? Explain. Ans: N/A, LO: 5, Bloom: E, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 211 1. Yes, High Country may attempt to "take over" or purchase another company. The means that it uses to accomplish its goal must be ethical, and certainly building up a portfolio of the stock in question is ethical. Unethical takeovers are those in which a company is purchased for its assets and "harvested," leaving employees without jobs, and possibly irreparably damaging a community. 2. It is not ethical for the company to leave the stock in the temporary category if it no longer meets the criterion for a temporary investment. It would depend upon whether the company was serious in its intention to purchase a controlling interest in Vendable. Since there is no evidence to the contrary, it appears that High Country's investment should be classified as long-term.

Reporting and Analyzing Investments

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S-A E 212 (Communication) Kalyn Gise is the daughter of Mark Gise, the founder and president of Carolina Blue 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 temporary investments 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 Kalyn question. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 212 This communication can be informal, but it should contain the key elements of the answer.

Dear Kalyn, Yesterday, you asked to see how we recorded the $10,000 that the company had "earned" because of the jump in the price of some of the stock we hold. Since we were finishing month-end closing, we couldn't answer your question right away. An increase in the value of temporary investments is an unrealized gain. An unrealized gain is reported in the income statement because of the likelihood that the securities will be sold at fair value since they are a temporary investment. The gain is recorded by increasing the amount reported as temporary investments and recording an unrealized gain. Again, I'm sorry we couldn't ask you to stay yesterday. Stop by again sometime (any time except month’s end!) (signed)

APPENDIX F PAYROLL ACCOUNTING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

1. 2.

1 1

K K

3. 4.

1 2

11. 12. 13. 14.

1 1 1 1

K AP AP K

15. 16. 17. 18.

1 1 1 1

28.

29.

1,2

30. 31.

1,2 1,2

AP AP

32. 33.

1,2 2

36.

37.

Item

3 3

C C

9. 10.

3 3

C K

3 3 3 3

K K K K

27.

True-False Statements K 5. 2 K 7. K 6. 2 K 8. Multiple Choice Questions AP 19. 2 C 23. K 20. 2 C 24. K 21. 2 K 25. C 22. 2 K 26. Brief Exercises AN Exercises AP 34. 2 AP AP 35. 3 AP Completion Statements K 38. 2 K

Matching: 39, Short Answer: 40

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 2. 3.

TF TF TF

11. 12. 13.

MC MC MC

14. 15. 16.

4. 5. 6.

TF TF TF

19. 20. 21.

MC MC MC

22. 29. 30.

7. 8.

TF TF

9. 10.

TF TF

23. 24.

Note: TF = True-False MC = Multiple Choice Be = Brief Exercise Matching: 39, Short Answer: 40

Type

Item

Type

Item

Learning Objective 1 MC 17. MC 29. MC 18. MC 30. MC 28. Be 31. Learning Objective 2 MC 31. Ex 34. Ex 32. Ex 37. Ex 33. Ex 38. Learning Objective 3 MC 25. MC 27. MC 26. MC 35. Ex = Exercise C = Completion

Type

Item

Type

Be Ex Ex

32. 36.

Ex C

Ex C C MC Ex

Item

Type

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. 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, Salaries and Wages Expense is debited for gross earnings, individual tax and other liability accounts are credited for payroll deductions, and Salaries and Wages Payable is credited for net pay. When the payroll is paid, Salaries and Wages Payable is debited, and Cash is credited. 2. 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 payroll is recorded by debiting Payroll Tax Expense and crediting separate liability accounts for each type of tax. 3. Discuss the objectives of internal control for payroll. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy of the accounting records pertaining to payrolls.

TRUE-FALSE STATEMENTS 1.

FICA taxes and federal income taxes are levied on employees' earnings without limit.

Answer: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

An employee earnings record is a cumulative record of each employee's gross earnings, deductions, and net pay during the year.

Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Reporting, AICPAPC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

The employer incurs a payroll tax expense equal to the amount withheld from the employees' wages for federal income taxes.

Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

The state unemployment tax rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year.

Answer: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

A Wage and Tax Statement shows gross earnings, FICA taxes withheld, and income taxes withheld for the year.

Answer: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

7. Internal control over payroll is not necessary because employees will complain if they do not receive the correct amount on their payroll checks. Answer: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

Payroll Accounting 8.

F-3

A good internal control feature is to have a written hiring authorization form completed before a new employee is added to the payroll.

Answer: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Risk Analysis, AICPA-PC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

A good internal control feature is to have several employees choose one person to punch all of their time cards.

Answer: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Risk Analysis, AICPA-PC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

10.

An employee's time card is used to record the number of exemptions claimed by the employee for income tax withholding purposes.

Answer: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2.

F T

3. 4.

T F

5. 6.

T T

7. 8.

F T

9. 10.

F F

MULTIPLE CHOICE QUESTIONS 11.

Which one of the following payroll taxes does not result in a payroll tax expense for the employer? a. FICA tax b. Federal income tax c. Federal unemployment tax d. State unemployment tax

Answer: b, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

12.

Lucie Ball's regular rate of pay is $15 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were a. $720. b. $600. c. $780. d. $1,080.

Answer: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: (40  $15) + [($15  1.5)  8] = $780

13.

Assuming a FICA tax rate of 7.65% on the first $110,100 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 $92,000? a. $84,962 b. $65,430 c. $73,600 d. $66,562

Answer: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: $92,000 − [$92,000  (.0765 + .20)] = $66,562

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

14.

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.

Answer: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No

15.

Jerri Rice has worked 44 hours this week. Her regular hourly wage is $12 per hour. What are Jerri's gross wages for the week? (The company Jerri works for is in compliance with the Fair Labor Standards Act.) a. $528 b. $552 c. $792 d. $576

Answer: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: (40  $12) + [($12  1.5)  4] = $552

16.

FICA taxes do not provide workers with a. life insurance. b. supplemental retirement. c. employment disability. d. medical benefits.

Answer: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

17.

Employees claim allowances for income tax withholding on a. Form W-4. b. Form W-2. c. Form 1040. d. Schedule A.

Answer: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

18.

The journal entry to record the payroll for a period will include a credit to Salaries and Wages Payable for the gross a. amount less all payroll deductions. b. amount of all paychecks issued. c. pay less taxes payable. d. pay less voluntary deductions.

Answer: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

19.

Which one of the following payroll taxes is not withheld from the employee's wages because it is not levied on the employee? a. Federal income tax b. Federal unemployment tax c. State income tax d. FICA tax

Answer: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Payroll Accounting 20.

F-5

By January 31 following the end of a calendar year, an employer is required to provide each employee with a(n) a. state unemployment tax form. b. federal unemployment tax form 940. c. wage and tax statement form W-2. d. employee's withholding allowance certificate form W-4.

Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

21.

The tax that is paid equally by the employer and employee is the a. federal income tax. b. federal unemployment tax. c. state unemployment tax. d. FICA tax.

Answer: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

22.

The effective federal unemployment tax rate is usually a. 6.2%. b. 0.8%. c. 5.4%. d. 8.0%.

Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

23.

Changes in pay rates during employment should be authorized by the a. personnel department. b. payroll department. c. treasurer's department. d. timekeeping department.

Answer: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

24.

Which of the following employees would likely receive a salary instead of wages? a. Store clerk b. Factory employee c. Sales manager d. Manual laborer

Answer: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No

25.

Control over timekeeping does not include a. having one employee punch the time cards for several employees in the same work area. b. time clock procedure monitoring by a supervisor. c. pay period time reports kept by a supervisor for salaried personnel. d. overtime approval by a supervisor.

Answer: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: N

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

26.

Which of the following is not performed by the payroll department? a. Preparation of payroll checks b. Maintaining payroll records c. Signing of payroll checks d. Preparation of payroll tax returns

Answer: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

27.

The payroll is paid by the a. personnel department. b. payroll department. c. cashier. d. treasurer's department.

Answer: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

11. 12. 13.

b c d

14. 15. 16.

c b a

17. 18. 19.

a a b

20. 21. 22.

c d b

23. 24. 25.

a c a

26. 27.

c d

BRIEF EXERCISES Be. 28 Ann Hech's regular hourly wage is $18 an hour. She receives overtime pay at the rate of time and a half. The FICA tax rate is 7.65%. Ann is paid every two weeks. For the first pay period in January, Ann worked 86 hours of which 6 were overtime hours. Ann's federal income tax withholding is $400 and her state income tax withholding is $170. Ann has authorized that $50 be withheld from her check each pay period for savings bonds. Instructions Compute Ann Hech's gross earnings and net pay for the pay period showing each payroll deduction in arriving at net pay. Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 28

(10 min.)

Gross Earnings: Regular Pay: 80 hours × $18/hr. Overtime Pay: $18 × 1.5 = $27/hr for overtime 6 overtime hours × $27 Total Gross Earnings: Net Pay: Gross Earnings Less: Federal Income Taxes Payable State Income Taxes Payable FICA Taxes Payable Savings Bonds Payable Net Pay:

$1,440 162 $1,602 $1,602.00 $400.00 170.00 122.55 50.00

742.55 $ 859.45

Payroll Accounting

F-7

Be. 29 Warren Company's payroll for the week ending January 15 amounted to $200,000 for salaries and wages. None of the employees has reached the earnings limits specified for federal or state employer payroll taxes. The following deductions were withheld from employees' salaries and wages: Federal Income Tax State Income Tax FICA Taxes Union Dues United Fund

$45,000 9,000 15,300 2,700 1,800

Federal unemployment tax (FUTA) rate is 6.2% less a credit equal to the rate paid for state unemployment taxes. The state unemployment tax (SUTA) rate is 5.4%. Instructions Prepare the journal entries to record the weekly payroll ending January 15 and also the employer’s payroll tax expense on the payroll. Answer: N/A, LO: 1,2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 29 Jan. 15

(10 min.)

Salaries and Wages Expense ........................................ 200,000 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)

15 Payroll Tax Expense ...................................................... FICA Taxes Payable ............................................... Federal Unemployment Taxes Payable .................. State Unemployment Taxes Payable ...................... (To record employer's payroll taxes on January 15 payroll)

45,000 9,000 15,300 2,700 1,800 126,200

27,700 15,300 1,600 10,800

F-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

EXERCISES Ex. 30 Sam Geller had earned (accumulated) salary of $104,500 through November 30. His December salary amounted to $9,500. Lara Lane began employment on December 1 and will be paid her first month's salary of $6,000 on December 31. Income tax withholding for December for each employee is as follows:

Federal Income Tax State Income Tax

Sam Geller $2,780 490

Lara Lane $1,200 240

The following payroll tax rates are applicable: FICA tax on first $110,100 FUTA tax on first $7,000 SUTA tax on first $7,000

7.65 (1.45% over $110,100) 6.2%* 5.4%

*Less a credit equal to the state unemployment contribution Instructions Record the payroll for the two employees at December 31 and record the employer's share of payroll tax expense for the December 31 payroll. Answer: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 30 Dec. 31

(15 min.)

Salaries and Wages Expense ....................................... 15,500.00 Federal Income Taxes Payable ............................ State Income Taxes Payable ................................ FICA Taxes Payable ............................................ Salaries and Wages Payable................................ (To record December 31 payroll)

3,980.00 730.00 943.95 9,846.05

FICA Taxes Sam Geller ($5,600  6.2%) + ($9,500  1.45%) $484.95 Lara Lane ($6,000 × 7.65%) = 459.00 $943.95 * Payroll Tax Expense ..................................................... 1,316 FICA Taxes Payable ............................................ Federal Unemployment Taxes Payable ................ State Unemployment Taxes Payable.................... (To record employer's share of payroll taxes for Dec. 31 payroll) Rounded (FUTA and SUTA are based only on Lara Lane's salary of $6,000.)

944 48 324

Payroll Accounting

F-9

Ex. 31 Assume that the payroll records of Erroll Oil Company provided the following information for the weekly payroll ended November 26, 2013. Year-to-Date Hourly Federal Earnings Through Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week C. Young 40 $55 $432 — $111,000 J. Ward 46 10 65 $5 23,200 K. Hurt 44 18 126 7 5,100 M. King 42 22 169 9 49,500 Additional information: All employees are paid overtime at time and a half for hours worked in excess of 40 per week. The FICA tax rate is 7.65% for the first $110,100 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.

Answer: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 31

(20 min.)

(a)

ERROLL OIL COMPANY Payroll Register For the Week Ending November 26, 2013 ——————————————————————————————————————————— Earnings Deductions Total Gross Employee Hours Reg. Overtime Pay FICA FIT Union Net Pay C. Young 40 2,200 — 2,200 — 432 — 1,768.00 J. Ward 46 400 90 490 37.49 65 5 382.51 K. Hurt 44 720 108 828 63.34 126 7 631.66 M. King 42 880 66 946 72.37 169 9 695.63 4,200 264 4,464 173.20 792 21 3,477.80 (b) Nov. 26

Salaries and Wages Expense ...................................... FICA Taxes Payable ........................................... Federal Income Taxes Payable ........................... Union Dues Payable ............................................ Salaries and Wages Payable .............................. (To record weekly payroll)

4,464.00

Payroll Tax Expense .................................................... 224.53 State Unemployment Taxes Payable ($828 × .054) Federal Unemployment Taxes Payable ($828 ×.008) FICA Taxes Payable ........................................... (To record employer's payroll taxes)

173.20 792.00 21.00 3,477.80

44.71 6.62 173.20

F - 10

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 32 Diane Lane earns a salary of $9,500 per month during the year. FICA taxes are 7.65% on the first $110,100 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, $32,300 was withheld for federal income taxes and $6,700 was withheld for state income taxes. Instructions (a) Prepare a journal entry summarizing the payment of Lane’s total salary during the year. (b) Prepare a journal entry summarizing the employer payroll tax expense on Lane's salary for the year. (c) Determine the cost of employing Lane for the year. Answer: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 32 (a)

(5 min.)

Salaries and Wages Expense ..................................................... 114,000.00 Federal Income Taxes Payable .......................................... State Income Taxes Payable ............................................. FICA Taxes Payable .......................................................... Salaries and Wages Payable .............................................

32,300.00 6,700.00 8,479.20 66,520.80

($110,100  .062) + [($9,500  12)]  .0145 = $8,479.20

(b)

(c)

Payroll Tax Expense ................................................................... FICA Taxes Payable .......................................................... Federal Unemployment Taxes Payable .............................. State Unemployment Taxes Payable .................................

8,913.20 8,479.20 56.00 378.00

The total cost of employment is: $114,000 + $8,913 = $122,913.

Ex. 33 Banner 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 Assume the following: FICA tax rate State Unemployment tax rate Federal Unemployment tax rate

$900,000 100,000 610,000 7.65% 5.4% (SUTA) .8% (FUTA)

Instructions Compute Banner's payroll tax expense for the year. Make a summary journal entry to record the payroll tax expense. Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Payroll Accounting Solution 33

F - 11

(25 min.)

Compute FICA tax: Less: Exempted wages Wages subject to FICA tax Applicable tax rate FICA tax expense

$900,000 100,000 800,000 x .0765 $61,200

Compute FUTA tax: Less: Exempted wages Wages subject to FUTA tax Applicable tax rate FUTA tax expense

$900,000 610,000 290,000 x .008 $2,320

Wages subject to SUTA tax Applicable tax rate SUTA tax expense

$290,000 x .054 $15,660

Journal entry to record payroll tax expense: Payroll Tax Expense ..................................................................... FICA Taxes Payable ............................................................. FUTA Taxes Payable ............................................................ SUTA Taxes Payable ...........................................................

79,180 61,200 2,320 15,660

Ex. 34 The following payroll liability accounts are included in the ledger of Clementine Company on January 1, 2013: FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable Union Dues Payable Health Insurance Payable U. S. Savings Bonds Payable

$1,600 4,000 665 175 1,190 400 5,000 1,000

In January, the following transactions occurred: Jan. 9 11 14 18 21 22

Sent a check for $5,000 to Blue Cross and Blue Shield. Deposited a check for $5,600 in Federal Reserve Bank for FICA taxes and federal income taxes withheld. Sent a check for $400 to the union treasurer for union dues. Paid state income taxes withheld from employees. Paid state and federal unemployment taxes. Purchased U. S. Savings Bonds for employees by writing a check for $1,000.

Instructions Journalize the January transactions Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

F - 12

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 34 Jan. 9

(15 min.)

Health Insurance Payable .................................................. Cash ..........................................................................

5,000

FICA Taxes Payable .......................................................... Federal Income Taxes Payable .......................................... Cash ..........................................................................

1,600 4,000

Union Dues Payable .......................................................... Cash ..........................................................................

400

State Income Taxes Payable ............................................. Cash ..........................................................................

665

State Unemployment Taxes Payable .................................. Cash...........................................................................

1,190

Federal Unemployment Taxes Payable............................... Cash...........................................................................

175

U. S. Savings Bonds Payable ............................................. Cash...........................................................................

1,000

5,000

5,600 400

665

1,190 175

1,000

Ex. 35 Match the codes assigned to the following payroll functions to the procedures listed below: H = Hiring Employees T = Timekeeping

PRE = Preparing the Payroll PAY = Paying the Payroll

1. ____ Distribution of checks by the treasurer. 2. ____ Supervisor approves hours worked. 3. ____ Posting job openings. 4. ____ Maintenance of payroll records. 5. ____ Verification of payroll calculations. 6. ____ Screening and interviewing of job applicants. 7. ____ Employment authorization. 8. ____ Signing prenumbered payroll checks. 9. ____ Use of a timeclock. 10. ____ Payroll tax return preparation. 11. ____ Employee signs receipt acknowledging cash received. 12. ____ Documentation of employee hiring. Answer: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Payroll Accounting Solution 35 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

PAY T H PRE PRE H H PAY T PRE PAY H

F - 13

(6 min.) Distribution of checks by the treasurer. Supervisor approves hours worked. Posting job openings. Maintenance of payroll records. Verification of payroll calculations. Screening and interviewing of job applicants. Employment authorization. Signing prenumbered payroll checks. Use of a timeclock. Payroll tax return preparation. Employee signs receipt acknowledging cash received. Documentation of employee hiring.

COMPLETION STATEMENTS 36.

Two federal taxes which are levied against employees' wages that must be deducted in arriving at net pay are (1) ________________ taxes and (2) _______________ taxes.

Answer: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

37.

The employer incurs a payroll tax expense equal to the amount contributed by each employee for ______________ taxes.

Answer: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

38.

A payroll tax expense which is borne entirely by the employer is the federal _______________ tax.

Answer: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

Answers to Completion Statements 36. 37. 38.

FICA, federal income FICA unemployment

MATCHING 39. Match the items below by entering the appropriate code letter in the space provided. A. B. C.

Wage and Tax Statement Net pay Federal income taxes

D. E.

FICA taxes Federal unemployment taxes

____

1. Levied against employees' wages without limit.

____

2. A payroll tax expense levied only against the employer based on employees' wages.

____

3. Gross earnings less payroll deductions.

____

4. A form showing gross earnings and income taxes withheld.

____

5. Levied against employees' wages with a maximum limit.

Answer: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

F - 14

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

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

C E B A D

SHORT-ANSWER ESSAY S-A E 40 An employee's net pay consists of gross pay less mandatory and voluntary payroll deductions. Identify the mandatory payroll deductions and give two or three examples of common voluntary deductions. Are these deductions recognized as payroll expenses by the employer? What type of payroll expenses does the employer incur related to having a payroll? Answer: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3-5, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 40 Mandatory payroll deductions include both federal and state income taxes and also FICA taxes. Among the deductions that are voluntary payroll deductions are United Way contributions, savings account deposits, insurance payments, and pension plan contributions. These mandatory payroll deductions do not represent payroll expenses for the employer because the employer is only acting as an agent in collecting these deductions. The expenses that do constitute payroll expenses for the employer include the federal and state unemployment taxes and the employer share of FICA taxes.

APPENDIX G SUBSIDIARY LEDGERS AND SPECIAL JOURNALS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES True-False Statements Item

Item

2 2 2 3

K K K C

17. 18. 19. 20.

3 3 3 3

K C C C

48. 49. 50. 51. 52. 53. 54. 55. 56.

3 3 3 3 3 3 3 3 3

K K K C C C C K K

57. 58. 59. 60. 61. 62. 63. 64. 65.

3 3 3 3 3 3 3 3 3

K K K K C C K K K

78. 79.

3 3

AN AN

80. 81.

3 3

AN AN

True-False Statements 1. 2. 3. 4.

1 1 1 1

K K K C

5. 6. 7. 8.

1 1 1 1

K K K C

9. 10. 11. 12.

2 2 2 2

K K K K

13. 14. 15. 16.

Multiple Choice Questions 21. 22. 23. 24. 25. 26. 27. 28. 29.

1 1 1 1 1 2 2 2 2

C K K K K K K C K

30. 31. 32. 33. 34. 35. 36. 37. 38.

2 2 2 2 2 2 2 2 2

K K K K C K K K K

39. 40. 41. 42. 43. 44. 45. 46. 47.

2 2 2 2 3 3 3 3 3

K C C K C C C C K

Brief Exercises 66. 67.

1 2

AP AP

68. 69.

2 2

AP AP

70. 71.

2 3

AP AP

Exercises 72. 73.

2 2

AN AP

74. 75.

2 2

AP AP

76. 77.

2 3

AN AN

Completion Statements 82. 83.

1 2

K C

84. 85.

2 3

C K

86. 87.

3 3

C K

Matching 88.

89.

Short-Answer Essay

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item Type Item Type Item

Type Item Type Item Type Item

Learning Objective 1 1. 2. 3.

TF TF TF

4. 5. 6.

TF TF TF

7. 8. 21.

TF TF MC

22. 23. 24.

MC MC MC

25. 66. 72.

MC Be Ex

73. 88.

Ex Ma

Type

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Item Type

Item Type Item Type Item

Type Item Type Item Type Item Type

Learning Objective 2 9. 10. 11. 12. 13.

TF TF TF TF TF

14. 15. 26. 27. 28.

TF TF MC MC MC

29. 30. 31. 32. 33.

MC MC MC MC MC

34. 35. 36. 37. 38.

MC MC MC MC MC

39. 40. 41. 42. 67.

MC MC MC MC Be

68. 69. 70. 74. 75.

Be Be Be Ex Ex

76. 89.

Ex SA

Learning Objective 3 16.TF 17.TF 18.TF 19.TF 20.TF

43.MC 44.MC 45.MC 46.MC 47.MC

48.MC 49.MC 50.MC 51.MC 52.MC

Note: TF = True-False MC = Multiple Choice

53.MC 54.MC 55.MC 56.MC 57.MC C = Completion Ex = Exercise

58.MC 59.MC 60.MC 61.MC 62.MC

63.MC 64.MC 65.MC 71.Be 77.Ex

78.Ex 79.Ex 80.Ex 81.Ex

Ma = Matching SA = Short-Answer Essay

CHAPTER LEARNING OBJECTIVES 1. Describe the nature and purpose of a subsidiary ledger. A subsidiary ledger is a group of accounts with a common characteristic. It facilitates the recording process by freeing the general ledger from details of individual balances. 2. Explain how special journals are used in journalizing. A special journal is used to group similar types of transactions. In a special journal, generally only one line is used to record a complete transaction. 3. Indicate how a multi-column journal is posted. In posting a multi-column journal: (a)

All column totals except for the Other Accounts column are posted once at the end of the month to the account title specified in the column heading.

(b)

The total of the Other Accounts column is not posted. Instead, the individual amounts comprising the total are posted separately to the general ledger accounts specified in the Account Credited 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 column.

Subsidiary Ledgers and Special Journals

G-3

TRUE-FALSE STATEMENTS 1.

A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Control accounts are always located in the general ledger.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A control account and subsidiary ledger can be established for inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A subsidiary ledger provides up-to-date information on specific account balances.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Special journals are used to record unique transactions which do not occur very often.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11.

The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

G-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

12.

A cash payments journal should not be used to record transactions which require payment by check.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13.

If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

14.

A debit column for Sales Returns and Allowances may be found in the cash payments journal.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

A single-column purchases journal is used to record purchases of merchandise on account.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

16.

Using special journals can save time in posting because column totals are often posted rather than individual entries.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

17.

The reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

18.

Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19.

The amounts appearing in the Merchandise Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.

Ans: F, LO: 3, Bloom: C, 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

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3.

F F T

4. 5. 6.

F T T

7. 8. 9.

T F F

10. 11. 12.

T F F

13. 14. 15.

F F T

16. 17. 18.

T F F

19. 20.

F F

Subsidiary Ledgers and Special Journals

G-5

MULTIPLE CHOICE QUESTIONS 21.

The balance of a control account in the general ledger a. must always be zero. b. must equal the amount of total assets. c. is always greater than the composite balance of individual accounts in a related subsidiary ledger. d. must equal the composite balance of individual accounts in a related subsidiary ledger.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

A subsidiary ledger is a. used in place of the general ledger if the general ledger is destroyed or stolen. b. a group of accounts used by branches and subsidiaries of a corporate business. c. a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger. d. used to post excess transactions if a general ledger account becomes full during an accounting period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

23.

A subsidiary ledger frees the general ledger from details of a. individual balances. b. external transactions. c. internal transactions. d. the control account.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

24.

A company would not likely use subsidiary ledgers for a. inventory. b. retained earnings. c. equipment. d. accounts receivable.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

25.

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, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

26.

A sales journal is used to record a. only cash sales of merchandise. b. sales of all assets on credit and for cash. c. only credit sales of merchandise. d. credit sales of merchandise, sales returns and allowances, and sales discounts.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

G-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

27.

If a transaction cannot be recorded in a special journal a. the company must refuse to enter into the transaction. b. it is recorded in the general journal. c. it is recorded directly in the accounts in the general ledger. d. it is recorded as an adjustment on the work sheet.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

28.

The one characteristic that all entries recorded in a cash receipts journal have in common is a. a credit to the Cash account. b. that they all represent collections from customers. c. that they originate from the sales of merchandise. d. a debit to the Cash account.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

29.

A single-column purchases journal indicates that a. only purchases of merchandise on account can be recorded. b. all purchases of merchandise can be recorded. c. all acquisitions on account can be recorded. d. another column must be added so that debits and credits can be recorded.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

30.

The one characteristic that all entries recorded in a multiple-column purchases journal have in common is a a. credit to the Cash account. b. debit to the Cash account. c. debit to the Accounts Payable account. d. credit to the Accounts Payable account.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31.

A company which uses special journals should record a transaction involving the purchase of merchandise for cash in a a. single-column purchases journal. b. multiple-column purchases journal. c. cash payments journal. d. general journal.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

32.

If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the a. general journal. b. cash receipts journal. c. cash payments journal. d. sales journal.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals 33.

G-7

Which of the following is not a special journal? a. Sales journal b. Purchases journal c. General journal d. Cash receipts journal

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

34.

Correcting entries are journalized in a. a special journal. b. the general journal. c. the general ledger. d. a correcting journal.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

35.

Adjusting entries are recorded a. only on the work sheet. b. only in the general ledger. c. in the general journal. d. in the special journals.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

36.

If a transaction cannot be recorded in a special journal, it is a. not recorded. b. a correcting entry. c. recorded in the general journal. d. an error.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

37.

A company uses a sales journal, cash receipts journal, purchases journal, cash payments journal, and a general journal. A cash sales return would be recorded in the a. sales journal. b. cash receipts journal. c. cash payments journal. d. general journal.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

38.

The entries in a sales journal will show a. all sales of merchandise. b. the cash sales of the company. c. the credit sales of merchandise. d. all sales of the company.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39.

Entries in a sales journal a. are made from sales invoices. b. will indicate the invoice number in the reference column of the sales journal. c. will occupy two lines of the sales journal. d. indicate either a cash debit or accounts receivable debit.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

G-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

40.

Journalizing in a sales journal will not a. require a debit to Accounts Receivable. b. show a sales invoice number. c. affect the reference column of the journal. d. include a credit to the Sales Revenue account.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41.

If a company purchases merchandise for cash, the transaction should be recorded in the a. purchases journal. b. general journal. c. cash payments journal. d. sales journal.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

42.

Cash from sales of merchandise will be recorded in the a. purchases journal. b. sales journal. c. cash receipts journal. d. general journal.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

43.

Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the a. sales journal. b. cash receipts journal. c. purchases journal. d. cash payments journal.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

44.

Entries in a sales journal are a. posted only to accounts in an accounts receivable subsidiary ledger. b. posted only to accounts in the general ledger. c. posted to accounts in an accounts receivable subsidiary ledger and to accounts in the general ledger. d. never posted.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

45.

Which one of the following columns in a cash receipts journal is not posted in total to an account in the general ledger? a. Cash column b. Sales Discounts column c. Accounts Receivable column d. Other Accounts column

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

Subsidiary Ledgers and Special Journals 46.

G-9

The use of special journals to record transactions a. eliminates the need for a general ledger. b. can save time in the posting process. c. eliminates the need for a general journal. d. should only be used if the volume of transactions is small.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

47.

Posting a sales journal to the accounts in the general ledger requires a a. debit to Cash and a credit to Sales Revenue. b. debit to Sales Revenue and a credit to Inventory. c. debit to Accounts Receivable and a credit to Inventory. d. debit to Accounts Receivable and a credit to Sales Revenue.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

48.

The entries recorded in the Other Accounts column of a cash payments journal a. are posted to the accounts payable subsidiary ledger daily. b. are posted individually to accounts in the general ledger. c. are not posted individually but are posted as a column total to the general ledger. d. do not require posting.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

49.

Proving the equality of the totals in the columns of multiple-column special journals is called a. posting to the subsidiary. b. debiting and crediting. c. footing and cross-footing. d. updating the master file.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

50.

If a company records merchandise it returns to suppliers in the general journal, then a. a posting must be made only to the accounts payable control account. b. a posting must be made only to the accounts payable subsidiary ledger account. c. a dual posting must be made. d. there will be a debit to Merchandise Inventory.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

51.

Wiggins Inc. uses a sales journal. An entry in this journal represents a a. debit to Cash; credit to Sales Revenue. b. debit to Accounts Receivable; credit to Sales Revenue. c. debit to Sales Discounts; credit to Cash. d. debit to Accounts Payable; credit to Sales Returns and Allowances.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

G - 10 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition 52.

Which accounts in the general ledger are affected when the monthly posting is made from the sales journal? a. Accounts Receivable; accounts receivable subsidiary accounts b. Accounts receivable subsidiary accounts; Sales Revenue c. Accounts Receivable; Sales Revenue d. Accounts Receivable; Inventory

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

53.

Which of the following is not a true statement about the daily posting of the sales journal? a. There is a debit posting to accounts in the accounts receivable subsidiary ledger. b. There is no credit posting. c. The reference column in the sales journal is checked when the posting is 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, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

54.

Evidence that the monthly posting of the sales journal total has been accomplished is indicated by a. a signature of the accountant doing the posting. b. a date under the double-line total. c. the general ledger account numbers under the double-lined total. d. inspecting the postings in the accounts payable subsidiary ledger.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

55.

Which of the following economic events would not be recorded in the cash receipts journal? a. Cash sales of merchandise b. Collections of accounts receivable c. Cash from sale of land d. Cash purchases of merchandise

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

56.

In this text the "Other Accounts" column in a cash receipts journal is also referred to as the a. miscellaneous column. b. excess column. c. sundry accounts column. d. compound-entry column.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

57.

The process of totaling the columns of a journal is termed a. ruling. b. columnizing. c. sizing. d. footing.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals 58.

G - 11

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

59.

Cross-footing a cash receipts journal means a. the equality of debits and credits in the journal has been proved. b. each line of the journal has a horizontal total. c. the columns of the journal have been cross-referenced. d. all necessary postings have been completed.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

60.

Which of the following would not be an appropriate heading for a column in the cash receipts journal? a. Cash b. Accounts Payable c. Sales Discounts d. Sales Revenue

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

61.

Proving the postings of a single-column purchases journal would involve comparing the a. general ledger posting to Accounts Payable to the debit postings of the accounts receivable subsidiary ledger. b. general ledger posting to Accounts Payable to the general ledger posting to Inventory. c. general ledger credit posting to Accounts Payable to the general ledger debit posting to Inventory. d. debit postings to the accounts receivable subsidiary ledger to the credit postings to the accounts payable subsidiary ledger.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

62.

If a company uses a multiple-column purchases journal, which of the following possible headings for debit columns of the journal would not be appropriate? a. Accounts Payable b. Inventory c. Supplies d. Other Accounts

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

63.

Entries in the cash payments journal are made from a. sales invoices. b. purchase invoices. c. prenumbered checks. d. canceled checks.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

G - 12 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition 64.

The reference column of a multiple-column cash payments journal after posting a. will only contain check marks. b. will be blank. c. will only contain account numbers. d. may contain either account numbers or check marks.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

65.

The reference column of the accounts in the accounts payable subsidiary ledger after posting may show a. only P references. b. CP, P, or G references. c. G, P, or S references. d. only CP references.

Ans: B, LO: 3, 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.

21. 22. 23. 24. 25. 26. 27.

d c a b c c b

28. 29. 30. 31. 32. 33. 34.

d a d c c c b

35. 36. 37. 38. 39. 40. 41.

c c c c a c c

42. 43. 44. 45. 46. 47. 48.

c a c d b d b

49. 50. 51. 52. 53. 54. 55.

c c b c d c d

56. 57. 58. 59. 60. 61. 62.

c d b a b c a

63. 64. 65.

c d b

BRIEF EXERCISES Be. 66 Presented below is information related to Walnut Company for its first month of operations. Identify the balances that appear in the accounts receivable subsidiary ledger and the accounts receivable balance that appears in the general ledger at the end of January. _____________Credit Sales_________ Jan. 5 Wang Co. $8,000 15 Mumua Co. 6,000 24 Lopez Co. 10,000

______Cash Collections_______ Jan. 15 Wang Co. $6,500 22 Mumua Co. 4,000 29 Lopez Co. 10,000

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 66

(10 min.)

Wang Co. subsidiary balance is $1,500 ($8,000 - $6,500) Mumua Co. subsidiary balance is $2,000 ($6,000 - $4,000) Lopez Co. subsidiary balance is $0 ($10,000 - $10,000) The balance that appears in the account receivable general ledger is $3,500 ($1,500 + $2,000).

Subsidiary Ledgers and Special Journals

G - 13

Be. 67 Waco Auto 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. Stockholders invested cash in the business.

____

2. Purchased store supplies on account.

____

3. Sold merchandise to customer on account.

____

4. Purchased a 2-year fire insurance policy for cash.

____

5. Received a check from a customer as payment on account.

____

6. Paid for store supplies purchased in transaction 2.

____

7. Purchased merchandise on account.

____

8. Issued a credit memorandum to a customer who returned defective merchandise previously sold on account.

____

9. Purchased office equipment for cash.

____ 10. Made an adjusting entry for store supplies used during the period. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Applications

Solution 67 1. 2. 3. 4. 5.

(10 min.) CR G S CP CR

6. 7. 8. 9. 10.

CP P G CP G

G - 14 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Be 68 Landrum Electronics 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 $3,600; it should have been $3,690. 2. A remittance of $500 from Dale Mitchell was correctly recorded in the cash receipts journal, but the amount was posted incorrectly to the account of customer Darin Mitchell in the subsidiary ledger. 3. A purchase of merchandise on account from Walt’s Electronics for $1,000 was incorrectly entered in the purchases journal at $10,000. 4. In the sales journal, the entries were incorrectly added for the month. The monthly total was listed as $24,280; it should have been $24,820. Instructions Indicate how each of the above errors might be discovered. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: FSA

Solution 68

(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. Dale Mitchell’s 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 Walt’s Electronics 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 $540 lower than the subsidiary ledger. Re-footing the sales journal should then locate the error. Be. 69 Below are some typical transactions incurred by Dryden Manufacturing Company. ____

1. Purchase of merchandise on account.

____

2. Collection on account from customers.

____

3. Sales of merchandise for cash.

____

4. Adjusting entry for depreciation on machinery.

____

5. Payment of creditors on account.

____

6. Sales discount taken on goods sold on credit.

____

7. Sales of merchandise on account.

____

8. Purchase of office supplies for cash.

Subsidiary Ledgers and Special Journals Be. 69

G - 15

(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, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 69 1. 2. 3. 4.

(5-7 min.) P CR CR G

5. 6. 7. 8.

CP CR S CP

Be. 70 Circle the correct answer to each situation. (a)

(b)

A sales journal will be used for: Credit Sales

Cash Sales

Sales Discounts

Yes

(e)

Purchases on Account Yes

Purchase Returns and Allowances Yes

A multiple-column purchases journal will be used for: Cash Purchases

(d)

A single-column purchases journal will be used for: Cash Purchases

(c)

Supplies Purchased on Account Yes

Equipment Purchases on Account Yes

A cash payments journal will be used for: Payments to Creditors

Purchases Discounts

Payment of Dividends

Yes

A cash receipts journal will be used for: Sale of Stock Yes

Purchases Discounts Yes

Cash Sales Yes

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Applications

G - 16 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution 70

(10 min.)

(a) Yes, No, No (b) No, Yes, No (c) No, Yes, Yes

(d) Yes, Yes, Yes (e) Yes, No, Yes

Be. 71 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: Special Journals S = Sales journal P = Single-column purchases journal CR = Cash receipts journal CP = Cash payments journal Heading

Code: Posting I = Individual posting T = Total posting B = Both individual and total posting

Special Journal

Posting

1. Accounts Payable—Cr.

___________

___

2. Sales Revenue—Cr.

___________

___

3. Inventory—Dr.

___________

___

4. Accounts Receivable—Dr.

___________

___

5. Inventory—Cr.

___________

___

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Applications

Solution 71

(8 min.)

Heading 1. Accounts Payable—Cr. 2. Sales Revenue—Cr. 3. Inventory—Dr. 4. Accounts Receivable—Dr. 5. Inventory—Cr.

Special Journal P S, CR P, CP S CP, CR, S

Posting B T T B T

Subsidiary Ledgers and Special Journals

G - 17

EXERCISES Ex. 72 After Crown Candy 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 Lawton Address 286 Buck Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 2 P25 2,400 2,400 Name Leno’s 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 100 3,400 Name Gordons Company Address 90210 Baker Boulevard —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 9,900 18 CP28 9,900 — 29 P34 13,600 13,060 Name Jose Gonzalez 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 Wilcox Supplies Address 1560 Puckett Street —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 8,200 7 P26 5,600 12,800 12 J11 420 12,380 20 CP29 5,000 17,380

G - 18 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Ex. 72

(Cont.)

The balance in the Accounts Payable control account of $41,580 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, LO: 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA

Solution 72

(20 min.)

IDENTIFICATION OF ERRORS: Leno’s Company The $100 represents merchandise returned and should be subtracted from the balance owed. Correct balance is $3,200. Gordons Company The $13,600 represents new purchases on account and should be added to the previous balance of zero. The correct balance is $13,600. Wilcox Supplies There is an addition error. Adding $5,600 to the beginning balance of $8,200 yields a balance of $13,800. Subtracting merchandise returned of $420 leaves a balance of $13,380. The $5,000 is a payment on account, not an increase. The correct balance is $8,380. ACCOUNTS PAYABLE SUBSIDIARY LEDGER ACCOUNT BALANCES Lawton Leno’s Company Gordons Company Jose Gonzalez Wilcox Supplies Total

$ 2,400 3,200 13,600 14,000 8,380 $41,580

Ex. 73 On October 1, the accounts receivable control account balance in the general ledger of Helms Company was $9,000. The accounts receivable subsidiary ledger contained the following detailed customer balances: Able $2,000, Bravo $1,600, Charlie $3,600, and Gamma $1,800. The following information is available from the company's special journals for the month of October: Cash Receipts Journal: Cash received from Charlie $1,900, from Able $2,600, from Sigma $1,700, and from Bravo $1,500. Sales Journal: Sales to Sigma $2,300, to Charlie $2,700, to Able $2,300, and to Gamma $2,000. Additionally, Charlie returned defective merchandise for credit for $900. Able returned defective merchandise for $600 which he had purchased for cash.

Subsidiary Ledgers and Special Journals Ex. 73

G - 19

(Cont.)

Instructions (a) Using T-accounts for Accounts Receivable Control and the detail customer accounts, post the activity for the month of December. (b)

Reconcile the accounts receivable control account with the subsidiary ledger by preparing a detail list of customer balances at December 31.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 73 (a)

(15 min.)

Control Account:

Accounts Receivable 9,000 9,300 9,700

(SJ) Bal.

(CR) (G)

7,700 900

Subsidiary Accounts: Able (S) Bal.

2,000 2,300 1,700

(CR)

Bravo 2,600 Bal.

Charlie (S) Bal.

3,600 2,700 3,500

(CR) (G)

1,600 100

(CR)

Gamma 1,900 900

(S) Bal.

1,800 2,000 3,800

Sigma (S) Bal. (b)

2,300 600

(CR)

1,700

Listing of accounts receivable at end of the month: Able Bravo Charlie Gamma Sigma Total

$1,700 100 3,500 3,800 600 $9,700

Accounts receivable balance

1,500

G - 20 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Ex. 74 Sadat Company uses a sales journal, a cash receipts journal, and a general journal to record transactions with its customers. Record the following transactions in the appropriate journals. The cost of all merchandise sold was 70% of the sales price. July

Sold merchandise for $20,000 to B. Rock on account. Credit terms 2/10, n/30. Sales invoice No. 100.

July

Received a check for $800 from R. Budd in payment of his account.

July

Sold merchandise to F. Truman for $700 cash.

July 10

Received a check in payment of Sales invoice No. 100 from B. Rock minus the 2% discount.

July 15

Sold merchandise for $9,000 to J. Weilmann on account. Credit terms 2/10, n/30. Sales invoice No. 101.

July 18

Borrowed $25,000 cash from United Bank signing a 6-month, 10% note.

July 20

Sold merchandise for $15,000 to C. Warden on account. Credit terms 2/10, n/30. Sales invoice No. 102.

July 25

Issued a credit memorandum for $600 to C. Warden as an allowance for damaged merchandise previously sold on account.

July 31

Received a check from J. Weilmann for $5,000 as payment on account.

SADAT COMPANY Sales Journal S1 —————————————————————————————————————————— Invoice Acct. Rec. Dr. C. of G.S. Dr. Date Account Debited No. Ref. Sales Rev. Cr. Inventory Cr. —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————

SADAT COMPANY General Journal G1 —————————————————————————————————————————— Date Explanations Ref. Debit Credit —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————

Subsidiary Ledgers and Special Journals Ex. 74

G - 21

(Cont.)

SADAT COMPANY Cash Receipts Journal CR1 ——————————————————————————————————————————— Sales Accounts Other C. of G.S. Dr. Accounts Cash Discounts Rec. Sales Rev. Accounts Inventory Cr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 74

(20 min.) SADAT 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. Rock 100 20,000 14,000 ——————————————————————————————————————————— July 15 J. Weilmann 101 9,000 6,300 ——————————————————————————————————————————— July 20 C. Warden 102 15,000 10,500 ———————————————————————————————————————————

SADAT COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— July 25 Sales Returns and Allowances 600 ——————————————————————————————————————————— Accounts Receivable—C. Warden 600 ———————————————————————————————————————————

G - 22 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution 74

(Cont.) SADAT 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. Budd 800 800 ——————————————————————————————————————————— July 8 Sales Rev. 700 700 490 ——————————————————————————————————————————— July 10 B. Rock 19,600 400 20,000 ——————————————————————————————————————————— July 18 Notes Pay. 25,000 25,000 ——————————————————————————————————————————— July 31 J. Weilmann 5,000 5,000 ——————————————————————————————————————————— Ex. 75 Lighthouse Ltd. uses a single-column purchases journal, a cash payments journal, and a general journal to record transactions with its suppliers and others. Record the following transactions in the appropriate journals. Transactions Oct.

Purchased merchandise on account for $35,000 from O’Connor Company. Terms: 2/10, n/30; FOB shipping point.

Oct.

Paid $7,200 to Freedom Insurance Company for a two-year fire insurance policy.

Oct.

Purchased store supplies on account for $700 from Martin Supply Company. Terms: 2/10, n/30.

Oct. 11

Purchased merchandise on account for $14,000 from Darlington LLC. Terms: 2/10, n/30; FOB shipping point.

Oct. 13

Issued a debit memorandum for $2,000 to Darlington LLC for merchandise purchased on October 11 and returned because of damage.

Oct. 15

Paid O’Connor Company for merchandise purchased on October 5, less discount.

Oct. 16

Purchased merchandise for $8,000 cash from Kaye Company.

Oct. 21

Paid Darlington LLC for merchandise purchased on October 11, less merchandise returned on October 13, less discount.

Oct. 25

Purchased merchandise on account for $22,000 from Willard Company. Terms: 2/10, n/30; FOB shipping point.

Oct. 31

Purchased office equipment for $30,000 cash from Wilcoxen Office Supply Company.

Subsidiary Ledgers and Special Journals

G - 23

Ex. 75 (Cont.) LIGHTHOUSE LTD. Purchases Journal P1 ——————————————————————————————————————————— Inventory. Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— LIGHTHOUSE LTD. General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— LIGHTHOUSE LTD. Cash Payments Journal CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

G - 24 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution 75

(20 min.) LIGHTHOUSE LTD. Purchases Journal

P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— Oct. 5 O’Connor Company 35,000 ——————————————————————————————————————————— Oct. 11 Darlington LLC 14,000 ——————————————————————————————————————————— Oct. 25 Willard Company 22,000 ——————————————————————————————————————————— LIGHTHOUSE LTD. General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— Oct. 8 Supplies 700 ——————————————————————————————————————————— Accounts Payable—Martin ——————————————————————————————————————————— Supply Company 700 ——————————————————————————————————————————— Oct. 13 Accounts Payable—Darlington LLC 2,000 ——————————————————————————————————————————— Inventory 2,000 ——————————————————————————————————————————— LIGHTHOUSE LTD. Cash Payments Journal CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— Oct. 6 Prepaid Insurance 7,200 7,200 ——————————————————————————————————————————— Oct. 15 O’Connor Company 35,000 700 34,300 ——————————————————————————————————————————— Oct. 16 Inventory 8,000 8,000 ——————————————————————————————————————————— Oct. 21 Darlington LLC 12,000 240 11,760 ——————————————————————————————————————————— Oct. 31 Equipment 30,000 30,000 30,000 ———————————————————————————————————————————

Subsidiary Ledgers and Special Journals

G - 25

Ex. 76 Below are some typical transactions incurred by Kuo Company. ____

1. Purchase of merchandise on account.

____

2. Collection on account from customers.

____

3. Payment of employee's wages.

____

4. Sales of merchandise for cash.

____

5. Close Income Summary to Retained Earnings.

____

6. Adjusting entry for depreciation on machinery.

____

7. Payment of creditors on account.

____

8. Purchase of office equipment on credit.

____

9. Sales discount taken on goods sold on credit.

____ 10. Sales of merchandise on account. ____ 11. Purchase of a delivery truck for cash. ____ 12. Return of merchandise purchased on credit. ____ 13. Payment of rent in advance. ____ 14. Adjusting entry for accrued interest expense. ____ 15. Purchase of office supplies for cash. For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized. CR — Cash Receipts Journal CP — Cash Payments Journal S — Sales Journal P — Single-Column Purchases Journal G — General Journal Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 76

(12 min.)

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

P CR CP CR G

G CP G CR S

11. 12. 13. 14. 15.

CP G CP G CP

G - 26 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Ex. 77 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: Special Journals S = Sales journal P = Single-column purchases journal CR = Cash receipts journal CP = Cash payments journal Heading

Code: Posting I = Individual posting T = Total posting B = Both individual and total posting

Special Journal

Posting

1. Accounts Payable—Cr.

___________

___

2. Sales 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, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 77

(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, S CR CP

Posting B T T T T B I T B B

Subsidiary Ledgers and Special Journals

G - 27

Ex. 78 Sirius LLC uses four special journals, (cash receipts, cash payments, sales, and purchases journal) in addition to a general journal. On November 1, 2013, 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 Discounts Dr. $600

Accounts Receivable Cr. $6,400

Sales Rev. Cr. $31,000

Other Accounts Acct. Ref. (X)

Amount $1,000

Cr. C. of G. S. Dr. Inventory Cr. $17,400

Cash Payments Journal: Other Accounts Dr. Acct. Ref. Amount (X) $1,600

Purchases Journal: Accounts Payable Cr. ?

Accounts Payable Dr. ?

Inventory Dr. $36,000

Supplies Dr. $2,400

Inventory Cr. $700

Cash Cr. $19,600

Other Accounts Dr. Acct. Ref. Amount (X) $3,300

Supplies Dr. $1,450

Additional Data: The Sales Journal total was $45,000. A customer returned merchandise for credit for $360 and Leo Company returned store supplies to a supplier for credit for $400. Instructions (a) Determine the missing amounts in the special journals. (b)

Determine the balances in the general ledger accounts (Cash, Accounts Receivable, and Accounts Payable) at the end of November.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 78 (a)

(20 min.)

The missing amounts can be determined by cross-footing the journals. Cash Receipts Credits ($6,400 + $31,000 + $1,000) Debits Cash debit

$38,400 600 $37,800

Cash Payments Credits ($700 + $19,600) Debits ($1,600 + $2,400) Accounts payable debit

$20,300 4,000 $16,300

G - 28 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution 78

(Cont.)

Purchases Debits ($36,000 + $1,450 + $3,300) Credits Accounts payable credit (b) (CR) Bal.

(CP) (G)

Cash 12,000 (CP) 37,800 30,200 Accounts Payable 16,300 400 (P) Bal.

19,600

$40,750 -0$40,750 Accounts Receivable 200,000 (CR) (S) 45,000 (G) Bal. 238,240

6,400 360

42,000 40,750 66,050

Ex. 79 Wood Furnishings Inc. began business on April 1. The sales journal, as it appeared at the end of the month, follows: SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post. Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Apr. 5 Jack Sago 10001 475 11 Leo Lauer 10002 535 16 Jack Sago 10003 818 19 Christy Sage 10004 447 26 Irene Walz 10005 1,884 4,159 1. Open general ledger T-accounts for Accounts Receivable (No. 112) and Sales (No. 401) and an accounts receivable subsidiary T-account ledger with an account for each customer. Make the appropriate postings from the sales journal. Fill in the appropriate posting references in the sales journal above. 2. Prove the accounts receivable subsidiary ledger by preparing a schedule of accounts receivable. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Subsidiary Ledgers and Special Journals Solution 79

G - 29

(20 min.)

1. SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Jack Sago 10001  475 11 Leo Lauer 10002  535 16 Jack Sago 10003  818 19 Christy Sage 10004  447 26 Irene Walz 10005  1,884 4,159 (112)/(401) GENERAL LEDGER

SUBSIDIARY LEDGER

Accounts Receivable 10/31 (S1) 4,159

112

Sales Revenue 10/31 (S1)

401 4,159

10/11 (S1)

Lauer, Leo 535

10/19 (S1)

Sage, Christy 447

10/5 (S1) 10/16 (S1)

10/26 (S1)

SCHEDULE OF ACCOUNTS RECEIVABLE Leo Lauer Christy Sage Jack Sago Irene Walz Total Accounts Receivable

$ 535 447 1,293 1,884 $4,159

Sago, Jack 475 818 1,293 Walz, Irene 1,884

G - 30 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Ex. 80 CASH PAYMENTS JOURNAL Page 45 ——————————————————————————————————————————— Other Accounts Ck. Account Post. Accounts Payable Inventory Cash Date No. Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— 2013 Jan. 4 659 N & R Inc, (a) 4,000 40 3,960 11 660 Prepaid Rent (b) 2,000 2,000 13 661 Inventory. (c) 565 565 14 662 Dividends (d) 1,000 1,000 18 663 Keene (e) 2,300 2,300 20 664 Inventory. (f) 450 450 29 665 Equipment (g) 2,400 2,400 6,415 6,300 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, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 80 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. 81 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.

Subsidiary Ledgers and Special Journals

G - 31

——————————————————————————————————————————— Accounts Credited

Date

Post Ref.

Cash Dr.

Sales Discounts Dr.

Accounts Sales Other Receivable Rev. Accounts Cr. Cr. Cr.

C.of G.S. Dr. Inventory Cr.

——————————————————————————————————————————— May 27

Jim Cale



980

1,000

Ex. 81 (Cont.) 28 29 31

Notes Receivable 113 Interest Revenue 416 Jim McHugh



3,360 370 400 5,110 (111)

3,000 360 370 20 (412)

400 1,400 (114)

370 (411)

260 3,360 (x)

260 (505)(120)

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Business Applications

Solution 81

(10 min.)

1. Cash receipts journal. 2. May 27— Jim Cale 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 $3,000 face value and $360 of interest revenue. May 29— A cash sale of merchandise is made for $370. The cost of the merchandise sold was $260. May 31— Jim McHugh has paid $400 on account. 3. (a) The numbers in parentheses under the bottom line of the journal indicate that these column totals have been posted to the general ledger accounts with these account numbers. (b) The checks in the posting reference column of the journal indicate that the accounts receivable subsidiary account for that customer has been credited for the amount shown in the accounts receivable column of this journal. (c) The 113 indicates that account No. 113 in the general ledger, Notes Receivable, has been credited for the $3,000. The 416 indicates that account No. 416 in the general ledger, Interest Revenue, has been credited for $360. (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.

G - 32 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

COMPLETION STATEMENTS 82.

The accounts receivable _____________ provides detailed information about customer accounts which is summarized in one ______________ account in the general ledger.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

83.

If a certain type of transaction occurs with great frequency, it is more efficient to create a ______________ to record that type of transaction.

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

84.

If a company maintains special journals, sales of merchandise on credit should be recorded in a _______________ whereas sales of merchandise for cash should be recorded in the _______________.

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

85.

The use of special journals often saves time in the _______________ process.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

86.

The entries in the Accounts Receivable Credit column of the cash receipts journal must be posted _______________ to the accounts in the accounts receivable subsidiary ledger and in _______________ to the control account in the general ledger.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

87.

Transactions that cannot be entered in a special journal are recorded in the _______________, and if control and subsidiary accounts are involved, there must be a _______________ posting.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

Answers to Completion Statements 82. subsidiary ledger, control 83. special journal 84. sales journal, cash receipts journal 85. posting 86. individually, total 87. general journal, dual

Subsidiary Ledgers and Special Journals

G - 33

MATCHING 88. Match the items below by entering the appropriate code letter in the space provided. A. B. C.

Accounts payable ledger Columnar journal Special journals

D. E.

Subsidiary ledger Control account

____

1. A general ledger account that summarizes detailed information in a subsidiary ledger.

____

2. A subsidiary ledger that contains accounts with individual creditors.

____

3. A special journal with more than one column.

____

4. Detailed information about a group of accounts with a common characteristic.

____

5. Used to record high volume, similar type transactions.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

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

E A B D C

SHORT-ANSWER ESSAY S-A E 89 At the end of the month, the accountant for Golden Company prepared a schedule of accounts receivable from the accounts receivable subsidiary ledger. Its total did not agree with the balance in the Accounts Receivable control account in the general ledger. Briefly describe the procedure that should be followed in reconciling the two balances. Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 89 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.

APPENDIX H ACCOUNTING FOR PARTNERSHIPS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES Item

Item

1. 2. 3. 4.

1 1 1 1

K K K K

5. 6. 7. 8.

1 1 1 2

21. 22. 23. 24. 25.

1 1 1 1 1

K K K K K

26. 27. 28. 29. 30.

1 2 2 2 2

46. 47.

2 2

AP AP

48. 49.

3 3

52. 53.

1 1

K K

54. 55.

1 1

Item

3 3 4 5

C K K K

17. 18. 19. 20.

5 5 5 5

K K K K

3 3 3 3 4

AP AP AP AP K

41. 42. 43. 44. 45.

5 5 5 5 5

K K K K AP

1 2

K K

60. 61.

4 5

K K

True-False Statements K 9. 2 K 13. K 10. 2 K 14. K 11. 2 K 15. K 12. 3 K 16. Multiple Choice Questions K 31. 2 AP 36. K 32. 2 AP 37. AP 33. 2 AP 38. AP 34. 3 K 39. AP 35. 3 AP 40. Brief Exercises AP 50. 3 AP AP 51. 5 AP Completion Statements K 56. 1 K 58. K 57. 1 K 59.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item Type

Item Type

Item Type Item Type Item Type Learning Objective 1

Item Type

1. 2. 3.

TF TF TF

4. 5. 6.

TF TF TF

7. 21. 22.

TF 23. MC 26. MC 24. MC 52. MC 25. MC 53. Learning Objective 2

MC C C

54. 55. 56.

C C C

57. 58.

C C

8. 9.

TF TF

10. 11.

TF TF

27. 28.

MC 29. MC 31. MC 30. MC 32. Learning Objective 3

MC MC

33. 46.

MC BE

47. 59.

BE C

12. 13.

TF TF

14. 34.

TF MC

35. 36.

MC 37. MC 39. MC 38. MC 48. Learning Objective 4

MC BE

49. 50.

BE BE

15.

40.

H-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Learning Objective 5 16. 17.

TF TF

18. 19.

TF TF

20. 41.

Note: TF = True-False MC = Multiple Choice

TF MC

42. 43.

MC MC

44. 45.

MC MC

C = Completion Ex = Exercise

Ma = Matching SA = Short-Answer Essay

CHAPTER LEARNING 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 a partnership is formed, each partner’s initial investment should be recorded 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. Net income or net loss is divided 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 reminder on a fixed ratio, and (e) salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio. 4. Describe the form and content of partnership financial statements. The financial statements of a partnership are similar to those of a corporation. The principal differences are (a) the division of net income is shown on the income statement, (b) the owners’ equity statement is called a partners’ capital statement, and (c) each partner’s capital is reported 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.

TRUE-FALSE STATEMENTS 1.

A partnership has a limited life, because any change in the relationship of the partners dissolves the partnership.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Each partner is personally liable for all debts of the partnership.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

A partnership agreement must be in writing.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Accounting for Partnerships

H-3

An advantage of the partnership form of business is that each partner’s potential loss is limited to that partner’s investment in the partnership.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

A partnership is easy to form and to dissolve.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Under the partnership form of business, large amounts of capital can be easily raised.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

One of the major advantages of a partnership is the unlimited liability of the partners.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

When a partner invests assets in a partnership, the assets are recorded at the partner’s book value.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Income and losses are divided equally among the partners unless the partnership agreement specifies otherwise.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

10.

If a partnership agreement does not specify how income and losses are to be distributed they should be allocated based on relative capital account balances.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

11.

When a loss is closed into the partners’ capital accounts, Income Summary is credited.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

When salary and interest allocations exceed net income, a net loss has occurred.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13.

It is possible for a partner’s capital account to increase as a result of the allocation of a net loss.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

14.

The salary, interest, and stated ratio method of allocation cannot be applied when a net loss has occurred.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

15.

The financial statements of a partnership are similar to those of a corporation.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

Liquidation of a partnership is the process of ending the business.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

H-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

17.

If liquidation of a partnership results in a capital deficiency in a partner’s account, the partner must pay into the partnership the amount of the negative balance.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

In a liquidation, one partner may have to make up the deficit in another partner’s account.

18.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

19.

After selling all the assets and paying the liabilities in a liquidation of the partnership, the partners share any remaining cash according to the stated ratios.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

20.

Gains and losses on sale of assets in liquidation are divided equally among partners.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Answers to True-False Statements 1. 2. 3. 4.

T T F F

5. 6. 7. 8.

T F F F

9. 10. 11. 12.

T F T F

13. 14. 15. 16.

T F T T

17. 18. 19. 20.

T T F F

MULTIPLE CHOICE QUESTIONS 21.

The ability of a partner to act on behalf of the partnership when engaging in business is called a. voluntary association. b. mutual agency. c. the partnership agreement. d. unlimited liability.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

22.

Claim to the partners’ personal assets by creditors if the partnership cannot pay its debts refers to a. mutual agency. b. dissolution. c. liquidation. d. unlimited liability.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

23.

Which of the following is not a characteristic of partnerships? a. Voluntary association b. Mutual agency c. Limited liability d. Limited life

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Accounting for Partnerships

24.

H-5

A partnership agreement should include a. the purpose of the business. b. the rights and duties of the partners. c. the basis of allocating profits and losses. d. All of these answer choices are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

25.

Which of the following partnership characteristics is a disadvantage? a. Voluntary association b. Participation in partnership income c. Unlimited liability d. Co-ownership of partnership property.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

26.

Which of the following partnership characteristics is an advantage? a. Limited life b. Unlimited liability c. Mutual agency d. Voluntary association

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

27.

Noncash assets invested into a partnership are recorded at a. zero. b. their carrying value. c. their fair value. d. their original cost.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28.

A partner invests into a partnership a building with a $80,000 carrying value and a $90,000 fair market value. As a result of the investment, the partner’s capital account will be credited for a. $90,000 b. $80,000 c. $10,000. d. $170,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A partner invests into a partnership accounts receivable that had a balance of $40,000. The related allowance for doubtful accounts is $3,200. As a result, the partner’s capital account will be credited for a. $40,000. b. $36,800. c. $43,200. d. Can not be calculated.

H-6

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

30.

Leon and Betty are forming a partnership. Leon will invest a truck with a book value of $18,000 and a fair value of $28,000. Betty will invest a building with a book value of $60,000 and a fair value of $180,000 with a mortgage of $30,000. At what amount should the building be recorded? a. $60,000. b. $54,000. c. $180,000. d. $90,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

31.

Leon and Betty are forming a partnership. Leon will invest a truck with a book value of $18,000 and a fair value of $28,000. Betty will invest a building with a book value of $60,000 and a fair value of $180,000 with a mortgage of $30,000. What amount should be recorded in Betty’s capital account? a. $30,000. b. $150,000. c. $180,000. d. $210,000.

32.

Leon and Betty are forming a partnership. Leon will invest a truck with a book value of $18,000 and a fair value of $28,000. Betty will invest a building with a book value of $60,000 and a fair value of $180,000 with a mortgage of $30,000. What amount should be recorded in Leon’ capital account? a. $60,000. b. $46,000. c. $18,000. d. $28,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

33.

Dent and Risch decide to organize a partnership. Dent invests $25,000 cash, and Risch contributes $15,000 cash and equipment having a book value of $6,000. Choose the entry to record Risch’s investment in the partnership assuming the equipment has a fair value of $11,000. a. Cash ................................................................. 15,000 Equipment ........................................................ 6,000 Risch, Capital ........................................ 21,000 b. Equipment ........................................................ 6,000 Risch, Capital ........................................ 6,000 c. Cash ................................................................. 15,000 Risch, Capital ........................................ 15,000 d. Cash ................................................................. 15,000 Equipment ........................................................ 11,000 Risch, Capital ........................................ 26,000

Accounting for Partnerships

34.

H-7

The division of partnership profits on the basis of salaries, interest and a stated ratio is usually necessary because a. this reflects the amount of time devoted to the partnership by the partners. b. partners seldom contribute time, effort, and resources equally. c. most states require this method of distribution. d. this prevents arguments among the partners.

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

35.

At the beginning of the year partners Noah and Jona have capital balances in a partnership of $50,000 and $75,000 respectively. They agree to share profits and losses as follows: Noah Jona As salaries $25,000 $27,500 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was $125,000, what will be the distribution of income to Noah? a. $60,000. b. $65,000. c. $62,500. d. $30,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $125,000 − $52,500 − [($50,000 + $75,000)  .10] = $60,000; $25,000 + ($50,000  .10) + ($60,000  .50) = $60,000

36.

At the beginning of the year partners Noah and Jona have capital balances in a partnership of $50,000 and $75,000 respectively. They agree to share profits and losses as follows: Noah Jona As salaries $25,000 $27,500 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was $125,000, what will be the distribution of income to Jona? a. $60,000. b. $65,000. c. $62,500. d. $35,000.

H-8

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

37.

At the beginning of the year partners Noah and Jona have capital balances in a partnership of $50,000 and $75,000 respectively. They agree to share profits and losses as follows: Noah Jona As salaries $25,000 $27,500 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was $62,500, what will be the distribution of income to Noah? a. $28,750. b. $30,000. c. $25,000. d. $17,500.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $62,500 − $52,500 − [($50,000 + $75,000)  .10] = ($2,500); $25,000 + ($50,000  .10) + [($2,500)  .50] = $28,750

38.

At the beginning of the year partners Noah and Jona have capital balances in a partnership of $120,000 and $90,000 respectively. They agree to share profits and losses as follows: Noah Jona As salaries $33,000 $18,000 As interest on capital at the beginning of the year 5% 5% Remaining profits or losses 50% 50% If income for the year was $75,000, what will be the distribution to Jona? a. $18,000 b. $37,500. c. $45,750. d. $29,250.

39.

At the beginning of the year partners Noah and Jona have capital balances in a partnership of $120,000 and $90,000 respectively. They agree to share profits and losses as follows: Noah Jona As salaries $33,000 $18,000 As interest on capital at the beginning of the year 8% 8% Remaining profits or losses 50% 50% If income for the year was $75,000, what will be the distribution to Noah? a. $28,800 b. $46,200 c. $42,600 d. $33,000.

Accounting for Partnerships

40.

H-9

The financial statements of a partnership are similar to those of a corporation but have some important differences. Which of the following statements is not true? a. The owners’ equity statement for a partnership is called the partners’ capital. b. The income statement for the partnership is identical to the income statement for a corporation with no needed additions. c. The balance sheet is the same except for the owner’s equity section. d The capital balances of each partner are shown in the balance sheet.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41.

A liquidation differs from a dissolution in that in a liquidation a. partners are merely added. b. partners simply withdraw. c. cash is distributed on the basis of the income ratios. d. the business will not continue.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

42.

In a liquidation, the liabilities of a partnership should be paid a. before any sales of assets. b. before distribution of gains and losses on the disposal of assets. c. before the completion of the accounting cycle for the final operating period. d. before the distribution of cash to partners.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

43.

All of the following are true for a liquidation except that a. the business will continue. b. there may be an adjustment of partners’ capital accounts. c. all liabilities must be paid prior to any distribution of cash to partners. d. a sale or realization of assets is involved.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

44.

In a partnership liquidation a. liabilities should be paid before partners. b. the partners’ accounts are settled on the basis of their stated ratios. c. gains and losses on the realization of assets are allocated to the partners on the basis of their current capital balances. d. the last journal entry credits the partners’ capital accounts.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

45.

LeAnn, Bernice, and Carla 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: LeAnn, $15,000 Cr; Bernice, $15,000 Cr; and Carla, $45,000 Cr. How much cash should be distributed to LeAnn? a. $9,000. b. $30,000. c. $15,000. d. $25,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

H-10 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Answers to Multiple Choice Questions 21. b 22. d 23. c 24. d

25. 26. 27. 28.

c d c a

29. 30. 31. 32.

b c b d

33. 34. 35. 36

d b a b

37. 38. 39 40.

a d b b

41. 42. 43. 44.

d d a a

45. c

BRIEF EXERCISES Be. 46 Randy and John decide to organize a partnership. Randy invests $15,000 cash, and John contributes $10,000 and equipment having a book value of $3,500 and a fair value of $7,000 Instructions Prepare the entry to record each partner’s investment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 46

(5 min.)

Cash ..................................................................................................... Randy, Capital ..........................................................................

15,000

Cash ..................................................................................................... Equipment ............................................................................................ John, Capital .................................................................................

10,000 7,000

15,000

17,000

Be. 47 Poncho and Chico decide to merge their proprietorships into a partnership called Ranger Company. The balance sheet of Ranger Company shows: Account Receivable Less: Allowance for doubtful accounts

$15,000 (1,500)

$13,500

Equipment Less: Accumulated depreciation

$20,000 (10,000)

$10,000

The partners agree that the net realizable value of the receivables is $12,500 and that the fair value of the equipment is $13,000. Instructions Indicate how the four accounts should appear in the opening balance sheet of the partnership. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Accounting for Partnerships

Solution 47

H-11

(5 min.) RANGER COMPANY Balance Sheet (partial)

Assets Accounts Receivable Less: Allowance for Doubtful Accounts Equipment

$15,000 (2,500)

$12,500 13,000

Be. 48 Ali & Tyson Co. reports net income of $50,000. The income ratios are Ali 60% and Tyson 40%. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 48

(4-6 min.) Division of Net Income

Salary allowance Interest allowance on partners’ capital Remaining income, $50,000 Ali ($50,000 x 60%) Tyson ($50,000 x 40%) Total remainder Total division of net income The entry to record the division of net income is: Income Summary ................................................. Ali, Capital................................................. Tyson, Capital ...........................................

Ali $0 0

Tyson $0 0

Total $0 0

30,000 20,000 $30,000

$20,000

50,000 $50,000

50,000 30,000 20,000

Be. 49 Frank and Jesse Co. reports net income of $40,000. Partner salary allowances are Frank $20,000 and Jesse $10,000. Indicate the division of net income to each partner, assuming the income ratios are Frank 70% and Jesse 30%. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

H-12 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution 49

(5-8 min.)

Division of Net Income Frank Salary allowance $20,000 Interest allowance on partners’ capital 0 Total salaries and interest 20,000 Remaining income, $10,000 ($40,000 - $30,000) Frank ($10,000 x 70%) 7,000 Jesse ($10,000 x 30%) Total remainder Total division of net income $27,000 The entry to record the division of net income is: Income Summary.......................................................... Frank, Capital.................................................... Jesse, Capital ....................................................

Jesse $10,000 0 10,000

Total $30,000 0 30,000

3,000 10,000 $40,000

$13,000 40,000

27,000 13,000

Be. 50 The Fran & Mary Co. reports net income of $30,000. Interest allowances are Fran $3,000 and Mary $5,000; partner salary allowances are Fran $18,000 and Mary $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, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 50

(5-8 min.)

Division of Net Income Fran Salary allowance $18,000 Interest allowance on partners’ capital 3,000 Total salaries and interest 21,000 Remaining income, ($6,000) ($30,000 - $36,000) Fran ($6,000 x 50%) (3,000) Mary ($6,000 x 50%) Total remainder Total division of net income $18,000 The entry to record the division of net income is: Income Summary.......................................................... Fran, Capital ..................................................... Mary, Capital .....................................................

Mary $10,000 5,000 15,000

Total $28,000 8,000 36,000

(3,000) $12,000

(6,000) $30,000

30,000 18,000 12,000

Accounting for Partnerships

H-13

Be. 51 After liquidating noncash assets and paying creditors, account balances in the Yahn Co. are Cash $36,000, Jude, Capital (Cr.) $11,000, Paul, Capital (Cr,) $8,000, J. D., Capital (Cr.) $10,000 and Alice, Capital (Cr.) $7,000. The partners share income equally. Instructions Journalize the final distribution of cash to the partners. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 51

(5-8 min.)

Jude, Capital ...................................................................................... Paul, Capital ....................................................................................... J. D., Capital ...................................................................................... Alice, Capital ...................................................................................... Cash ...........................................................................................

11,000 8,000 10,000 7,000 36,000

COMPLETION STATEMENTS 52. An association of two or more person to carry on as co-owners of a business for profit is called a ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

53. A change in partners due to withdrawal or admission, which does not necessarily terminate the business is called a _____________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

54. A _______________ _______________ is a written contract expressing the voluntary agreement of two or more individuals in a partnership. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

55. A partnership in which one or more general partners have unlimited liability and one or more partners have limited liability for the obligations of the firm is called a ______________ ______________ partnership. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

56. A ______________ partner has unlimited liability for the debits of a firm. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

H-14 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition 57. A corporation that has 75 or fewer stockholders and is taxed like a partnership is called a (an) _________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

58. The _______________ _______________ is the basis for dividing net income and net loss in a partnership. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

59. The owners’ equity statement for a partnership is called the ______________ _________________ statement. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. A partnership ____________________ is an event that ends both the legal and economic life of a partnership. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61. In the liquidation of a partnerships and all partners have credit balances after allocation of gain or loss it is said that there is no _______________ _______________. Ans: N/A, LO: 5, 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 52. partnership 53. dissolution 54. partnership agreement 55. limited liability 56. general

57. 58. 59. 60. 61.

“S” corporation income ratio partners’ capital liquidation capital deficiency

APPENDIX I ACCOUNTING FOR SOLE PROPRIETORSHIPS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES Item

Item

4 4 4 4

K K K K

17. 18.

4 4

K K

4 4 4 4 4 4

K K K C K K

43. 44. 45.

4 4 4

AP AP AP

True-False Statements 1. 2. 3. 4.

1 2 2 2

K K K K

5. 6. 7. 8.

2 2 2 3

K K K K

9. 10. 11. 12.

3 4 4 4

K K K K

13. 14. 15. 16.

Multiple Choice Questions 19. 20. 21. 22. 23. 24.

1 1 1 1 2 2

K C K K K C

25. 26. 27. 28. 29. 30.

2 2 2 2 2 2

K K C C K K

31. 32. 33. 34. 35. 36.

2 2 2 2 3 3

C K C C K K

37. 38. 39. 40. 41. 42.

Brief Exercises 46. 47.

2 2

AP AP

48. 49.

2 2

AP AP

50.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. TF 19. MC 20. MC 21. MC 22. MC Learning Objective 2 2. TF 5. TF 23. MC 26. MC 29. MC 32. MC 46. BE 3. TF 6. TF 24. MC 27. MC 30. MC 33. MC 47. BE 4. TF 7. TF 25. MC 28. MC 31. MC 34. MC 48. BE Learning Objective 3 8. TF 9. TF 35. MC 36. MC 50. BE Learning Objective 4 10. TF 13. TF 16. TF 37. MC 40. MC 43. MC 51. BE 11. TF 14. TF 17. TF 38. MC 41. MC 44. MC 12. TF 15. TF 18. TF 39. MC 42. MC 45. MC Note: TF = True-False MC = Multiple Choice

C = Completion Ex = Exercise

Ma = Matching SA = Short-Answer Essay

I-2

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

CHAPTER LEARNING OBJECTIVES 1. Identify the differences in equity accounts between a corporation and a sole proprietorship. A sole proprietorship uses a permanent owner’s equity capital account instead of Common Stock and Retained Earnings. Withdrawals of cash or other assets by the owner for personal use are recorded in a temporary drawing account. 2. Understand what accounts increase and decrease owner’s equity. Investments by the owner and revenue increase owner’s equity. Owner’s drawings and expenses decrease owner’s equity. 3. Describe the differences between a retained earnings statement and an owner’s equity statement. A sole proprietor prepares an owner’s equity statement rather than a retained earnings statement. The owner’s equity statement shows the beginning balance in the owner’s capital account (instead of Retained Earnings, as shown in the retained earnings statement), plus any investments made by the owner, less any drawings (in place of Dividends, shown in the retained earnings statement). 4. Explain the process of closing the books for a sole proprietorship. In closing the books for a sole proprietorship, separate entries are made to close revenues and expenses to Income Summary, Income Summary to Owner’s Capital, and Owner’s Drawing to Owner’s Capital.

TRUE-FALSE STATEMENTS 1.

The primary differences between accounting and reporting for a sole proprietorship and a corporation involves accounting for revenues and expenses.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In a sole proprietorship there is no need to separate owner’s investments from net income retained for dividends as a sole proprietorship does not declare dividends.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The ownership claim on total assets is known as owner’s equity in a sole proprietorship.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In a proprietorship, owner’s equity is increased by revenues and expenses.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Decreases in owner’s equity of a sole proprietorship are caused by owner’s drawing and expenses.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Drawings are decreases in owner’s equity that result from operating the business.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Accounting for Sole Proprietorships

I-3

The basic steps in the accounting process apply to all forms of business.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The primary differences between the financial statements of a corporation and a sole proprietorship relate to the way equity is reported.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A sole proprietorship prepares a retained earnings statement and uses the title Retained Earnings title on its balance sheet.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10.

Closing entries for a proprietorship formally recognize in the ledger the transfer of net income (or net loss) and owner’s drawing to the retained earnings account.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11.

In the closing process for a sole proprietor, the revenue and expense accounts are closed, in the same manner as for a corporation, to another temporary account, Income Summary.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

Income Summary is closed with a debit to Income Summary and a credit to Owner’s Drawing account.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

Closing entries result in the transfer of net income or loss into the owner’s capital account.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14.

The Owner’s Drawing account bypasses the Income Summary account when it is being closed.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

After all closing entries have been posted, the balance of the Income Summary account will be zero.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16.

The post-closing trial balance is prepared prior to the closing entries.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17.

As with a corporation, the purpose of a proprietorship post-closing trial balance is to prove the equality of the temporary account balances that are carried forward into the next accounting period.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

18.

The post-closing trial balance will contain only permanent balance sheet accounts.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

I-4

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Answers to True-False Statements 1. 2. 3.

F T T

4. F 5. T 6. F

7. T 8. T 9. F

10. F 11. T 12. F

13. T 14. T 15. T

16. F 17. F 18. T

MULTIPLE CHOICE QUESTIONS 19.

The basic accounting equation for a sole proprietorship is: a. Assets = Liabilities plus Stockholder’s equity. b. Assets = Liabilities plus Common Stock. c. Assets = Liabilities plus Owner’s Equity. d. Assets = Liabilities plus Retained Earnings.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Business Economics

20.

As compared to a corporation, the accounting for a sole proprietorship is similar except for: a. equity transactions. b. the recognition of revenues. c. the timing of expenses. d. the recognition of liabilities.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

21.

The primary difference between accounting and reporting for a sole proprietorship and a corporation involves accounting for: a. revenues. b. asset purchases. c. recognition of liabilities. d. equity transactions.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Business Economics

22.

The classification and normal balance of the drawings account is: a. revenue with a credit balance. b. an expense with a debit balance. c. a liability with a credit balance. d. Owner’s equity with a debit balance.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Reporting

23.

An investment by the owner of a sole proprietorship: a. increases assets and liabilities. b. increases assets and owner’s equity. c. increases liabilities and owner’s equity. d. All of these.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Accounting for Sole Proprietorships

24.

I-5

Which one of the following represents the expanded basic accounting equation for a sole proprietorship? a. Assets = Liabilities + Owner’s Equity + Drawings - Revenue - Expenses b. Assets + Drawings + Expenses = Liabilities + Owner’s Equity + Revenues c. Assets - Liabilities - Drawings = Owner’s Equity + Revenues - Expenses d. Assets = Revenues + Expenses - Liabilities

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Business Economics

25.

For a sole proprietorship a revenue a. increases assets and owner’s equity. b. increases assets and decreases owner’s equity. c. leaves total assets unchanged. d. decreases assets and increases owner’s equity.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26.

Owner’s equity is increased by a. withdrawals. b. revenues. c. expenses. d. liabilities.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

27.

If total owner’s equity increased by $5,000, then a. assets must have decreased by $5,000. b. liabilities must have increased by $5,000. c. assets must have increased by $5,000, or liabilities must have decreased by $5,000. d. assets and owner’s equity each increased by $2,500.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

28.

For a sole proprietorship the payment of a liability a. decreases assets and liabilities. b. Increases assets and decreases owner’s equity. c. Leaves total assets unchanged. d. decreases assets and increases owner’s equity.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

29.

For a sole proprietorship a withdrawal by an owner a. increases assets and owner’s equity. b. increases assets and decreases owner’s equity. c. decreases assets and decreases owner’s equity. d. Increases assets and increases owner’s equity.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Reporting

I-6 30.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Which of the following items has no effect on owner’s equity? a. Revenue b. Purchase of land c. Owner’s withdrawal d. Expense

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31.

Payments to owners are called a. expenses. b. liabilities. c. dividends. d. withdrawals.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

32.

Withdrawals by an owner a. increase expenses. b. decrease owner’s equity. c. decrease revenues. d. are called a net loss.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

33.

The first step in the recording process for a sole proprietorship is to a. prepare financial statements. b. analyze the transaction in terms of its effect on the accounts. c. post to a journal. d. prepare a trial balance.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

34.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

35.

The Owner’s Drawings account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is shown as a decrease on the owner’s equity statement. d. is not a proper subdivision of owners’ equity.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Reporting

Accounting for Sole Proprietorships

36.

I-7

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, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Reporting

37.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

38.

Which of the following is a true statement about closing the books of a sole 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 Dividends account are closed to the Income Summary account.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39.

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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

40.

A post-closing trial balance will show: a. only balance sheet accounts. b. zero balances for balance sheet accounts. c. zero balances for all accounts. d. only income statement accounts.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: No ne, IMA: Reporting

41.

The purpose of the post-closing trial balance is to a. prove that no mistakes were made. b. prove the equality of the permanent account balances that are carried forward into the next accounting period. c. prove the equality of the temporary account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

I-8 42.

Test Bank for Accounting: Tools for Business Decision Making, Fifth 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, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43.

Use the following information from the income statement of the AAA Janitorial Service. Revenues Service Revenue $5,500 Expenses Salaries and wages expense $ 1,150 Advertising expense 600 Rent expense 300 Supplies expense 300 Insurance expense 100 Total expenses 2,450 Net Income $3,050 The entry to close the Janitorial Service Revenue account includes a a. debit to Service Revenue for $5,500. b. credit to Service Revenue for $5,500. c. debit to Income Summary for $5,500. d. debit to the Owner’s, Capital account for $5,500.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

44.

Use the following information from the income statement of the AAA Janitorial Service. Revenues Service Revenue $5,500 Expenses Salaries and wages expense $ 1,150 Advertising expense 600 Rent expense 300 Supplies expense 300 Insurance expense 100 Total expenses 2,450 Net Income $3,050 The entry to close the expense accounts includes a a. credit to Income Summary for $2,450. b. debit to Income Summary for $2,450. c. debit to Salaries and Wages Expense for $1,150. d. credit to the Owner’s Capital account for $2,450.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

I-9

Accounting for Sole Proprietorships

45.

Use the following information from the income statement of the AAA Janitorial Service. Revenues Service Revenue $5,500 Expenses Salaries and wages expense $ 1,150 Advertising expense 600 Rent expense 300 Supplies expense 300 Insurance expense 100 Total expenses 2,450 Net Income $3,050 The entry to close the Income Summary includes a a. credit to Income Summary for $3,050. b. debit to Income Summary for $3,050. c. debit to the Owner’s Capital account for $3,050. d. credit to Common Stock for $3,050.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Answers to Multiple Choice Questions 19. c 20. a 21. d 22. d

23. 24. 25. 26.

b b a b

27. 28. 29. 30.

c a c b

31. 32. 33. 34

d b b a

35. 36. 37 38.

c c c c

39. 40. 41. 42.

d a b c

43. a 44. b 45. b

BRIEF EXERCISES Be. 46 Presented here are five economic events. For each item, indicate whether the event increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and owners’ equity.

Owner’s Equity _______

1. Owner invested cash in the business.

Assets = _______

Liabilities ______

2. Purchased supplies on account. 3. Paid employees' salaries.

_______ _______

______ ______

_______ _______

4. Owner made a cash withdrawal.

_______

______

_______

5. Expenses paid in cash.

_______

______

_______

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

I-10 Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Solution Be 46

(5 min.)

1. Owner invested cash in the business. 2. Purchased supplies on account. 3. Paid employees' salaries. 4. Owner made a cash withdrawal. 5. Expenses paid in cash.

Assets + + -

Liabilities NE + NE NE NE

Owner’s Equity + NE -

Be. 47 In the space provided by each item mark each transaction as affecting owner’s investment (I), owner’s drawing (D), revenue (R), expense (E), or not affecting owner’s equity (NOE). a. _____ Received cash for services performed b. _____ Paid cash to purchase equipment c. _____ Owner withdrew cash. d. _____ Paid utilities. e. _____ Owner invested cash into the business. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 47 a. b. c. d. e.

(5 min.)

R NOE D E I

Be. 48 Determine the missing items. Assets = Liabilities + Owner’s Equity $85,000 (b) $104,000

$49,000 $42,000 (c)

(a) $44,000 $44,000

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 48 (5 min.) a. $36,000 b. $86,000

c. $60,000

I-11

Accounting for Sole Proprietorships

Be. 49 Marsha Gupta was reviewing her business activities at the end of the year (2014) and decided to prepare an owner’s equity statement. At the beginning of the year her assets were $370,000, liabilities were $250,000, and owner’s capital was $120,000. The net income for the year was $330,000. Owner’s withdrawals of $100,000 were paid during the year. Prepare an owner’s equity statement in good form. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 49

(5 min.) MARSHA GUPTA Owner’s Equity Statement For the Year Ended 2014

M. Gupta, Capital, Beginning Add: Net Income

$120,000 330,000 450,000 100,000 $350,000

Less: Drawings M. Gupta, Capital, Ending Be. 50

The following selected accounts appear in the adjusted trial balance for Federer Company. Identify the accounts that would be included in the post-closing trial balance. 1. 2. 3. 4.

Accumulated Depreciation Depreciation Expense Garner, Capital Drawing

5. 6. 7.

Supplies Accounts Payable Service Revenue

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 50

(5 min.)

The following are accounts that would be included in the post-closing trial balance. 1. 3. 5. 6.

Accumulated Depreciation Garner, Capital Supplies Accounts Payable

APPENDIX J PRICING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

1. 2. 3. 4. 5.

1 1 1 2 2

C K K K C

6. 7. 8. 9. 10.

2 2 3 3 3

C C K K K

Item

4 4 4 5 5

K C K K C

21. 22. 23. 24. 25.

6 6 6 6 6

C K K K C

98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.

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 AP AP AP AP AP C K K C K C K C K C C K C K AP

122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145.

4 4 4 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6

AP AP AP C K K K K K K C K K K C AP AP AP AP AP AP AP AP AP

155. 156. 157.

4 4 4

AP AP AP

158. 159.

6 6

AP AP

172. 173. 174. 175.

4 4 4 4

AN AN AN AN

176. 177.

6 6

AP AP

True-False Statements 11. 12. 13. 14. 15.

3 4 4 4 4

K K K C C

16. 17. 18. 19. 20.

Multiple Choice Questions 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

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 C C K K K K C AP AP AP AP AP K K AP AP AP AP AP AP AP

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3

AP AP AP AP C C K K C AP AP C K AP AP K K C C K AP AP AP K

146. 147. 148.

1 2 2

AP AP AP

149. 150. 151.

2 2 2

AP AP AP

74. 75. 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 4 4 4 4 4 4 4 4 4 4 4

AP AP AP AP AP AP AP K K K AP AP AP K K K C AP K K K K K C

Brief Exercises 152. 153. 154.

3 3 3

AP AP AP

Exercises 160. 161. 162. 163. a

1 1 1 2

AP AP AP AP

164. 165. 166. 167.

2 2 2 3

AP AP AP AP

168. 169. 170. 171.

3 3 4 4

AP AP AN AN

This question covers a topic in an Appendix to the chapter.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Completion Statements 178. 179.

1 2

K K

180. 181.

2 3

K K

182. 183.

4 4

K K

184. 185.

4 4

K K

186. 187.

5 6

K K

Item

Type

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 2. 3. 26.

TF TF TF MC

27. 28. 29. 30.

MC MC MC MC

31. 32. 33. 34.

4. 5. 6. 7. 41. 42.

TF TF TF TF MC MC

43. 44. 45. 46. 47. 48.

MC MC MC MC MC MC

49. 50. 51. 52. 53. 54.

8. 9. 10. 11. 65.

TF TF TF TF MC

66. 67. 68. 69. 70.

MC MC MC MC MC

71. 72. 73. 74. 75.

12. 13. 14. 15. 16. 17. 18. 87. 88.

TF TF TF TF TF TF TF MC MC

89. 90. 91. 92. 93. 94. 95. 96. 97.

MC MC MC MC MC MC MC MC MC

98. 99. 100. 101. 102. 103. 104. 105. 106.

19.

20.

125.

21. 22. 23. 24. 25.

TF TF TF TF TF

127. 128. 129. 130. 131.

MC MC MC MC MC

132. 133. 134. 135. 136.

Type

Item

Type

Item

Learning Objective 1 MC 35. MC 39. MC 36. MC 40. MC 37. MC 146. MC 38. MC 160. Learning Objective 2 MC 55. MC 61. MC 56. MC 62. MC 57. MC 63. MC 58. MC 64. MC 59. MC 147. MC 60. MC 148. Learning Objective 3 MC 76. MC 81. MC 77. MC 82. MC 78. MC 83. MC 79. MC 84. MC 80. MC 85. Learning Objective 4 MC 107. MC 116. MC 108. MC 117. MC 109. MC 118. MC 110. MC 119. MC 111. MC 120. MC 112. MC 121. MC 113. MC 122. MC 114. MC 123. MC 115. MC 124. Learning Objective 5 MC 126. MC 186. Learning Objective 6 MC 137. MC 142. MC 138. MC 143. MC 139. MC 144. MC 140. MC 145. MC 141. MC 158.

Type

Item

Type

MC MC BE Ex

161. 162. 178.

Ex Ex C

MC MC MC MC BE BE

149. 150. 151. 163. 164. 165.

BE BE BE Ex Ex Ex

166. 179. 180.

Ex C C

MC MC MC MC MC

86. 152. 153. 154. 167.

MC BE BE BE BE

168. 169. 181.

Ex Ex C

MC MC MC MC MC MC MC MC MC

155. 156. 157. 170. 171. 172. 173. 174. 175.

BE BE BE Ex Ex Ex Ex Ex Ex

182. 183. 184. 185.

C C C C

159. 176. 177. 187.

BE Ex Ex C

C MC MC MC MC BE

Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains one set of eight Matching questions and two Short-Answer Essay questions.

Pricing

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CHAPTER LEARNING OBJECTIVES 1. Compute a target cost when the market determines a product price. To compute a target cost, the company determines its target selling price. Once the target selling price is set, it determines its target cost by setting a desired profit. The difference between the target price and desired profit is the target cost of the product. 2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves establishing a cost base and adding to this cost base a markup to determine a target selling price. The cost-plus pricing formula is expressed as follows: Target selling price = Cost + (Markup percentage × Cost). 3. Use time-and-material pricing to determine the cost of services provided. Under timeand-material pricing, two pricing rates are set—one for the labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead cost. 4. Determine a transfer price using the negotiated, cost-based, and market-based approaches. The negotiated price is determined through agreement of division managers. Under a cost-based approach, the transfer price may be based on variable cost alone or on variable costs plus fixed costs. Companies may add a markup to these numbers. The costbased approach often leads to poor performance evaluations and purchasing decisions. A market-based transfer price is based on existing competing market prices and services. A market-based system is often considered the best approach because it is objective and generally provides the proper economic incentives. 5. Explain issues involved in transferring goods between divisions in different countries. Companies must pay income tax in the country where they generate the income. In order to maximize income and minimize income tax, many companies prefer to report more income in countries with low tax rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer prices they use on internal transfers between divisions located in different countries. 6. Determine prices using absorption-cost pricing and variable-cost pricing. Absorptioncost pricing uses total manufacturing cost as the cost base and provides for selling and administrative costs plus the target ROI through the markup. The target selling price is computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per unit). Variable-cost pricing uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup. The target selling price is computed as: Variable cost per unit + (Markup percentage × Variable cost per unit).

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

TRUE-FALSE STATEMENTS 1.

In most cases, a company sets the price instead of it being set by the competitive market.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

The difference between the target price and the desired profit is the target cost of the product.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

In a competitive environment, the company must set a target cost and a target selling price.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

The first step for time-and-material pricing is to calculate the material loading charge.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

10.

The material loading charge is expressed as a percentage of the total estimated cost of materials for the year.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

11.

Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Pricing 12.

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Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

13.

There are two approaches for determining a transfer price: cost-based and market-based.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14.

If a cost-based transfer price is used, the transfer price must be based on variable cost.

15.

A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

16.

In the formula for a minimum transfer price, opportunity cost is the contribution margin of goods sold externally.

17.

The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach.

18.

A negotiated transfer price should be used when an outside market for the goods does not exist.

19.

The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

20.

Differences in tax rates between countries can complicate the determination of the appropriate transfer price.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

21.

The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

22.

The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

23.

Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

J-6 24.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition The markup percentage in the variable-cost approach is computed by dividing the desired ROI/unit plus fixed costs/unit by the variable costs/unit.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

25.

Under the variable-cost approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3. 4. 5.

F T T F T

6. 7. 8. 9. 10.

F T T F T

11. 12. 13. 14. 15.

F T F F T

16. 17. 18. 19. 20.

T F T F T

21. 22. 23. 24. 25.

T F T T F

MULTIPLE CHOICE QUESTIONS 26.

Factors that can affect pricing decisions include all of the following except a. cost considerations. b. environment. c. pricing objectives. d. All of these are factors.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

27.

In most cases, prices are set by the a. customers. b. competitive market. c. largest competitor. d. selling company.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

28.

A company must price its product to cover its costs and earn a reasonable profit in a. all cases. b. its early years. c. the long run. d. the short run.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Pricing 29.

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Prices are set by the competitive market when a. the product is specially made for a customer. b. there are no other producers capable of manufacturing a similar item. c. a company can effectively differentiate its product from others. d. a product is not easily distinguished from competing products.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

30.

All of the following are correct statements about the target price except it a. is the price the company believes would place it in the optimal position for its target audience. b. is used to determine a product's target cost. c. is determined after the company has identified its market and does market research. d. is determined after the company sets its desired profit amount.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

31.

Companies that sell products whose prices are set by market forces are called a. price givers. b. price leaders. c. price takers. d. price setters.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

32.

In which of the following situations would a company not set the prices of its products? a. When the product is not easily differentiated from competing products b. When the product is specially made for a customer c. When there are few or no other producers capable of making a similar product d. When the product can be effectively differentiated from others

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

33.

The calculation to determine target cost is a. variable manufacturing costs + fixed manufacturing costs. b. sales price – (variable manufacturing costs + fixed manufacturing costs). c. variable manufacturing costs + selling and administrative variable costs. d. sales price – desired profit.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

34.

Target cost is comprised of a. variable and fixed manufacturing costs only. b. variable manufacturing and selling and administrative costs only. c. total manufacturing and selling and administrative costs. d. fixed manufacturing and selling and administrative costs only.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

35.

A company that is a price taker would most likely use which of the following methods? a. Time-and-material pricing b. Target costing c. Cost plus pricing, contribution approach d. Cost plus pricing, absorption approach

Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

36.

Bond Co. is using the target cost approach on a new product. Information gathered so far reveals: Expected annual sales Desired profit per unit Target cost

400,000 units $0.35 $168,000

What is the target selling price per unit? a. $0.42 b. $0.70 c. $0.35 d. $0.77 Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($168,000 ÷ 400,000) + $0.35 = $0.77

37.

Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected: Annual sales Projected selling and administrative costs Desired profit

50,000 bottles $8,000 $70,000

The target cost per bottle is a. $0.44. b. $0.60. c. $0.16. d. $0.40. Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $2.00 − ($70,000 ÷ 50,000) = $0.60

38.

Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What is the desired profit per unit? a. $0.40 b. $2.03 c. $3.65 d. None of these answer choices are correct.

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $810,000 ÷ $4.05 = 200,000; $4.05 − ($730,000 ÷ 200,000) = $0.40

Pricing 39.

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Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the target cost per unit? a. $4.00 b. $3.52 c. $4.48 d. $4.80

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: ($300,000 − $36,000) ÷ 75,000 = $3.52

40.

Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $1.84. The expected unit sales price is $22 based on 10,000 units. What is the total target cost? a. $201,600 b. $220,000 c. $18,400 d. $238,400

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: ($22 − $1.84) × 10,000 = $201,600

41.

In cost-plus pricing, the markup consists of a. manufacturing costs. b. desired ROI. c. selling and administrative costs. d. total cost and desired ROI.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

42.

The desired ROI per unit is calculated by a. multiplying the ROI times the investment and dividing by the estimated volume. b. multiplying the unit selling price by the ROI. c. dividing the total cost by the estimated volume and multiplying by the ROI. d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement

43.

Bellingham Suit Co. has received a shipment of suits that cost $200 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit? a. $333 b. $320 c. $280 d. $500

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $200 × 1.60 = $320

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following information for questions 44–47. Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales 44.

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the total cost per pair of shoes? a. $40 b. $68 c. $168 d. $96

45.

What is the desired ROI per pair of shoes? a. $68 b. $168 c. $102 d. $170

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement Solution: ($1,700,000 × .30) ÷ 5,000 = $102

46.

What is the target selling price per pair of shoes? a. $142 b. $170 c. $114 d. $158

47.

What is the markup percentage? a. 150% b. 255% c. 850% d. 182%

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($1,700,000 × .30) ÷ ($40,000 + $20,000 + $160,000 + $120,000) = 150

Pricing

J - 11

Use the following information for questions 48 and 49. Lock Inc. has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment 48.

$145 15,000 units $115 $1,800,000

The ROI percentage is a. 20%. b. 25%. c. 30%. d. 35%.

49.

The markup percentage is a. 20.69%. b. 22.59%. c. 25%. d. 26.09%.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($145 − $115) ÷ $115 = 26.09

50.

A company using cost-plus pricing has an ROI of 24%, total sales of 20,000 units and a desired ROI per unit of $30. What was the amount of investment? a. $144,000 b. $2,500,000 c. $456,000 d. $789,475

Use the following information for questions 51–53. Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales 51.

$250,000 $450,000 14% $2,000,000 200,000 units

What is the target selling price per unit? a. $4.90 b. $3.50 c. $2.65 d. $3.65

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [$250,000 + $450,000 + ($2,000,000 × .14)] ÷ 200,000 = $4.90

J - 12 52.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition What is the markup percentage? a. 112% b. 20% c. 62% d. 40%

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($2,000,000 × .14) ÷ ($250,000 + $450,000) = 40

53.

What would the markup percentage be if only 150,000 units were sold and Brislin still wanted to earn the desired ROI? a. 32.95% b. 53.33% c. 35.0% d. 44.00%

54.

When using cost-plus pricing, which amount per unit does not change when the expected volume differs from the budgeted volume? a. Variable cost b. Fixed cost c. Desired ROI d. Target selling price

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

55.

Why does the unit selling price increase when expected volume is lower than budgeted volume? a. Variable costs and fixed costs have to be spread over fewer units. b. Fixed costs and desired ROI have to be spread over fewer units. c. Variable costs and desired ROI have to be spread over fewer units. d. Fixed costs only have to be spread over fewer units.

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

56.

In cost-plus pricing, the target selling price is computed as a. variable cost per unit + desired ROI per unit. b. fixed cost per unit + desired ROI per unit. c. total unit cost + desired ROI per unit. d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

57.

In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by the a. fixed cost per unit. b. total cost per unit. c. total manufacturing cost per unit. d. variable cost per unit.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement

Pricing 58.

J - 13

The cost-plus pricing approach's major advantage is a. it considers customer demand. b. that sales volume has no effect on per unit costs. c. it is simple to compute. d. it can be used to determine a product’s target cost.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

59.

The following per unit information is available for a new product of Red Ribbon Company: Desired ROI Fixed cost Variable cost Total cost Selling price

$ 20 40 60 100 120

Red Ribbon Company's markup percentage would be a. 17%. b. 20%. c. 33%. d. 50%. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $20 ÷ $100 = 20

60.

Bryson Company has just developed a new product. The following data is available for this product: Desired ROI per unit Fixed cost per unit Variable cost per unit Total cost per unit

$ 30 50 75 125

The target selling price for this product is a. $155. b. $125. c. $105. d. $80. Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $125 + $30 = $155

61.

All of the following are correct statements about the cost-plus pricing approach except that it a. is simple to compute. b. considers customer demand. c. includes only variable costs in the cost base. d. will only work when the company sells the quantity it budgeted.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

J - 14 62.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the ROI percentage by ________ and then dividing by units produced. a. fixed costs. b. total investment. c. total costs. d. variable costs.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Use the following information for questions 63–64. Red Grass Company produces high definition television sets. The following information is available for this product: Fixed cost per unit Variable cost per unit Total cost per unit Desired ROI per unit 63.

$250 750 1,000 300

Red Grass Company's markup percentage would be a. 30%. b. 40%. c. 60%. d. 120%.

64.

The target selling price for this television is a. $550. b. $1,000. c. $1,050. d. $1,300.

65.

In time-and-material pricing, a material loading charge covers all of the following except a. purchasing costs. b. related overhead. c. desired profit margin. d. All of these are covered.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

66.

The first step for time-and-material pricing is to calculate the a. charge for obtaining materials. b. charge for holding materials. c. labor charge per hour. d. charges for a particular job.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Pricing 67.

J - 15

The labor charge per hour in time-and-material pricing includes all of the following except a. an allowance for a desired profit. b. charges for labor loading. c. selling and administrative costs. d. overhead costs.

Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

68.

The last step in determining the material loading charge percentage is to a. estimate annual costs for purchasing, receiving, and storing materials. b. estimate the total cost of parts and materials. c. divide material charges by the total estimated costs of parts and materials. d. add a desired profit margin on the materials themselves.

Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

69.

In time-and-material pricing, the charge for a particular job is the sum of the labor charge and the a. materials charge. b. material loading charge. c. materials charge + desired profit. d. materials charge + the material loading charge.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 70-72. The following data is available for Wheels ‘N Spokes Repair Shop for 2013: Repair technicians’ wages Fringe benefits Overhead Total

$360,000 80,000 60,000 $500,000

The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2013. 70.

Wheels ‘N Spokes’ labor charge in 2013 would be a. $100. b. $112. c. $128. d. $140.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: ($500,000 ÷ 5,000) + $40 = $140

71.

In January 2013, Wheels ‘N Spokes repairs a bicycle that uses parts of $180. Its material loading charge on this repair would be a. $72. b. $108. c. $180. d. $252.

J - 16 72.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition In March 2013, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and uses parts of $240. The bill for this repair would be a. $520. b. $560. c. $592. d. $616.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($500,000 ÷ 5,000) + $40 = $140; ($240 × 1.40) + ($140 × 2) = $616

73.

Which of the following organizations would most likely not use time-and-material pricing? a. Automobile repair company b. Engineering firm c. Custom furniture manufacturer d. Public accounting firm

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 74–76. Carlos Consulting Inc. provides financial consulting and has collected the following data for the next year’s budgeted activity for a lead consultant. Consultants’ wages Fringe benefits Related overhead Supply clerk’s wages Fringe benefits Related overhead Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated supply costs 74.

$90,000 $22,500 $17,500 $18,000 $4,000 $20,000 $20 15% 5,000 $168,000

The labor rate per hour is a. $42.50. b. $26.00. c. $41.50. d. $46.00.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [($90,000 + $22,500 + $17,500) ÷ 5,000] + $20 = $46

75.

The material loading charge is a. 15%. b. 25%. c. 40%. d. 55%.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [($18,000 + $4,000 + $20,000) ÷ $168,000] + .15 = 40

Pricing 76.

J - 17

A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill would be a. $1,172. b. $772. c. $952. d. $1,100.

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [($90,000 + $22,500 + $17,500) ÷ 5,000]+$20 = $46; [($18,000 + $4,000 + $20,000) ÷ $168,000] + .15 = .40; ($46 × 20) + ($180 × 1.40) = $1,172

Use the following information for questions 77–78. Lonely Guy Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered: Total bill Labor profit margin Materials profit margin Total labor charges Cost of materials used Total hourly cost 77.

$600 $10 20% $390 $120 $22.50

What was the material loading charge? a. 37.5% b. 43.8% c. 61.3% d. 75%

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $600 − $390 = $210; ($210 − $120) ÷ $120 = 75

78.

How many hours were billed on the job? a. 19.5 b. 18.5 c. 17.3 d. 12.0

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $390 ÷ ($22.50 + $10) = 12.0

79.

Lawrence Legal Services recently billed a customer $690. Labor hours were 6 and the cost of the materials used was $150. If the company’s hourly labor rate was $75, what material loading charge was used? a. 30% b. 50% c. 60% d. 100%

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $690 − ($75 × 6) − $150 = $90; $90 ÷ $150 = 60

J - 18 80.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per hour. How much will be charged on a job that requires 3.5 hours of work and $40 of materials? a. $128 b. $110 c. $88 d. $133

81.

The time component under time-and-material pricing includes a a. loading charge. b. charge for receiving, handling, and storing materials. c. portion of the materials clerk’s wages. d. profit margin.

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

82.

Using time-and-material pricing involves how many steps? a. 4 b. 3 c. 2 d. 1

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

83.

The last step in calculating the hourly rate to be charged in time-and-material pricing is to a. estimate the total labor costs plus fringe benefits. b. estimate the total labor hours. c. add a profit margin. d. add a charge for overhead costs.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 84–86. Jaycee Auto Repair has the following budgeted costs for the next year: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Invoice cost of parts and materials Total budgeted costs 84.

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

The labor rate to be used next year assuming 7,500 hours of repair time and a profit margin of $25 per labor hour is a. $22. b. $41. c. $43. d. $47.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting Solution: ($165,000 ÷ 7,500) + $25 = $47

Pricing 85.

J - 19

The material loading charge to be used next year assuming a 40% markup on material cost is a. 20%. b. 40%. c. 65%. d. 80%.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: [($45,000 + $15,000 + $40,000) ÷ $400,000] + 40 = 65

86.

The labor rate is based on 7,500 repair hours and a profit margin of $25 per labor hour. Jaycee estimates that the repairs to a Cadillac Escalade damaged in an accident will take 45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is a. $5,890. b. $7,890. c. $5,775. d. $7,015.

Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($165,000 ÷7,500) + $25 = $47; [($45,000 + $15,000 + $40,000) ÷ $400,000] + 40 = 65; (45 × $47) + $3,500 + ($3,500 × .65) = $7,890

87.

The price used to record a sale between divisions within the same vertically integrated company is called the a. sales price. b. integrated price. c. transfer price. d. bargain price.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

88.

The overall objective in the determination of a transfer price is to a. maximize the return of the selling division. b. minimize the cost to the purchasing division. c. minimize the return of the selling division. d. maximize the return to the whole company.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

89.

Which two methods are used most often when establishing a transfer price? a. Negotiated transfer pricing and cost-based transfer pricing b. Cost-based transfer pricing and market-based transfer pricing c. Negotiated transfer pricing and market-based transfer pricing d. Cost-based transfer pricing and standard-based pricing

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

J - 20

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following information for questions 90 and 91. The Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units. 90.

What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: d, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $0, 8,000 < 10,000

91.

What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $25 − $15 = $10, (8,000 + 3,000) > 10,000

92.

In the minimum transfer price formula, variable cost is defined as the variable cost of a. all units sold, both internally and externally. b. units sold externally. c. units not sold. d. units sold internally.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

93.

Under the negotiated transfer pricing approach, the minimum transfer price is established by the a. purchasing division. b. corporate headquarters management. c. selling division. d. corporate negotiator.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

94.

Under the negotiated transfer pricing approach, the maximum transfer price is established by the a. purchasing division. b. corporate headquarters management. c. selling division. d. corporate negotiator.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Pricing 95.

J - 21

Assume the Thread Division has excess capacity. The Garment Division wants the Thread Division to furnish them additional spools of thread that could be made using the excess capacity. In a negotiated transfer price, the Thread Division should accept as a minimum any transfer price that exceeds the a. total cost of producing spools for outside sales. b. variable costs of producing the additional spools for the Garment Division. c. contribution margin and outside spool sales. d. foregone contribution margin on outside spool sales.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

96.

The most common method used to establish transfer prices is a. negotiated transfer pricing. b. market-based transfer pricing. c. cost-plus transfer pricing. d. cost-based transfer pricing.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

97.

When a sale occurs between divisions of the same company, which transfer pricing approach may lead to the buying division overpricing its product? a. Cost based transfer pricing b. Market-based transfer pricing c. Negotiated transfer pricing d. Cost-plus transfer pricing

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 98–100. The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity Price per board foot Variable production cost per bd. ft. Variable selling cost per bd. ft. Construction Division: Board feet needed Outside price paid per bd. ft.

200,000 board feet $2.50 $1.25 $0.50 60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. 98.

If current outside sales are 130,000 board feet, what is the minimum transfer price that the Lumber Division could accept? a. $1.25 b. $1.40 c. $1.75 d. $2.50

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $1.25 + $0.50 − $0.35 = $1.40

J - 22 99.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition If current outside sales are 150,000 board feet, what is the minimum transfer price that the Lumber Division could accept? a. $2.00 b. $1.65 c. $1.40 d. $2.15

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $2.50 − $0.35 = $2.15

100.

If the Lumber Division has sufficient excess capacity to fulfill the Construction Division’s needs, what will be the effect on the company’s overall contribution margin? a. Decrease by $30,000 b. Decrease by $24,000 c. Increase by $36,000 d. Increase by $33,500

Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $1.25 + $0.50 − $0.35 = $1.40; ($2.00 − $1.40) × 60,000 = $36,000

Use the following information for questions 101 and 102. Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The Production Division is currently paying $2,400 per unit to an outside supplier. $90 per unit can be saved on internal sales from reduced selling expenses. 101.

What is the minimum transfer price that the Engine Division should accept? a. $2,460 b. $2,550 c. $2,400 d. $1,500

102.

What is the increase/decrease in overall company profits if this transfer takes place? a. Decrease $1,200,000 b. Increase $2,520,000 c. Decrease $3,000,000 d. Increase $27,000,000

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement Solution: $2,550 − $90 = $2,460 ($2,460 − $2,400) × 20,000 = $1,200,000

Pricing

J - 23

Use the following information for questions 103 and 104. The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can. 103.

Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept? a. $0.24 b. $0.32 c. $0.22 d. $0.30

104.

Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? a. $0.58 b. $0.66 c. $0.28 d. $0.34

Use the following information for questions 105 and 106. The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating results were as follows: Sales (160,000) gallons Variable costs Contribution margin Fixed costs Net Income 105.

$500,000 312,000 188,000 100,000 $ 88,000

Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division. The minimum price that will increase the Dairy Division’s profit is a. $2.50 per gallon. b. $1.18 per gallon. c. $1.95 per gallon. d. $0.55 per gallon.

J - 24 106.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division, what is the minimum price that will allow the Dairy Division to maintain its current net income? a. $3.13 per gallon b. $1.18 per gallon c. $1.95 per gallon d. $0.55 per gallon

Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $500,000 ÷ 160,000 = $3.13

107.

Negotiated transfer pricing is not always used because of each of the following reasons except that a. market price information is sometimes not easily obtainable. b. a lack of trust between the negotiating divisions may lead to a breakdown in the negotiations. c. negotiations often lead to different pricing strategies from division to division. d. opportunity cost is sometimes not determinable.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

108.

All of the following are approaches for determining a transfer price except the a. cost-based approach. b. market-based approach. c. negotiated approach. d. time-and-material approach.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

109.

When a cost-based transfer price is used, the transfer price may be based on any of the following except a. fixed cost alone. b. full cost. c. variable cost alone. d. All of these may be used.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

110.

All of the following are correct statements about the cost-based transfer price approach except that it a. can understate the actual contribution to profit by the selling division. b. can reduce a division manager's control over the division's performance. c. bases the transfer price on standard cost instead of actual cost. d. provides incentive for the selling division to control costs.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

111.

The general formula for the minimum transfer price is: minimum transfer price equals a. fixed cost + opportunity cost. b. external purchase price. c. total cost + opportunity cost. d. variable cost + opportunity cost.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Pricing 112.

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Variable costs of units sold internally will always be a. lower than the variable costs of units sold externally. b. higher than the variable costs of units sold externally. c. the same as the variable costs of units sold externally. d. Either higher or lower than for units sold externally.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

113.

In the formula for the minimum transfer price, opportunity cost is the __________ of the goods sold externally. a. variable cost b. total cost c. selling price d. contribution margin

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

114.

The transfer price approach that conceptually should work the best is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

115.

The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

116.

All of the following are correct statements about the market-based approach except that it a. assumes that the transfer price should be based on the most objective inputs possible. b. provides a fairer allocation of the company's contribution margin to each division. c. produces a higher company contribution margin than the cost-based approach. d. ensures that each division manager is properly motivated and rewarded.

Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

117.

The negotiated transfer price approach should be used when a. the selling division has available capacity and is willing to accept less than the market price. b. an outside market for the goods does not exist. c. no market price is available. d. any of these situations exist.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

J - 26 118.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Assuming the selling division has available capacity, a negotiated transfer price should be within the range of a. fixed cost per unit and the external purchase price. b. total cost per unit and the external purchase price. c. variable cost per unit and the external purchase price. d. variable cost per unit and the opportunity cost.

119.

The transfer price approach that will result in the largest contribution margin to the buying division is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

120.

The maximum transfer price from the buying division's standpoint is the a. total cost + opportunity cost. b. variable cost + opportunity cost. c. external purchase price. d. external purchase price + opportunity cost.

Use the following information for questions 121 and 122. The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally for $55. Its variable cost is $25 per unit, and its fixed cost per unit is $7. Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $32. 121.

Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $25 variable cost

122.

Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $55 external price

Pricing

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Use the following information for questions 123 and 124. Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division’s variable cost per unit is $35 and its fixed cost per unit is $10. 123.

If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept? a. $30 b. $35 c. $45 d. $70

124.

If the Food Division has 10,000 units available capacity, what is the minimum transfer price the Food Division should accept? a. $30 b. $35 c. $45 d. $70

125.

All of the following are correct statements about transfers between divisions located in countries with different tax rates except that a. differences in tax rates across countries complicate the determination of the appropriate transfer price. b. many companies prefer to report more income in countries with low tax rates. c. companies must pay income tax in the country where income is generated. d. a decreasing number of transfers are between divisions located in different countries.

Ans: d, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

126.

Transfers between divisions located in countries with different tax rates a. simplify the determination of the appropriate transfer price. b. are decreasing in number as more companies "localize" operations. c. encourage companies to report more income in countries with low tax rates. d. all of these answer choices are correct.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

127.

Which of the following is consistent with generally accepted accounting principles? a. Absorption-cost approach b. Contribution approach c. Variable-cost approach d. Both absorption-cost and contribution approach

Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

J - 28 128.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition Under the absorption-cost approach, all of the following are included in the cost base except a. direct materials. b. fixed manufacturing overhead. c. selling and administrative costs. d. variable manufacturing overhead.

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

129.

The first step in the absorption-cost approach is to compute the a. desired ROI per unit. b. markup percentage. c. target selling price. d. unit manufacturing cost.

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

130.

The markup percentage in the absorption-cost approach is computed by dividing the sum of the desired ROI per unit and a. fixed costs per unit by manufacturing cost per unit. b. fixed costs per unit by variable costs per unit. c. selling and administrative expenses per unit by manufacturing cost per unit. d. selling and administrative expenses per unit by variable costs per unit.

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

131.

In the absorption-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and selling and administrative expenses. c. desired ROI and fixed costs. d. selling and administrative expenses only.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

132.

The absorption-cost approach is used by most companies for all of the following reasons except that a. absorption cost information is readily provided by a company's cost accounting system. b. absorption cost provides the most defensible bases for justifying prices to interested parties. c. basing prices on only variable costs could encourage managers to set too low a price to boost sales. d. this approach is more consistent with cost-volume-profit analysis.

Ans: d, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

133.

Under the variable-cost approach, the cost base includes all of the following except a. variable selling and administrative costs. b. variable manufacturing costs. c. total fixed costs. d. All of the above are included.

Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

Pricing 134.

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In the variable-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and fixed costs. c. desired ROI and selling and administrative expenses. d. fixed costs only.

Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

135.

The markup percentage denominator in the variable-cost approach is the a. desired ROI per unit. b. fixed costs per unit. c. manufacturing cost per unit. d. variable costs per unit.

Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

136.

The reasons for using the variable-cost approach include all of the following except this approach a. avoids arbitrary allocation of common fixed costs to individual product lines. b. is more consistent with cost-volume-profit analysis. c. provides the most defensible bases for justifying prices to all interested parties. d. provides the type of data managers need for pricing special orders.

Ans: c, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

137.

Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing cost per unit is $15. Variable selling and administrative costs per unit are $4, while fixed selling and administrative costs per unit are $6. Maggie desires an ROI of $7.50 per unit. If Maggie Co. uses the absorption-cost approach, what is its markup percentage? a. 8.33% b. 16.67% c. 25% d. 50%

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($4 + $6 + $7.50) ÷ ($20 + $15) = 50

138.

Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing cost per unit is $10. Variable selling and administrative costs per unit are $5, while fixed selling and administrative costs per unit are $2. Maggie desires an ROI of $8 per unit. If Maggie Co. uses the variable-cost approach, what is its markup percentage? a. 30% b. 50% c. 80% d. 100%

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($10 + $2 + $8) ÷ ($20 + $5) = 80

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Use the following information for questions 139–144. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead 139.

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The cost base using the absorption-cost approach is a. $90. b. $105. c. $195. d. $135.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: $30 + $36 + $45 + $24 = $135

140.

The markup percentage using the absorption-cost approach is a. 131%. b. 102%. c. 90%. d. 80%.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($33 + $60 + $15) ÷ ($30 + $36 + $45 + $24) = 80

141.

The target selling price using the absorption-cost approach is a. $351. b. $243. c. $162. d. $371.

Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($33 + $60 + $15) ÷ ($30 + $36 + $45 + $24) = 80; $30 + $36 + $45 + $24 = $135; $135 + ($135 × .80) = $243

142.

The cost base using the variable-cost approach is a. $90. b. $105. c. $195. d. $135.

143.

The markup percentage using the variable-cost approach is a. 131%. b. 102%. c. 90%. d. 80%.

Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: ($33 + $45 + $60) ÷ ($30 + $36 + $24 + $15) = 131

Pricing 144.

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The target selling price using the variable-cost approach is a. $311.85. b. $207.90. c. $212.10. d. $242.55.

Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics Solution: $30 + $36 + $24 + $15 = $105; ($33 + $45 + $60) ÷ 105 = 131; $105 + ($105 × 1.31) = $242.55

145.

Alfredo Co. has collected the following per unit data: Direct labor Direct materials Variable overhead

$8 5 4

Variable selling and admin. Fixed overhead Fixed selling and admin.

$3 1 7

The markup percentage is 120%. What is the markup amount under the variable-cost approach? a. b. c. d.

$21.60 $24.00 $20.40 $33.60

Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management Solution: ($8 + $5 + $4 + $3) × 1.20= $24

Answers to Multiple Choice Questions Item

26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Ans.

d b c d d c a d c b d b a b a b a b

Item

44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61.

Ans.

b c b a b d b a d d a b c b c b a c

Item

62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

Ans.

b a d d c b d d d a d c d c a d d c

Item

80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.

Ans.

a d b c d c b c d b d a d c a b d b

Item

98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115.

Ans.

b d c a a c a c a d d a d d d d c b

Item

116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133.

Ans.

c d c a c b d d b d c a c d c b d c

Item a

134. 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145. a

Ans.

b d c d c d d b b a d b

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BRIEF EXERCISES BE 146 Home Appliances Co. wants to introduce a new digital display, laser driven iron to the market. The estimated unit sales price is $85. The required investment is $3,500,000. Unit sales are expected to be 300,000 and the minimum required rate of return on all investments is 15%. Instructions Compute the target cost per iron. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

Solution 146

(5 min)

Sales (300,000 × $85) Less desired ROI ($3,500,000 × 15%) Target cost Number of irons Target cost per iron

$25,500,000 525,000 24,975,000 ÷ 300,000 $ 83.25

BE 147 Talia Corp. produces digital cameras. For each camera produced, direct materials are $20, direct labor is $16, variable manufacturing overhead is $12, fixed manufacturing overhead is $28, variable selling and administrative expenses are $10, and fixed selling and administrative expenses are $24. Instructions Compute the target selling price assuming a 40% markup on total per unit cost. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 147

(5 min)

Direct materials ....................................................... Direct labor .............................................................. Variable manufacturing overhead ............................ Fixed manufacturing overhead ................................ Variable selling and administrative expenses .......... Fixed selling and administrative expenses............... Total unit cost .................................................... Total unit cost $110

+ +

$20 16 12 28 10 24 $110

(Markup percentage × Total unit cost) (40% × $110)

= =

Target selling price $154

Pricing

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BE 148 Tina Company expects to produce 100,000 products in the coming year and has invested $20,000,000 in the equipment needed to produce the products. Tina requires a return on investment of 10%. Instructions What is Tina’s ROI per unit? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 148

(3 min)

(Total investment  Desired ROI percentage) ($20,000,000  Number of units ROI per unit = = 100,000

10%)

= $20

BE 149 NayTag produces washing machines and dryers. The following per unit information is available for washing machines: direct materials, $72; direct labor, $48; variable manufacturing overhead, $36; fixed manufacturing overhead, $84; variable selling and administrative expenses, $24; fixed selling and administrative expenses, $56. NayTag desires an ROI per unit of $80. Instructions Compute NayTag’s markup percentage using a total cost approach.

Solution 149

(5 min)

The markup percentage would be:

$80 = 25% $72 + $48 + $36 + $84 + $24 + $56

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

BE 150 MAC Company has invested $3,000,000 in assets to produce 10,000 units of its finished product. MAC’s budget for the year is as follows: net income, $360,000; variable costs, $2,400,000; fixed costs, $300,000. Instructions Compute each of the following: 1. Budgeted ROI. 2. Markup percentage using a total cost approach. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 150

(5 min)

1. ROI is equal to net income divided by invested assets. For MAC Company, budgeted ROI is: Budgeted ROI = $360,000 ÷ $3,000,000 = 12% Net income 2. The markup percentage is equal to: Total cost

For MAC Company, the budgeted markup percentage is:

$360,000 = 13.3% $2,400,000 + $300,000

BE 151 During the current year Greeve Corporation expects to produce 10,000 units and has budgeted the following: net income $300,000; variable costs $900,000; and fixed costs $350,000. It has invested assets of $1,750,000. The company's budgeted ROI was 20%. What was its budgeted markup percentage using a full-cost approach? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 151

(5 min)

The markup percentage is equal to Desired ROI per unit divided by total unit cost. The desired ROI per unit is computed as follows: Desired ROI per unit =

$1,750,000  20% = $35 10,000 units

The total unit cost is computed as follows: Total unit cost =

$900,000 + $350,000 = $125 10,000 units

The markup percentage is computed as follows: Desired ROI per unit = $35 = 28% Total unit cost $125

BE 152 Horton Small Engine Repair charges $45 per hour of labor. It has a material loading percentage of 40%. On a recent job replacing the engine of a riding lawnmower, Horton worked 4 hours and used parts with a cost of $400. Calculate Horton's total bill. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 152 (4 min) Horton's total bill would equal: (4 hours  $45) + $400 + ($400  40%) = $740

Pricing

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BE 153 On a recent job repairing a small boat engine, Marine Repairs Company worked 21 hours and used parts with a cost of $1,500. Marine Repairs Company charges $80 per hour of labor and has a material loading charge of 60%. Instructions Calculate the total bill for repairing the small boat engine. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 153

(5 min)

The total bill would equal: (21 hours × $80) + $1,500 + ($1,500 × 60%) = $4,080

BE 154 Alma and Associates, a new consulting service, recently received a bill for repairs on its computers totaling $2,280. Alma thinks it may have been overcharged and is trying to recreate the components of the bill. She knows the hourly rate is $75 and 15 hours of labor was charged. She also knows $700 of parts were replaced. Instructions Compute the material loading charge percentage the repair service used. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 154

(5 min)

Total repair bill Less labor charges (15 hours × $75) Total charge for parts Less parts cost Cost of loading charge Parts cost Loading charge percentage

$2,280 1,125 1,155 700 455 ÷ 700 65%

BE 155 Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $92 per unit. The variable cost per unit is $42, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $54. Freberg is operating at full capacity. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 155

(5 min)

The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. The opportunity cost is equal to its contribution margin on goods sold to external parties. Thus, the minimum transfer price in this case is: $42 + ($92 – $42) = $92.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

BE 156 Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $92 per unit. The variable cost per unit is $55, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $61. Freberg has sufficient excess capacity to provide the 30,000 batteries to the other division. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 156

(5 min)

If Freberg has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is: $55 + $0 = $55.

BE 157 Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $92 per unit. The variable cost per unit is $55, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 special, highperformance batteries to another division within the company. Freberg’s variable cost on these special batteries is $62 per unit. Freberg is operating at full capacity. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 157

(5 min)

The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. In this case, the minimum transfer price is: $62 + ($92 – $55) = $99.

BE 158 Bundy Batteries produces batteries for laptop computers. The following per unit cost information is available: direct materials $15; direct labor $18; variable manufacturing overhead $12; fixed manufacturing overhead $30; variable selling & administrative expenses $15; and fixed selling & administrative expenses $20. The desired ROI per unit is $25. Instructions Compute the markup percentage using the absorption-cost approach. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 158

(5 min)

Markup percentage =

$25 + ($15 + $20) = 80% $15 + $18 + $12 + $30

Pricing

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BE 159 Future Adhesives Inc. uses the variable-cost approach to determine target selling prices. A special adhesive used in the aerospace industry has the following per unit data: desired ROI $30; fixed manufacturing overhead $25; and fixed selling & administrative costs $35. The markup percentage is 150%. Instructions Compute the target selling price. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 159

(5 min)

$30 + $25 + $35 Cost base Markup percentage = = 150% Cost base = $90 ÷ 150% = $60 Target selling price = $60 + ($60 × 150%) = $150

EXERCISES Ex. 160 Stone Company is considering introducing a new line of pagers, targeting the preteen population. Stone believes that if the pagers can be priced competitively at $45, approximately 300,000 units can be sold. The controller has determined that an investment in new equipment totaling $4,000,000 will be required. Stone requires a minimum rate of return of 16% on all investments. Instructions Compute the target cost per unit of the pager. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 160

(6-10 min.)

Sales (300,000 × $45) Less desired ROI ($4,000,000 × 16%) Target cost for 300,000 units

$13,500,000 640,000 $12,860,000

Target cost per unit = $12,860,000 ÷ 300,000 = $42.87

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 161 Mellie Computer Devices Inc. is considering the introduction of a new printer. The company’s accountant had prepared an analysis computing the target cost per unit but misplaced his working papers. From memory he remembers the estimated unit sales price was $200 and the target unit cost was $195. Sales were projected at 100,000 units with a required $5,000,000 investment. Instructions Compute the required minimum rate of return. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 161

(5–10 min.)

Sales (100,000 × $200) Less target cost (100,000 × $195) Desired ROI (in dollars) Investment Minimum ROI

$20,000,000 19,500,000 500,000 ÷ 5,000,000 10%

Ex. 162 Laserspot is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Laserspot does not believe that it can charge more than $80 for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns. LittleLaser will require an investment of $7,500,000 to manufacture, and the company wants an ROI of 16%. Instructions Determine the target cost for one LittleLaser. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 162 (6–8 min.) The following formula may be used to determine return on investment Investment  ROI percentage = Return on investment $7,500,000  16% = $1,200,000 Return on investment per unit is then $12 ($1,200,000  100,000) The target cost is therefore $68 computed as follows: Target cost = Market Price − Desired profit $68 = $80 − $12

Pricing

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Ex. 163 Joey's Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for the coming year are as follows.

Direct materials (tapes, CDs, etc) Direct labor Variable overhead Fixed overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Session $60 $400 $50

Total

$850,000 $40 $800,000

Instructions (a) Determine the total cost per session. (b) Determine the desired ROI per session. (c) Calculate the mark-up percentage on the total cost per session. (d) Calculate the target price per session. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 163 (12 min) (a) Total cost per session: Direct materials Direct labor Variable overhead Fixed overhead ($850,000 ÷ 1,000) Variable selling & administrative expenses Fixed selling & administrative expenses ($800,000 ÷ 1,000)

(b) Desired ROI per session = (16.5% × $2,000,000) ÷ 1,000 = $330 (c) Mark-up percentage on total cost per session = $330 ÷ 2,200 = 15% (d) Target price per session = $2,200 + ($2,200 × 15%) = $2,530

Per Session $ 60 400 50 850 40 800 $2,200

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 164 Rita Corporation produces commercial fertilizer spreaders. The following information is available for Rita's anticipated annual volume of 400,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $32 54 72

Total

$12,000,000 34 7,200,000

The company has a desired ROI of 20%. It has invested assets of $120,000,000. Instructions Compute each of the following: 1. Total cost per unit. 2. Desired ROI per unit. 3. Markup percentage using total cost per unit. 4. Target selling price. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 164

(12 min.)

1. Total cost per unit: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($12,000,000 ÷ 400,000) Variable selling and administrative expenses Fixed selling and administrative expenses ($7,200,000 ÷ 400,000)

2. Desired ROI per unit = (20% × $120,000,000) ÷ 400,000 = $60 3. Markup percentage using total cost per unit =

$60 = 25% $240

4. Target selling price = $240 + ($240 × 25%) = $300

Per Unit $ 32 54 72 30 34 18 $240

Pricing

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Ex. 165 Goliath Corporation is in the process of setting a selling price for a new product it has just designed. The following data relate to this product for a budgeted volume of 60,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $30 40 10

Total

$1,800,000 6 1,440,000

Goliath uses cost-plus pricing to set its target selling price. The markup on total unit cost is 30%. Instructions Compute each of the following for the new product: 1. Total variable cost per unit, total fixed cost per unit, and total cost per unit. 2. Desired ROI per unit. 3. Target selling price. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 165

(18 min.)

1. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Variable cost per unit

Fixed manufacturing overhead Fixed selling and administrative expenses Fixed cost per unit Variable cost per unit Fixed cost per unit Total cost per unit

$ 86 54 $140

2. Total cost per unit Markup Desired ROI per unit

$140 × 30% $ 42

3. Total cost per unit Desired ROI per unit Target selling price

$140 42 $182

Total Costs $1,800,000 1,440,000

$30 40 10 6 $86 Budgeted Cost Volume Per Unit ÷ 60,000 = $30 ÷ 60,000 = 24 $54

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 166 Skyhigh Company is in the process of setting a selling price for its newest model stunt kite, the Looper. The controller of Skyhigh estimates variable cost per unit for the new model to be as follows: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses

$15 8 4 5 $32

In addition, Skyhigh anticipates incurring the following fixed cost per unit at a budgeted sales volume of 20,000 units: Total Costs ÷ Budget Volume = Cost per Unit Fixed manufacturing overhead $240,000 20,000 $12 Fixed selling and administrative expenses 260,000 20,000 13 Fixed cost per unit $25 Skyhigh uses cost-plus pricing and would like to earn a 10 percent return on its investment (ROI) of $400,000. Instructions Compute the selling price that would provide Skyhigh a 10 percent ROI. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 166

(6–10 min.) Variable cost per unit Fixed cost per unit Desired ROI per unit Target selling price

$32 25 2* $59

*$400,000 × .10 = $40,000; $40,000 ÷ 20,000 = $2 per unit

Pricing

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Ex. 167 Silver Spoon Service repairs commercial food preparation equipment. The following budgeted cost data is available for 2013:

Technicians' wages and benefits Parts manager's salary and benefits Office manager's salary and benefits Other overhead Total budgeted costs

Time Charges $500,000

Material Charges $ 72,000 18,000 135,000 $225,000

112,000 48,000 $660,000

Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It desires a $54 profit margin per hour of labor and a 40% profit margin on parts. Silver Spoon estimates the total invoice cost of parts and materials in 2013 will be $500,000. Instructions 1. Compute the rate charged per hour of labor. 2. Compute the material loading charge. 3. Silver Spoon has received a request from Lime Corporation for an estimate to repair a commercial fryer. The company estimates that it would take 20 hours of labor and $8,000 of parts. Compute the total estimated bill. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 167

(18-20 min.)

1. Total Cost Hourly labor rate for repairs Technicians' wages and benefits Overhead costs Office manager's salary and benefits Other overhead

Per Hour Charge

Total Hours

$500,000

10,000

$ 50.00

112,000 48,000 $660,000

÷ ÷ ÷

10,000 10,000 10,000

= = =

11.20 4.80 66.00 54.00 $120.00

Profit margin Rate charged per hour of labor 2. Material Charges Overhead costs Parts manager's salary and benefits Office manager's salary and benefits Other overhead Profit margin Material loading charge

$ 72,000 18,000 $ 90,000 135,000

Total Invoice Cost, Parts and Materials

÷ ÷

$500,000 $500,000

= =

Material Loading Charge

18% 27% 45% 40% 85%

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Solution 167

(cont.)

3. Job: Lime Corporation Labor charges 20 hours @ $120 Material charges Cost of parts and materials Material loading charge (85% × $8,000) Total price of labor and materials

$ 2,400 $8,000 6,800

14,800 $17,200

Ex. 168 Forrest Painting Service has budgeted the following time and material for 2013: BUDGETED COSTS FOR 2013

Painters' wages and benefits Service manager's salary and benefits Office employee's salary and benefits Cost of paint Overhead (supplies, utilities, etc.) Total budgeted costs

Time Charges $ 36,000

Material Charges $23,000 3,000 50,000 8,500 $84,500

12,000 16,000 $64,000

Forrest budgets 4,000 hours of paint time in 2013 and will charge a profit of $12 per hour, in addition to a 25% markup on the cost of paint. On February 15, 2013, Forrest is asked to prepare a price estimate to paint a building. Forrest estimates that this job will take 12 labor hours and $500 in paint. Instructions 1. Compute the labor rate for 2013. 2. Compute the material loading charge rate for 2013. 3. Prepare a time-and-material price estimate for painting the building. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 168

(18-20 min.)

1. Computation of labor rate Total Cost Hourly labor rate Painters' wages and benefits Overhead costs Office employee's salary and benefits Other overhead Profit margin Rate charged per hour of labor

Total Hours

Per Hour Charge

$36,000

4,000

12,000 16,000 $64,000

÷ ÷ ÷

4,000 4,000 4,000

= = =

3 4 16 12 $28

Pricing Solution 168

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(Cont.)

2. Computation of material loading charge

Overhead costs Service manager's salary and benefits Office employee's salary and benefits Other overhead

Material Charges

Total Invoice Cost of Paint

$23,000 3,000 26,000 8,500 $34,500

÷ ÷ ÷

$50,000 50,000 50,000

Material Loading Charge

= = =

Profit margin Material loading charge

52% 17% 69% 25% 94%

3. Price estimate for time and materials Job: Paint building Labor charges: 12 hours @ $28 Material charges Cost of paint Material loading charge (94% × $500) Total price of labor and materials

$ 336 $500 470

970 $1,306

Ex. 169 Chuck's Classic Cars restores classic automobiles to showroom status. Budgeted data for the current year are: Time Charges $270,000

Restorers' wages and fringe benefits Puchasing agent's salary and fringe benefits Administrative salaries and fringe benefits 60,000 Other overhead costs 20,000 Total budgeted costs $350,000

Material Loading Charges $ 67,500 22,500 75,600 $165,600

The company anticipated that the restorers would work a total of 10,000 hours this year. Expected parts and materials were $1,200,000. In late January, the company experienced a fire in its facilities that destroyed most of the accounting records. The accountant remembers that the hourly labor rate was $60 and that the material loading charge was 83.80%.

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 169

(cont.)

Instructions (a) Determine the profit margin per hour on labor. (b) Determine the profit margin on materials. (c) Determine the total price of labor and materials on a job that was completed after the fire that required 150 hours of labor and $60,000 in parts and materials. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 169 (10–12 min.) (a) Hourly labor rate: Restorers' wages and fringes Overhead costs: Administrative salaries & fringes Other overhead costs Total hourly cost

Total Cost

÷ Total Hours

Hourly Charge

$270,000

10,000

$27

60,000 20,000 $350,000

÷ ÷ ÷

10,000 10,000 10,000

= = =

6 2 $35

Profit margin = Hourly rate − total hourly cost = $60 − $35 = $25 (b) Material Loading Charges Overhead costs: Purchasing agent’s salary and fringes Administrative salaries & fringes

Other overhead costs Total Material loading charge (with profit) Material loading charge (without profit) Profit margin on materials

Total Invoice Cost, Parts & Materials =

Material Loading Percentage

$ 67,500 22,500 90,000 ÷ $1,200,000

7.50%

75,600 $165,600

= =

6.30% 13.80%

÷ $1,200,000 ÷ $1,200,000

83.80% 13.80% 70.00%

(c) Labor charges: 150 hours @ $60 Material charges: Cost of parts & materials Material loading charge ($60,000 × 83.80%) Total price of labor and materials

$ 9,000 $60,000 50,280

110,280 $119,280

Pricing

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Ex. 170 The Appraisal Department of Easy Mortgage Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $280 per home appraisal, and its variable costs are $220 per appraisal. Recently, Easy Mortgage Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,500 appraisals on all Easy Mortgage Bank-financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $265. The variable cost per appraisal to the Home-Loan Department would be $10 less than those performed for outside customers due to savings in administrative costs. Instructions (a) Determine the minimum transfer price, assuming the Appraisal Department has excess capacity. (b) Determine the minimum transfer price, assuming the Appraisal Department has no excess capacity. (c) Assuming the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $265? Discuss. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 170

(8-10 min.)

(a) Minimum transfer price = ($220 − $10) + $0 = $210 (b) Minimum transfer price = ($220 − $10) + ($280 − $220) = $270 (c) No. By forcing the Appraisal Department to accept the $265 per appraisal price, management is penalizing the Appraisal department. If the department was allowed to sell its services to outside customers it could earn $60 ($280 − $220) in contribution margin per appraisal. Forcing them to sell their services internally would allow them to earn only $55 ($265 − $210) in contribution margin. A loss of $5 per appraisal or a total of $7,500 (1,500  $5) would result. Ex. 171 The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this subassembly for a final product that is sold outside at $1,200. Division A charges Division B market price for the part, which is $700 per unit. Variable costs are $530 and $600 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit. Instructions (a) Calculate Division B’s contribution margin if transfers are made at the market price, and calculate the company’s total contribution margin. (b) Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B? If so, at what price?

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 171

(Cont.)

(c) Assume that Division A can sell in the open market only 500 units at $700 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 171

(8–10 min.)

(a) Sales Less: Costs Variable costs Transfer costs Total costs Contribution to income

Division A $700

Division B $1,200

Total Company $1,200

$ 530 0 $ 530 $ 170

$ 600 700 $1,300 $ (100)

$1,130 0 $1,130 $ 70

(b) The opportunity cost is the market price. Transfers should be made at market prices less any avoidable costs. In the current situation, it would appear that no transfers would be made. (c) (i) Maintain price, no transfers (500 × $700) − $265,000 = $85,000 (ii) Cut price, no transfers (1,000 × $560) − $530,000 = $30,000 (iii) Maintain price and transfers (500 × $1,200) + (500 × $700) − $830,000* = $120,000 * (500 × $1,130) + (500 × $530) The firm is better off by maintaining the current market price for Division A’s product and transferring 500 units to Division B. A transfer price within the range of $530 to $600 would be needed to motivate both divisional managers to engage in the transfers. An optimal transfer price cannot be determined from the information given (even with full information, the best transfer price in the range may not be determinable).

Ex. 172 Pert Corporation manufactures state-of-the-art DVD players. It is a division of Vany TV, which manufactures televisions. Pert sells the DVD players to Vany, as well as to retail stores. The following information is available for Pert's DVD player: variable cost per unit $60; fixed costs per unit $45; and a selling price of $150 to outside customers. Vany currently purchases DVD players from an outside supplier for $140 each. Top management of Vany would like Pert to provide 50,000 DVD players per year at a transfer price of $60 each.

Pricing Ex. 172

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(Cont.)

Instructions Compute the minimum transfer price that Pert should accept under each of the following assumptions: 1. Pert is operating at full capacity. 2. Pert has sufficient excess capacity to provide the 50,000 players to Vany. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 172

(9 min.)

1. The minimum transfer price is $150 [$60 + ($150 – $60)], the outside market price, since Pert is operating at full capacity. 2. The minimum transfer price is $60, the variable cost of the DVD players, since Pert has excess capacity. However, since the market price is $140 (Vany's current cost), Pert should be able to negotiate a price much higher than $60.

Ex. 173 Green Yard Company, a division of Lawn Supplies, Inc., produces lawn mowers. Green Yard sells lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following information is available for Green Yard's mowers: Fixed cost per unit Variable cost per unit Selling price per unit

$150 100 375

Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $340. In order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green Yard to provide 100,000 lawn mowers per year at a transfer price of $340 per unit. Green Yard is currently operating at full capacity. It could avoid $6 per unit of variable selling costs by selling internally. Instructions 1. Compute the minimum transfer price that Green Yard should be required to accept. 2. Compute the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this transfer. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 173

(9 min.)

1. The minimum transfer price that Green Yard should accept is: ($100 – $6) + ($375 – $100) = $369 2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is: Contribution margin lost by Green Yard ($375 – $100) Increased contribution margin to Lawn Supplies ($340 – $94) Net decrease in contribution margin

$275 246 $ 29

Total contribution margin decrease is: $29 × 100,000 units = $2,900,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

Ex. 174 Spirit Manufacturing is a division of Birch Communications, Inc. Spirit produces cell phones and sells these phones to other communication companies, as well as to Birch. Recently, the vice president of marketing for Birch approached Spirit with a request to make 20,000 units of a special cell phone that could be used anywhere in the world. The following information is available regarding the Spirit division: Selling price of regular cell phone Variable cost of regular cell phone Additional variable cost of special cell phone

$100 50 35

Instructions Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following: 1. The marketing vice president offers to pay Spirit $110 per phone. Spirit has available capacity. 2. The marketing vice president offers to pay Spirit $110 per phone. Spirit has no available capacity and would have to forgo sales of 20,000 phones to existing customers to meet this request. 3. The marketing vice president offers to pay Spirit $175 per phone. Spirit has no available capacity and would have to forgo sales of 30,000 phones to existing customers to meet this request. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 174

(13 min.)

1. Assuming that Spirit Manufacturing has available capacity, variable cost would be ($50 + $35) or $85 and the opportunity cost would be zero. Therefore, the minimum transfer price would be $85 = $85 + $0. Since the $110 transfer price being offered exceeds the $85 minimum transfer price, the offer should be accepted. 2. Assuming no available capacity, and that the new units produced would be equal to the number of standard units forgone, variable cost of the special cell phone would be ($50 + $35) or $85 and the opportunity cost would be ($100 – $50) or $50. Therefore, the minimum transfer price would be $135 = $85 + $50. Since this is higher than the $110 transfer price, Spirit Manufacturing should reject the offer. 3. Assuming no available capacity, and that in order to produce the 20,000 special cell phones, 30,000 standard cell phones would be forgone, the minimum variable cost would be ($50 + $35) or $85 and the opportunity cost would be: Total contribution margin on standard cell phones ($100 – $50) × 30,000 —————————————————————— = —————————— Number of special cell phones 20,000

= $75

Therefore, the minimum transfer price would be $160 = ($50 + $35) + $75. Since the $175 transfer price being offered exceeds the minimum transfer price of $160, Spirit Manufacturing should accept the offer.

Pricing

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Ex. 175 Pubworld is a textbook publishing company that has contracts with several different authors. It also operates a printing operation called Printpro. Both companies operate as separate profit centers. Printpro prints textbooks written by Pubworld authors, as well as books written by nonPubworld authors. The printing operation bills out at $0.06 per page and a typical textbook requires 600 pages of print. A developmental editor from Pubworld approached the printing operation manager offering to pay $0.045 per page for 5,000 copies of a 600-page textbook. Outside printers are currently charging $0.05 per page. Printpro's variable cost per page is $0.04. Instructions 1. Calculate the appropriate transfer price and indicate whether the printing should be done internally by Printpro under each of the following situations: a. Printpro has available capacity. b. Printpro has no available capacity and would have to cancel an outside customer's job to accept the editor's offer. 2. Calculate the change in contribution margin for each company, if top management forces Printpro to accept the $0.045 transfer price when it has no available capacity. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 175

(13 min.)

1a. Assuming that the printing operation has available capacity, the printing operation's variable cost is $0.04 and its opportunity cost is $0. The minimum transfer price would be $0.04 = $0.04 + $0. Therefore, in this case, the printing operation should accept the offer to print internally. The $0.045 transfer price would provide a contribution margin of $0.005 ($0.045 – $0.04) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.045, since the company is saving money at any price below the $0.05 price charged by outside printers. 1b. Assuming no available capacity, the printing operation's variable cost is $0.04 per page and its opportunity cost is $0.02 ($0.06 – $0.04) per page. The minimum transfer price would be $0.06 = $0.04 + $0.02. Therefore, the printing operation would not accept the internal transfer price of $0.045. 2. Printpro would lose: ($0.06 – $0.04) × 600 pages × 5,000 copies = $60,000 Pubworld would save: ($0.05 – $0.045) × 600 pages × 5,000 copies = $15,000

Ex. 176 The following information is available for a product manufactured by Gardenia Corporation: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and admin. expenses Fixed selling and admin. expenses

Per Unit $62 48 15

Total

$250,000 10 55,000

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition (Cont.)

Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce 5,000 units per year. Instructions Compute each of the following: 1. Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses. 2. Desired ROI per unit. 3. Markup percentage using the absorption-cost approach. 4. Markup percentage using the variable-cost approach. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 176

(12–14 min.)

$250,000 1. Fixed manufacturing overhead = ———— = $50 per unit 5,000 $55,000 Fixed selling and administrative expenses per unit = ———— = $11 per unit 5,000 16% × $8,250,000 2. Desired ROI per unit = ————————— = $264 per unit 5,000 $264 + ($10 + $11) 3. Absorption-cost markup percentage = ——————————— = 163% $62 + $48 + $15 + $50 $264 + ($50 + $11) 4. Variable-cost markup percentage = ——————————— = 241% $62 + $48 + $15 + $10 Ex. 177 Peachtree Doors, Inc. is in the process of setting a target price on its newly designed patio door. Cost data relating to the door at a budgeted volume of 5,000 units is as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $100 170 80

Total

$750,000 25 375,000

Peachtree uses cost-plus pricing that provides it with a 25% ROI on its patio door line. A total of $4,000,000 in assets is committed to production of the new door. Instructions 1. Compute each of the following under the absorption-cost approach: a. Markup percentage needed to provide desired ROI. b. Target price of the patio door.

Pricing Ex. 177

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(Cont.)

2. Compute each of the following under the variable-cost approach: a. Markup percentage needed to provide desired ROI. b. Target price of the patio door. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 177

(12–14 min.)

1. Absorption-cost approach a. Computation of unit manufacturing cost: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($750,000 ÷ 5,000) Total manufacturing cost

Per Unit $100 170 80 150 $500

Computation of markup percentage to provide a 25% ROI: Markup [25% × ($4,000,000 ÷ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300 Percentage = —————————————————————————— = —— = 60% $500 $500 b. Computation of target price: Target price: $500 + (60% × $500) = $800 2. Variable-cost approach a. Computation of unit variable cost: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Total variable cost

Per Unit $100 170 80 25 $375

Computation of markup percentage to provide a 25% ROI: Markup [25% × ($4,000,000 ÷ 5,000)] + [($750,000 ÷ 5,000) + ($375,000 ÷ 5,000)] Percentage = ————————————————————————————————— $375 $425 = —— = 113.33% $375 b. Computation of target price: Target price: $375 + (113.33% × $375) = $800

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

COMPLETION STATEMENTS 178.

The difference between the target price and the desired profit is the _________________ cost of the product.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

179.

In the cost-plus pricing formula, the target selling price equals cost + (________________ × cost).

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

180.

The _______________ pricing approach has a major advantage: it is simple to compute.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

181.

Under the time-and-material pricing approach, the material charge is based on the cost of direct materials used and a material __________________ for related overhead costs.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

182.

The transfer of goods between divisions of the same company is termed _____________ sales.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

183.

The three approaches for determining a transfer price are negotiated, ________________ based, and _________________ based transfer prices.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

184.

To ensure that the selling division attempts to control its costs, the transfer price should be based on _________________ cost instead of actual cost.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

185.

The formula for the minimum transfer price is: Minimum transfer price = Variable cost + ___________________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

186.

__________________ involves contracting with an external party to provide a good or service, rather than performing the work internally.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

187.

The __________________ approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Pricing

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Answers to Completion Statements 178. target 179. markup percentage 180. cost-plus 181. loading charge 182. internal 183. cost, market 184. standard 185. Opportunity cost 186. Outsourcing 187. absorption-cost

MATCHING 188.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D.

Cost-plus pricing Market-based transfer price Markup Negotiated transfer price

E. F. G. H.

Outsourcing Target selling price Time-and-material pricing Virtual companies

____

1. Contracting with an external party to provide a good or service.

____

2. An approach to cost-plus pricing that uses two pricing rates.

____

3. Product's selling price is determined by adding a markup to a cost base.

____

4. Transfer price is determined by agreement of division managers.

____

5. Companies that have no manufacturing facilities.

____

6. Percentage applied to a product's cost.

____

7. Price that will provide the desired profit on a product.

____

8. Transfer price is based on existing prices of competing products.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Answers to Matching 1. 2. 3. 4.

E G A D

5. 6. 7. 8.

H C F B

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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

SHORT-ANSWER ESSAY QUESTIONS S-A E 189 A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing rates are set. Required: Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain what the material loading charge covers and how it is expressed. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 189 The time-and-material pricing approach is used often in service industries, especially professional firms and consulting firms. This approach involves three steps: (1) calculate the labor charge per hour, (2) calculate the charge for obtaining and holding materials, and (3) calculate the charges for a particular job. The material loading charge covers the costs of purchasing, handling, and storing materials, plus any desired profit margin on the materials. It is expressed as a percentage of the total estimated costs of parts and materials.

S-A E 190 There are three possible approaches for determining a transfer price: negotiated, cost-based, and market-based transfer prices. Required: Explain how the transfer price is determined under each of the approaches. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 190 Under the negotiated transfer price approach, the transfer price will range between the external purchase price per unit and the sum of unit variable cost and unit opportunity cost. In the costbased approach, the transfer price is based on either the full cost or the variable cost of the selling division. Under the market-based approach, the minimum transfer price is the unit variable cost plus the unit opportunity cost.